Qualified Purchaser

The highest of the three investor standards, and the one with the most counterintuitive test: it measures investments, not net worth.

The Definition

Section 2(a)(51) of the Investment Company Act. You are a qualified purchaser if you are:

• A natural person owning at least $5 million in investments (individually or jointly with a spouse)
• A family-owned company owning at least $5 million in investments
• A trust not formed for the purpose of the investment, where the trustee and each settlor are themselves qualified purchasers
• Any person or entity owning and investing on a discretionary basis at least $25 million in investments, whether for its own account or for others

“Investments” Is a Term of Art

This is the part that catches people. Rule 2a51-1 defines what counts, and the list is narrower than net worth:

Counts — Securities (with limits on securities of controlled affiliates), real estate held for investment, commodity interests and physical commodities held for investment, financial contracts entered into for investment purposes, and cash and cash equivalents held for investment.

Doesn’t count — Your primary residence. Real estate used in a trade or business. Personal property. Property used for personal purposes.

And critically: investments are valued net of any indebtedness incurred to acquire them. A $6 million portfolio bought with $2 million of margin is $4 million of investments. You would not be a qualified purchaser.

So the sequence is: net worth is the broadest measure, investments is a narrower subset, and the $5 million investments test sits well above a $1 million net worth test in practice — often five to ten times higher in real balance sheets.

Why Funds Care: 3(c)(1) vs 3(c)(7)

Private funds avoid registering as investment companies by relying on one of two exemptions, and the choice determines who they can accept.

Section 3(c)(1) — Up to 100 beneficial owners, who must generally be accredited investors. Simple, but the 100-slot cap is a hard ceiling. A fund that fills it cannot accept another investor, which is why 3(c)(1) sponsors ration allocation and often set high minimums to avoid wasting slots on small checks.

Section 3(c)(7) — Unlimited investors, but every one must be a qualified purchaser. No 100-owner cap (though a separate Exchange Act threshold at 2,000 holders of record imposes a practical ceiling for large funds).

That’s the trade. A 3(c)(7) fund gives up the broader accredited pool and gets scale in exchange. If a fund tells you it’s 3(c)(7), it’s telling you the minimum standard is $5 million in investments regardless of what any marketing page says about accredited investors.

Where It Shows Up

• Institutional-scale private equity, credit, and hedge funds. Most large funds run 3(c)(7).
• Feeders and SPVs into those funds. If an SPV is investing into a 3(c)(7) fund, the SPV itself must qualify — and depending on structure, look-through rules may reach through to its investors.
• Carry eligibility. Qualified purchaser status is an independent route to qualified client status under Rule 205-3, so a qualified purchaser can always be charged performance fees.

The Practical Summary

Three standards, three statutes, three different questions. Nobody sat down and designed them as a ladder — they accumulated.