Sure, it’s 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 shouldn’t say you’re “qualified” if you’re not, even if you think you are. In other words, you must be certain that you’ve attained that designation. If you aren’t, and you make financial moves as if you are, there will be consequences.
Here’s why you shouldn’t lie about being a qualified purchaser – and more.
Qualified Purchaser
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 that’s 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 purchaser’s 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, it’s that
easy to falsify their status. SEC rule 506(b) provides that investors must provide “reasonable assurance” that they’re 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 they’ve reviewed the investor’s
financial data within the last 90 days and deemed the investor qualified.
Know that if they claim to be a qualified purchaser and they’re not, investors shouldn’t whine about a failed deal, saying they never should’ve 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 investor’s losses if the deal fails. In addition to regulatory penalties, prosecution is possible.
To make sure they’re “qualified,” investors should peruse the “suitability” part of the SEC’s Private Placement Memorandum.
Why shouldn’t investors lie about being a qualified purchaser? It simply isn’t worth it. Their best bet is to work to legitimately attain the desired status, or shift their energies to other, more accessible investment opportunities.
