Qualified Purchasers under the Investment Company Act

In a private fund exempt under 3(c)(1) investors only generally need to be accredited investors (and “qualified clients” if the fund manager is SEC registered. If you have more than 100 investors in the fund you will need to fall under the 3(c)(7) exemption. That means all of your investors must be “qualified purchasers.” A qualified purchaser is a much greater requirement than an accredited investor and a qualified client.

To paraphrase the requirements under Section 2(a)(51) of the Investment Company Act, a “qualified purchaser” means:

• a person not less than $5 million in investments
• a company with not less than $5 million in investments owned by close family members
• a trust, not formed for the investment, with not less than $5 million in investments
• an investment manager with not less than $25 million under management
• a company with not less than $25 million of investments

To that list you can also add:

• A company (regardless of the amount of such company’s Investments) beneficially owned exclusively by Qualified Purchasers.
• A “Qualified Institutional Buyer” under Rule 144A of the 33 Act (except that “dealers” under Rule 144 must meet the $25 million standard of the 1940 Act, rather than the $10 million standard of Rule 144A). Rule 144A generally defines a “Qualified Institutional Buyer” as institutions, including registered Investment Companies, that own and invest on a discretionary basis $100 million of securities that are affiliated with the institution, banks that own and invest on a discretionary basis $100 million in  securities and have an audited net worth of $25 million, and certain registered dealers.

“Investments” generally means the following:

1. Securities, including stocks, bonds and notes, other than securities of an issuer that  is under common control with the qualified purchaser.
2. Real estate held for investment purposes.
3. Commodity futures contracts, options or commodity futures and options on physical commodities traded on a contract market or board of trade, held for investment purposes.
4. Physical commodities (e.g., gold and silver), with respect to which futures contracts are traded on a contract market or board of trade, held for investment purposes.
5. Financial contracts (e.g., swaps and similar individually negotiated financial transactions), other than securities, held for investment purposes.
6. For an investment company or a commodity pool, any binding capital commitments.
7. Cash and cash equivalents held for investment purposes. Neither cash used by an individual to meet everyday expenses nor working capital used by a business is considered cash held for investment purposes.

Sources:

• Section 2(a)(51) of the Investment Company Act
• Rule 144A (17 C.F.R. 230.144A) (.pdf)
• What is a qualified purchaser in Hedge Fund Law Blog
• Rule 144A Offerings May Supplant IPOs from Bowne
• Private Fund Exemptions under the Investment Company Act – prior post

Image of Coin Stacks is by Darren Hester under a creative commons license.