What Is a Qualified Purchaser?
A qualified purchaser is defined as an individual or family-owned entity holding at least $5 million in investments, or an institutional entity holding at least $25 million in investments, as set forth in Section 2(a)(51) of the Investment Company Act of 1940. The designation exists to create a higher bar than the accredited investor standard, reflecting the SEC’s view that investors meeting this threshold have the sophistication and resources to evaluate complex fund structures without the protections afforded to retail investors.
Why It Matters for Fund Formation
The qualified purchaser threshold is the gatekeeper for 3(c)(7) funds. Under Section 3(c)(7) of the Investment Company Act, a fund that limits its investors exclusively to qualified purchasers is exempt from registering as an investment company, regardless of how many investors participate (up to 2,000). Compare that to a 3(c)(1) fund, which caps participation at 100 beneficial owners.
For emerging managers raising a first or second fund, this distinction has real structural implications. If your LP base is primarily high-net-worth individuals, the 100-investor cap under 3(c)(1) can become a constraint quickly. Structuring as a 3(c)(7) fund removes that ceiling, but it also narrows your addressable LP universe to those who clear the $5 million threshold.
Qualification Categories
The Investment Company Act defines four categories of qualified purchaser:
Individuals. Any natural person who owns at least $5 million in investments. “Investments” is specifically defined and excludes real estate used as a personal residence, though it includes securities, financial contracts, cash and cash equivalents, and real estate held for investment purposes.
Family companies. An entity owned entirely by two or more closely related natural persons, where each owner meets the $5 million individual threshold.
Trusts. A trust not formed for the specific purpose of investing in the fund, where each trustee or person who contributed assets to the trust is a qualified purchaser.
Institutional investors. Any entity acting for its own account or for the accounts of other qualified purchasers, that owns and invests on a discretionary basis at least $25 million. This covers pension funds, endowments, and other institutional limited partners.
Verification in Practice
Unlike Rule 506(c) offerings under Regulation D, where the SEC mandates specific verification procedures for accredited investors, the verification of qualified purchaser status is less prescriptive. Most fund counsel rely on investor representations in the subscription agreement, supplemented by questionnaires. That said, general partners carry the risk if an investor later turns out not to qualify. Standard practice is to require investors to certify their status and describe the nature and value of their investments.
The Practical Tradeoff
Structuring as a 3(c)(7) fund gives you room to grow your investor count, but it cuts out a meaningful segment of the accredited investor pool. Many family offices and high-net-worth individuals who comfortably meet accredited investor standards fall short of the $5 million investments threshold. The decision between 3(c)(1) and 3(c)(7) typically comes down to your fundraising strategy: fewer, larger checks versus a broader LP base with a lower entry point.
Frequently Asked Questions
What is the difference between a qualified purchaser and an accredited investor?
An accredited investor needs $1 million in net worth (excluding primary residence) or $200,000 in annual income. A qualified purchaser needs $5 million in investments. The qualified purchaser standard is significantly higher and unlocks access to 3(c)(7) funds that can accept unlimited investors.
Can an entity be a qualified purchaser?
Yes. An entity qualifies if it owns and invests at least $25 million on a discretionary basis. Family companies where all owners are qualified purchasers also qualify. Trusts that were not formed specifically to acquire fund interests and where all trustees and grantors are qualified purchasers meet the standard as well.
Why do fund managers care about the qualified purchaser distinction?
Funds relying on the 3(c)(7) exemption under the Investment Company Act can accept up to 2,000 investors, compared to 100 for 3(c)(1) funds limited to accredited investors. This gives GPs far more flexibility in scaling AUM without triggering Investment Company Act registration.
