Qualified Purchaser - Capital Raising Glossary

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.

The distinction is not academic. It determines the legal structure your fund can use, the number of investors you can accept, and the regulatory obligations you carry. For fund managers in the middle of a raise, the qualified purchaser threshold shapes everything from LP targeting to fund documentation.

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.

Here is how the math plays out in practice:

Scenario: Emerging manager raising a $50M fund

Under a 3(c)(1) structure:

Maximum 100 investors
Average check size needed: $500K
Can accept accredited investors (net worth $1M+ or income $200K+)
Broader pool of potential LPs, but hard cap on count

Under a 3(c)(7) structure:

Maximum 2,000 investors
Average check size could be as low as $25K (though practically much higher)
Must verify every LP holds $5M+ in investments
Smaller addressable pool, but virtually unlimited capacity to add investors

Most emerging managers raising funds under $100M choose 3(c)(1) because their LP base is a mix of accredited individuals and smaller family offices that may not clear the qualified purchaser bar. Managers raising $250M+ almost always use 3(c)(7) because their LP base skews institutional, the 100-investor cap becomes binding, and the $25M institutional threshold is easily met by pension funds, endowments, and larger family offices.

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.

The key word is “investments,” not “net worth.” A person with a $10M home, $2M in retirement accounts, and $1M in brokerage accounts has a high net worth but does not qualify as a qualified purchaser. The $5M must come from assets the SEC classifies as investments.

Worked example: Individual qualification

Brokerage account (stocks and bonds): $2.8M
Private fund interests (PE and VC funds): $1.5M
Cash in investment accounts: $400K
Investment real estate (rental properties): $600K
Primary residence: $3.2M (excluded)
Car, art, personal property: $500K (excluded)
Qualifying investments: $5.3M (qualifies)

Family companies. An entity owned entirely by two or more closely related natural persons, where each owner meets the $5 million individual threshold. This category covers situations where a family pools capital through an LLC or LP for investment purposes. Both owners must independently qualify, not just the entity in aggregate.

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. The “not formed for the specific purpose” language is an anti-abuse provision. You cannot create a trust the day before subscribing to a fund and claim qualification. The trust must have an independent purpose, such as estate planning or wealth preservation, and the people behind it must individually qualify.

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, sovereign wealth funds, and other institutional limited partners. For most institutional LPs, the $25M threshold is trivially met.

Qualified Purchaser vs. Accredited Investor: The Full Comparison

The two standards serve different regulatory purposes and apply to different exemptions. Understanding the distinction is essential for structuring your fund and targeting your LP outreach.

Criteria	Accredited Investor	Qualified Purchaser
Threshold (individual)	$1M net worth (excl. primary residence) OR $200K income ($300K joint)	$5M in investments
Threshold (entity)	$5M in total assets	$25M in investments
What counts	Net worth includes most assets	Only “investments” as defined by SEC
Primary residence	Excluded from net worth calculation	Excluded from investments
Regulatory purpose	Gate for Reg D private offerings	Gate for 3(c)(7) fund exemption
Fund investor cap	100 investors under 3(c)(1)	2,000 investors under 3(c)(7)
Verification	Self-certification under 506(b); verified under 506(c)	Representation in subscription agreement + questionnaire

Worked example: Why the distinction matters

Consider two investors:

Investor A has $4M in a brokerage account, $2M in home equity, and $500K in retirement accounts. Their net worth (excluding primary residence) is $4.5M. They qualify as an accredited investor but not as a qualified purchaser ($4.5M in investments, short of the $5M threshold).

Investor B has $6M in a diversified investment portfolio and rents their apartment. They qualify as both accredited and qualified purchaser.

A 3(c)(1) fund can accept both investors. A 3(c)(7) fund can only accept Investor B. This is why the structural choice between 3(c)(1) and 3(c)(7) directly impacts your fundraising funnel.

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 verification process typically works like this:

Subscription agreement. The LP signs a document that includes a representation that they meet the qualified purchaser definition. The representation is specific, not a generic checkbox. It asks the LP to identify which category they fall under and to confirm the value of their qualifying investments.
Investor questionnaire. A detailed questionnaire asks the LP to describe their investment holdings, the source of funds, and their investment experience. Fund counsel reviews this for consistency and red flags.
Fund counsel review. The fund’s legal counsel reviews each subscription to confirm that the representations, on their face, support qualified purchaser status. If something does not add up, counsel will request additional documentation.
Ongoing obligation. Some LPAs require LPs to notify the fund if their status changes, though enforcement of this provision is rare in practice.

For institutional LPs, verification is straightforward. A pension fund with $500M in assets clearly meets the $25M threshold. The complexity arises with individuals and smaller entities that are closer to the threshold, where the composition of their investment portfolio determines whether they qualify.

The Practical Tradeoff for Fund Managers

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:

Choose 3(c)(1) when:

Your fund is under $100M
Your LP base includes a mix of HNWIs and small family offices
You expect fewer than 100 investors total
You want maximum flexibility in who can invest

Choose 3(c)(7) when:

Your fund is $250M+
Your LP base is primarily institutional
You anticipate needing more than 100 investors (common with fund-of-funds structures or platforms)
All or nearly all of your target LPs clear the $5M/$25M threshold anyway

Hybrid approach: Some managers use a master-feeder structure with a 3(c)(1) feeder for accredited investors and a 3(c)(7) feeder for qualified purchasers, both feeding into a single master fund. This maximizes the addressable LP universe while maintaining structural flexibility. The added legal cost ($50K to $100K in additional formation expenses) is justified for funds where both investor segments are material to the capital raise.

Common Questions from LPs

Experienced LPs rarely ask about qualified purchaser status because they know they qualify. The questions tend to come from individuals and smaller entities navigating the threshold for the first time.

“Does my 401(k) count?” Generally yes, if the account holds investments as defined by the SEC. Retirement accounts holding stocks, bonds, and mutual funds count toward the $5M threshold. The account does not need to be liquid or accessible.

“What about my stake in my operating company?” Generally no. Equity in an operating company where you are an active participant is not an “investment” under the SEC’s definition. The statute draws a line between financial investments and business ownership. If you own a $20M company but your investment portfolio is $3M, you do not qualify.

“I hold $4M in investments today but expect to cross $5M within six months.” You do not qualify today. The determination is made at the time of subscription, not based on projections. Wait until you actually hold $5M in qualifying investments before subscribing.

Regulatory Context and Evolution

The qualified purchaser standard was established by the National Securities Markets Improvement Act of 1996, which amended the Investment Company Act. Before NSMIA, the 3(c)(1) exemption with its 100-investor cap was the only practical path for most private funds. The creation of the 3(c)(7) exemption, gated by the qualified purchaser threshold, gave the industry a way to scale funds without triggering investment company registration.

The $5M threshold has not been adjusted for inflation since 1996. In nominal terms, $5M in 1996 is equivalent to roughly $10M in 2026 dollars. This means the threshold has effectively become easier to meet over time, expanding the qualified purchaser pool. There have been periodic discussions at the SEC about updating the threshold, but no formal rulemaking has advanced.

For fund managers, the practical takeaway is that the qualified purchaser pool is larger today than it was when the standard was created, and it continues to grow as wealth concentrates among individuals and families with diversified investment portfolios. When building your LP pipeline, understanding which prospects meet this threshold and which do not determines whether a 3(c)(7) structure is viable for your fund.

FAQ

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 up to 2,000 investors, compared to the 100-investor cap for 3(c)(1) funds limited to accredited 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.

What counts as 'investments' for qualified purchaser status?

The SEC defines investments to include securities (stocks, bonds, fund interests), financial contracts (derivatives, options, futures), cash and cash equivalents held for investment purposes, and real estate held as an investment. It specifically excludes a primary residence, personal property not held for investment, and business assets of an operating company. A person with $8M in home equity but only $3M in securities does not qualify.

Can a married couple combine assets to meet the $5 million threshold?

The statute focuses on individual qualification, but spouses can meet the threshold through jointly owned investments. If a married couple holds $5M in joint investment accounts, each spouse can potentially qualify based on the joint holdings. However, the analysis depends on how ownership is structured. Fund counsel typically evaluate each LP individually and may require both spouses to demonstrate qualification separately if they are investing through a joint account.