Sure, its great to be designated a qualified purchaser. Membership, as they say, does have its privileges. But there is a relatively high threshold for gaining such status. So, you totally shouldnt say youre qualified if youre not, even if you think you are. In other words, you must be certain that youve attained that designation. If you arent, and you make financial moves as if you are, there will be consequences.
Heres why you shouldnt lie about being a qualified purchaser and more.
There are two common regulatory classifications that dictate which investors can participate in specific kinds of opportunities. One is accredited investor
, and the other is a qualified purchaser. According to the SEC, these investors can take advantage of certain offerings that are not registered with the federal agency. This includes shares that are unavailable to the public and that are issued by privately held entities.
Simply put, a qualified purchaser is an individual or family business that has $5 million or more of investments, not counting the value of a primary residence or any property thats used for everyday business. Such investments can include classes such as real estate, stocks and bonds, financial contracts, cash, commodity futures contracts, and several other alternative assets.
Note that the benchmark for qualified purchasers is assets, as opposed to investments.
Other Ways to Qualify as a Qualified Purchaser
If an individual or entity invests at least $25 million in private capital, even on behalf of a qualified purchaser, they, too, can be deemed a qualified purchaser. Trusts that are managed by qualified purchasers, or an entity solely owned by qualified purchasers, are also eligible.
The Difference Between a Qualified Purchaser and Accredited Investor
We must define this since a qualified purchasers status is significantly relative to that of an accredited investor.
The chief differences between the two are that the qualified purchaser designation is based on investment holdings rather than net worth or income, and that the requirements to become a qualified purchaser are loftier than those for accredited investors.
That means that, for the most part, qualified purchasers have relatively more investment opportunities.
The Benefits of Being a Qualified Purchaser
A chief benefit to being a qualified purchaser
is access to 3(c)(7) funds, which can accept up to 2,000 qualified purchasers. Such designation can also provide access to 3(c)(1) funds, since purchasers easily meet the $1 million net worth requisite.
In short, qualified purchasers are playing on a whole other investment playing field, as opposed to accredited investors.
Consequences of Falsely Claiming Qualified Purchaser Status
Because investors can self-certify, its that easy to falsify their status
. SEC rule 506(b) provides that investors must provide reasonable assurance that theyre qualified. And that assurance must come within 90 days of the initial investment. Such verification can be in the form of a letter from a certified public accountant, registered investment advisor, or lawyer who must certify that theyve reviewed the investors financia
l data within the last 90 days and deemed the investor qualified.
Know that if they claim to be a qualified purchaser and theyre not, investors shouldnt whine about a failed deal, saying they never shouldve been permitted to invest in the first place.
There may also be repercussions regulatory actions if an investor lies about their qualifications and causes liability for the syndication, a group of investors who have pooled their capital to jointly buy a large real estate property.
If a syndicator knows that an investor is fudging their status and does nothing, they could become liable for the investors losses if the deal fails. In addition to regulatory penalties, prosecution is possible.
To make sure theyre qualified, investors should peruse the suitability part of the SECs Private Placement Memorandum.
Why shouldnt investors lie about being a qualified purchaser? It simply isnt worth it. Their best bet is to work to legitimately attain the desired status, or shift their energies to other, more accessible investment opportunities.