Qualified Purchasers

A Qualified Purchaser (QP) is a high-status classification for an investor under U.S. federal securities law. Think of it as the VIP section of the investment world, a tier even more exclusive than the more commonly known Accredited Investor. This designation, defined by the Securities and Exchange Commission (SEC) under the Investment Company Act of 1940, is reserved for individuals and entities deemed so financially sophisticated that they don't require the same level of regulatory protection as the general public. The core idea is that if you have a substantial portfolio, you likely have the experience (or can afford the advice) to evaluate and withstand the risks of complex, less-regulated investment vehicles. Achieving QP status unlocks access to certain private funds, such as exclusive hedge funds and private equity funds, that are not available to other investors.

The bar for becoming a QP is significantly higher than for an Accredited Investor, and it focuses specifically on the size of one's investments, not just overall net worth or income. The SEC sets out clear financial thresholds.

• You must be a natural person (or a married couple investing jointly) who owns at least $5 million in investments. For this purpose, “investments” includes things like stocks, bonds, mutual funds, and real estate held for investment purposes. It notably excludes your primary residence and any property used for business.

• A family-owned company that owns at least $5 million in investments.
• A trust, provided it wasn't set up specifically to invest in the fund in question, that is sponsored by and for QPs and has at least $5 million in investments.
• Any other entity (like a pension fund or institutional investor) that, acting for its own account or the accounts of other QPs, in the aggregate owns and invests on a discretionary basis at least $25 million in investments.

It's easy to confuse these two terms, but the distinction is crucial. While all Qualified Purchasers are, by definition, also Accredited Investors, the reverse is certainly not true. The difference comes down to the financial requirements and the world of opportunities they unlock.

The hurdle for an Accredited Investor is meeting an income test (over $200k annually, or $300k with a spouse) or a net worth test (over $1 million, excluding the primary home). The QP requirement is much steeper: a cool $5 million in investable assets. This shifts the focus from a snapshot of wealth (net worth) to a measure of active market participation (investments).

Being an Accredited Investor opens the door to many private placements and funds, such as those structured under Rule 506 of Regulation D. However, QP status grants you a key to an even more exclusive room: access to private funds known as 3(c)(7) funds. Unlike other private funds that are limited to 100 or so investors, 3©(7) funds can have up to 1,999 Qualified Purchasers. This allows these funds to grow to enormous sizes while remaining largely outside the SEC's registration and reporting requirements, offering them more flexibility and privacy.

For the disciplined value investing practitioner, achieving QP status should be viewed as a byproduct of successful investing, not the goal itself. While it's nice to get an invitation to the party, it doesn't mean you should go. The world of 3©(7) funds is often characterized by:

• High Fees: These funds are famous for their “2 and 20” fee structure, where they charge a 2% annual management fee on assets and a 20% performance fee on profits. As Warren Buffett has often argued, these fees can be a massive drag on long-term returns.
• Lack of Transparency: By design, these funds operate with less public disclosure, making it difficult to perform the deep, fundamental analysis that is the hallmark of value investing.
• Complex Strategies: Many hedge funds employ strategies that are opaque, highly leveraged, or based on short-term market timing—the very opposite of buying wonderful businesses at fair prices and holding them for the long term.

The takeaway: Don't be blinded by exclusivity. A patient and rational investor can often achieve superior results by simply sticking to first principles and investing in publicly-traded companies they understand. If you do happen to cross the QP threshold, treat the newly available “exclusive” opportunities with extreme skepticism and the same rigorous due diligence you would apply to any other investment. The velvet rope is often just a marketing tool.