Explore the distinct advantages that come with being an accredited investor vs. a qualified purchaser with Christina; you’ll gain the insight you need to make better investments.
What Is an Accredited Investor?
Accredited investors are legal entities whose financial status endows them with certain investment privileges. In the case of individual persons, reaching designated financial thresholds opens up greater access to investment opportunities that they would otherwise be able to reach. These investors are considered high net-worth individuals — persons with sufficiently high finances that indicate they possess a high degree of financial capability.
High net worth is a requisite for many unconventional investment opportunities because their associated risk is too great for retail investors.
Conventional investments, like acquiring shares of a publicly traded company through the stock exchange, may come with certain risks. However, as they are traded on the exchange, they are necessarily registered with government regulators. Therefore, they implicitly abide by certain standards that make them safer investments for retail investors. For example, retail investors would not be on the hook if they held shares in a company declaring bankruptcy.
The financial capability of accredited investors means they can be far more active in how they invest. Accredited investors can acquire equity, invest in complex funds, and generally participate in the financial world with deeper involvement. While these opportunities may present higher degrees of risk, they present much stronger rewards.
How Do You Become an Accredited Investor?
Becoming an accredited investor depends on your financial status. However, there is no official accreditation that designates one’s status as an accredited investor. Rather, persons engaging in investment opportunities available to accredited investors will typically be audited beforehand to determine their accredited status.
The financial thresholds set to determine accredited status find their legal basis in the Securities Act of 1933. In the wake of the 1929 Stock Market Crash, the federal government drafted the Securities Act to better monitor Wall Street and protect investors.
This legislation also outlines the standards that qualify accredited investors as such. Subsequent legislation like the Investors Act of 1940, Dodd-Frank, and the Tax Cuts and Jobs Act have all altered specifics regarding how persons can qualify as accredited investors.
As of 2022, these are the qualifications for accredited investor status:
- Person(s) has a net worth of at least one million dollars through their owned assets; primary residence is not included in total net worth; joint net worth with spouse or partner must be at least one million dollars.
- Person(s) must earn an annual income of over $200,000 dollars; joint annual income shared with spouse or partner must be over $300,000 dollars; person(s) must demonstrably show that they have earned the requisite amount for the two preceding years and the current year.
Institutional Accredited Investors
Since financial thresholds are the key determinant of accredited investor status, many incorporated entities qualify as accredited investors. Banks, investment funds, and pensions are a few examples of institutional accredited investors.
Institutional accredited investors gain access to strong investment opportunities because they have the capital resources as well as the financial expertise, staffing, and network to do so. More often than not, high-net worth-individuals will invest with institutional accredited investors to make financial decisions on their behalf.
Here are a few entity types that are typically considered institutional accredited investors:
- Insurance companies
- Investment companies
- LLCs (limited liability companies)
- Private business development companies
- Qualified institutional buyers (QIBs)
- Director(s), executive officer(s), or general partners issuing securities
- Benefits plans over five million dollars
- Exempt reporting advisers
- State-registered investment advisers
- Registered investment advisers
- Rural business investment companies (RBICs)
- Banks
Investment Opportunities for Accredited Investors
Accredited investors have access to a number of investment opportunities outside of conventional offers. While these opportunities may vary in form and function, what they have in common is a high standard for pooled investor participation.
Here are a few opportunities available to accredited investors:
- Venture capital firms.
- Hedge funds
- Real estate investments
- Private equity funds
- Real estate private equity funds
- Derivatives
- Convertible investments
- Private REITs
Accredited investors interested in participating in investment opportunities like these are considered limited partners: they are participating in the operation in a limited capacity—through making an investment.
The fund managers are considered general partners. These are the professionals in charge of delegating fund operations, acquiring assets, and earning a return for their investors.
Advantages for Accredited Investors
While accredited investors face higher degrees of risk, the rewards presented through investment opportunities like private equity real estate, hedge funds, and so on are much greater than conventional options.
For example, private equity has outperformed public markets for over two decades. Investors are increasingly turning to alternative investment options available to accredited investors because their risks are growing fewer while their potential is growing larger.
What Is a Qualified Purchaser?
A qualified purchaser, like an accredited investor, is a designation for high-net-worth individuals or institutions to signify their privileged financial status. As with accredited investors, qualified purchasers can make investments outside the Securities Act regulations because they sufficiently demonstrate financial acuity through their net worth, assets under management, or expertise.
The standards for qualified purchasers are higher than accredited investors. Qualified purchasers primarily consist of incorporated entities. While recent legislation has widened the kinds of entity types that can qualify as qualified purchasers, individuals rarely possess the levels of wealth required to qualify.
How Do You Become a Qualified Purchaser?
In order to qualify as a qualified purchaser, entities must have over five million dollars worth of assets. The total value of these assets excludes primary residences. Additionally, qualified purchaser status for family offices or businesses excludes assets that are directly used for the function of that office or business.
The total value of an entity’s value must stem from its assets under management or investments. This includes everything from securities held, stock and bonds, real estate investment assets, futures, etc.
Investment Opportunities for Qualified Purchasers
Like accredited investors, qualified purchasers gain access to a wider degree of investment opportunities than conventional investment operations. The sheer volume of their holdings implies a financial stability and capability that attracts stronger, more involved investment opportunities.
High-level qualified purchasers, qualified institutional buyers–(QIBs), qualify as such if they manage at least 100 million dollars worth of securities. These exceptionally wealthy operations gain access to Rule 144A securities or privately placed securities.
Private placements function like highly selective initial public offerings for security exchanges. Pre-selected qualified institutional buyers are given the opportunity to acquire substantial unregulated securities directly from the company. This gives investors a stronger return and the companies the opportunity to keep more equity for themselves by not going public.
Many investment opportunities will appeal to qualified purchasers exclusively. Because qualified purchasers are essentially high-value accredited investors, investment programs can utilize larger pools of capital with fewer capital investors. In this way, general partners can build closer relationships with their LPs, affording them the opportunity to be more exact and produce better results for them.
What’s the Difference Between Accredited Investors and Qualified Purchasers?
The key differences between accredited investors and qualified purchasers are the financial guidelines that qualify each of these designations as such. Accredited investors have comparatively lower financial thresholds to gain their privileged designation: a total net worth of one million dollars and demonstrable income of 200,000 or 300,000 dollars for a select number of years.
Qualified purchasers must have at least five million dollars in their total net worth; qualified institutional buyers have even higher financial thresholds to qualify — 100 million dollars in net worth.
Functionally, the only difference between accredited investors and qualified purchasers is the investment opportunities available to them. Both of these financial designations widen the number of investment opportunities they can make: unregulated, high-risk, high-rewards offerings unavailable to retail investors.
Since qualified purchasers have higher yields of capital, they gain access to even more investment opportunities in this privileged financial strata: specifically, Rule 144A securities.
How Should You Invest?
There are a wide number of investment opportunities available to this distinguished class of investors. Finding the right investment opportunity depends on your financial needs and ongoing market trends that make certain opportunities more advantageous than others.
With the current state of inflation in the United States, many high-level investors are turning to high-value real estate–a reliable investment during periods of economic uncertainty. Considering that private equity routinely outperforms public options, the best way to invest in high-value real estate is to partner with a private equity real estate firm.
Invest With The Best
Christina has consistently delivered for its LPs for over forty years. Our investment strategy hinges on connecting investors with the most high-value and exclusive real estate in the United States — the Westside region of Los Angeles.
Christina’s fund managers have the expertise and connections that allow them to put together ultra-high-value real estate deals. With a focus on tax-advantaged cash distributions and long-term wealth management, Christina’s portfolios are second to none.
Get started with Christina and protect your portfolio for tomorrow.
Sources:
17 CFR § 230.501 – Definitions and terms used in Regulation D. | Cornell Law School
Private equity will still outperform public markets in the next recession | Fortune
U.S. inflation turning the corner as consumer prices rise below expectations | Reuters