Based on data from 2020, we estimate 1,956,090 households in the United States, or 1.5% of households, were qualified purchasers. By our estimates, that’s 14.3% as many households as accredited investors and 30.6% as many households as qualified clients.
Qualified purchasers held roughly $38.47 trillion in total wealth in 2020. According to estimates from the 2019 Federal Reserve SCF, that’s around 40.0% of all privately held household wealth. SCF survey data was mainly from 2019, with 9% of responses spanning into the early pandemic (~ April 2020 at the latest).
What is a qualified purchaser?
Qualified purchasers are a special class of investors mentioned in the (amended) Investment Companies Act of 1940 and fully clarified by the Securities and Exchange Commission in 1997. The simplest way to qualify is by holding $5,000,000 in investments.
Funds with only qualified purchasers can avoid SEC registration rules no matter how many investors join. Without qualified purchasers, this rule caps limited partners at 100, effectively limiting total fund size. This fund size bonus is on top of performance fees allowed for qualified clients and private investment participation (in general) for accredited investors.
TinySeed wrote an excellent article on the SEC accredited investor cap and its interplay with qualified purchasers.
Qualified Purchaser Criteria
In 1997, the SEC clarified what counts as an investment for a qualified purchaser otherwise defined in U.S. Code § 80a–2(51). The most common way to qualify is to maintain $5,000,000 in investments (net of any borrowing to acquire those investments) – but there are a few angles to qualify:
- If you own $5,000,000 or more in investments alone or with a spouse
- If you have a closely held family company that controls $5,000,000 or more in investments
- If you have a trust which wasn’t formed to meet the qualified purchaser criteria for this particular investment and controls $5,000,000 or more in investments
- If you control a $25,000,000 or larger investment fund and all individual investors are qualified purchasers (fund size including committed but not yet collected capital)
You’ll note that the qualified purchaser criteria revolves around investments, not net worth ex-primary home equity, as with accredited investors and qualified clients.
What qualifies as an investment for qualified purchasers?
If you read through the SEC’s rulemaking release from 1997, you’ll see that they attempted to narrow assets down into those that require investment intent with some element of navigating a market. In short – and stated a few ways in various supporting documentation – they tried to define a “sophisticated investor”.
Here’s what counts as an “investment” for a potential qualified purchaser:
- Publicly traded securities
- Financial contracts entered into for investment purposes
- Equity in private companies you don’t control (including via investment vehicles, even if the vehicle has some active control over smaller firms, e.g., board seats)
- Equity in a private company you control if the company has $50 million or more in total shareholder equity
- Real estate held for investment purposes
- Commodity interests – including physical commodities such as gold – held for investment purposes
- Cash held for investment purposes
- The cash surrender value of insurance policies
You’ll note some relatively common assets are missing here. Vacation homes, real estate you own used by your extended family, real estate you own for your business, jewelry, and antiques are out. Equity in small businesses you control – even if the company is worth $49 million! – is out. Commodity hedging you do for business purposes (or physical commodities you need to hold) is out.
Qualified Purchaser Estimate Methodology
As you can see, unlike with the net worth tests for accredited investors and qualified clients, it’s a lift to come up with an estimate for purchasers.
You’ll find the backing documentation for the next section in these SCF documents:
Estimating Qualified Purchasers
I start with financial assets (“fin”), then add net equity in non-residential real estate (“nnresre”) and non-active business equity (“nonactbus”). Next, subtract other miscellaneous financial assets (“othfin”) – don’t worry, I’ll selectively add some types back – and other debt (“odebt”).
Next, I add back financial assets (X4020/X4024/X4028) of types 3, 18, 71, 74, and 85. Then – using X3129/X3128 and X3229/X3228 – I add back net equity from actively controlled private businesses with $50 million or more in total equity.
Finally, filter the resulting variable for $5 million or more, and you’ve got your qualified purchaser subset.
Note: If you disagree with the above take, you’ll have to run your assumptions yourself. I made judgment calls – for example, excluding not-otherwise-classifiable cash (read: possibly held at home) – but it’s a defensible set. Also, the household estimates are low – many investments have increased since the survey so the number of QPs has almost certainly increased.
Funds of Qualified Purchasers
Qualified purchasers are a huge advantage to a fund because their participation makes it easier to raise large funds without edging into higher disclosure requirements.
Consider the common fund structure of 2-and-20 – that’s a 2 percent annual management fee plus 20% carried interest over some hurdle. Even raising a $25,000,000 fund – $500,000 in fees charged for fund activities and employment annually – generally means you’re looking at $250,000 minimum commitment sizes. That’s a heavy lift from most accredited investors who aren’t qualified purchasers – at a relatively modest fund size.
One possible compromise? As mentioned in TinySeed’s post, a separate fund (or sleeve) of qualified purchasers can invest in parallel with a fund of traditional investors. This allows larger effective funds and bigger check sizes out of the joint “fund”. Of course, it’s certainly an administrative burden… so larger funds will generally continue to limit entry to qualified purchasers unless and until the rules change.
(And no, it’s not entirely regulation’s fault – qualified purchasers should be better able to handle Bernie Madoff-type blow-up fraud situations than other accredited investors.)
Had fun reading the statistics? Read some of our posts on investing and net worth: