Qualified Purchaser

A Qualified Purchaser (QP) is an individual or entity deemed financially sophisticated enough by the Securities and Exchange Commission (SEC) to invest in certain high-end, private investment funds. This elite status requires a significantly higher level of wealth than the more common accredited investor designation. To be a QP, an individual generally needs to own at least $5 million in investments. The idea behind this rule, established under the Investment Company Act of 1940, is that individuals and institutions with this level of financial standing possess the knowledge and resources to understand and withstand the greater risks associated with funds like hedge funds and private equity funds. These funds, often structured as 3(c)(7) funds, are exempt from many of the registration and disclosure requirements of the SEC, allowing them to pursue more complex and aggressive strategies than funds available to the general public.

The SEC has very specific and strict definitions for who can be considered a Qualified Purchaser. The criteria differ for individuals and institutions.

An individual (or a married couple investing jointly) must own at least $5 million in investments. The definition of “investments” is broad but has important exclusions.

• What counts:
  • Securities (stocks, bonds)
  • Real estate held for investment purposes (not your primary home)
  • Commodity futures and physical commodities (like gold)
  • Financial contracts and cash or cash equivalents held for investment purposes
• What does NOT count:
  • Your primary residence
  • Jewelry, art, and other collectibles (unless held by a dealer)
  • The value of a family-owned business controlled by the person

The bar is set even higher for entities. An institution, such as a family office, trust, or corporation, must own and manage on a discretionary basis at least $25 million in investments for its own account or for the accounts of other Qualified Purchasers.

Being a QP isn't just a fancy label; it's a golden ticket that unlocks a specific tier of the investment world that is off-limits to most people, including many accredited investors.

The primary benefit of being a QP is gaining access to 3©(7) funds. These private funds can only be offered to Qualified Purchasers. This exclusivity allows them to grow much larger than other types of private funds. For example, a 3(c)(1) fund, which is available to accredited investors, is typically limited to 100 investors. A 3©(7) fund, by contrast, can have up to 1,999 investors, giving the fund manager more capital to deploy. This access is the key reason the QP designation is so sought after in high-finance circles.

It's easy to confuse these two terms, but the difference is significant. Think of it like airline status:

• Accredited Investor: This is like Business Class. It requires a lower financial threshold (e.g., $1 million in net worth excluding your primary home, or a consistent high income). It grants access to many private placements and private funds (like 3©(1)s).
• Qualified Purchaser: This is First Class. It requires a much higher threshold ($5 million in investments) and proves a greater level of financial sophistication. It unlocks the most exclusive investment vehicles, namely 3©(7) funds.

While both statuses open doors to investments not available on public markets, the QP is a far more exclusive club.

For a student of value investing, the QP status should be viewed with a healthy dose of skepticism. While it provides access to a wider universe of opportunities, it is a tool, not a substitute for sound judgment. The complex, opaque, and often high-fee nature of the funds available to QPs demands more rigorous due diligence, not less. The core principles of value investing—thoroughly understanding an investment, insisting on a margin of safety, and never overpaying—are more critical than ever when swimming in these deeper waters. Remember, achieving QP status doesn't automatically make you a better investor, nor does it guarantee access to better returns. Many of history's greatest investment fortunes were built entirely within the public markets, accessible to all. The key to success is not the exclusivity of your access, but the quality of your thinking.