Key Takeaways

  • A qualified investor (also called an accredited investor) meets SEC-defined standards for income, net worth, or professional expertise to access unregistered securities.
  • Qualification can be based on income, assets, financial knowledge, or professional licensing (such as Series 7, 65, or 82 licenses).
  • Being a qualified investor opens access to hedge funds, private equity, venture capital, and certain crowdfunding opportunities.
  • Non-qualified investors have limited access and may face more protections, while qualified investors can pursue higher-risk, higher-reward investments.
  • Qualified investors differ from qualified purchasers (who must meet higher asset thresholds) and qualified institutional buyers (QIBs) (large institutions investing $100M+).

What is a Qualified Investor?

A qualified investor, also referred to as an accredited investor, is an individual or entity that can purchase securities that aren’t registered primarily due to the investor’s income and net worth. Specific standards apply to meet such requirements, which are defined in the Securities and Exchange Commission (SEC) Regulation D- Rule 501.

Benefits of Being a Qualified Investor

Qualified investors enjoy opportunities that go beyond the reach of the general public. Because they are presumed to have the financial sophistication and resources to bear higher risks, they can invest in:

  • Private placements and hedge funds not registered with the SEC.
  • Venture capital and private equity funds that target startups and emerging companies.
  • Real estate syndications and crowdfunding deals typically restricted to accredited investors.
  • Special purpose vehicles (SPVs) and other advanced structures used for startup or large-scale financing.

These opportunities often involve higher potential returns but also carry increased risk and less regulatory protection compared to traditional investments.

Requirements of Becoming a Qualified Investor

Many businesses offer securities to only qualified investors because this exempts them from having to register such securities. However, if the securities are offered to both qualified and non-qualified investors, the securities must be registered with the SEC. Qualified investors can include people, businesses, financial institutions, corporations, trusts, and even nonprofit organizations. One is shown to be qualified or accredited in the following ways:

  • Knowledge. Regulatory agencies, including the SEC, must verify that an individual or business has both the assets as well as the knowledge to take on such investment risks in unregistered securities before categorizing the person or entity as being qualified.
  • Income test. The prospective investor must have an annual income of $200,000 or $300,00 for joint income for the last two years with the assurance that the income will remain the same or increase over time. Two exceptions apply to the income test: [1] someone is married within the period of time in which the income test is conducted and [2] the person has a net worth of over $1 million, either individually or jointly with a spouse, then the income test is not necessary.

Keep in mind that the SEC may be changing the framework at some point to make the requirements stricter in terms of becoming qualified. Some additional requirements may include one’s educational background as well as the number of years of professional experience.

The Jumpstart Our Business Startup (JOBS) Act has continually played a role in transforming the overall landscape for private investments and providing that non-qualified investors have access to certain private offerings. Currently under review is a new proposed rule that would allow non-accredited investors, meaning anyone, to invest in crowdfunded offerings, which is generally only open to qualified investors.

Alternative Qualification Methods

While income and net worth are the most common standards, the SEC also recognizes other ways to qualify:

  • Professional certifications and licenses: Holders of Series 7, Series 65, or Series 82 licenses automatically qualify as accredited investors.
  • Knowledgeable employees: Certain employees of private funds may qualify based on their direct involvement in managing investments.
  • Entities and trusts: Trusts with more than $5 million in assets and sophisticated decision-makers, or entities with all qualified equity owners, may also meet the definition.

This expansion of the criteria allows for broader participation from financially knowledgeable individuals who may not meet the strict income or asset thresholds.

Qualified vs. Non-Qualified Investor

While a qualified investor must meet the above-mentioned criteria, a non-qualified investor is one who does not meet such criteria. For example, a non-qualified investor will have a net worth of less than $1 million (individually and/or jointly) and does not meet the income requirements of $200,000 individually or $300,000 jointly.

Investment Risks and Protections

The distinction between qualified and non-qualified investors is primarily about balancing opportunity versus protection.

  • Qualified investors can invest freely in private securities, but they do so without the same disclosure protections or oversight that apply to public offerings. They are expected to conduct their own due diligence and assume the risk of loss.
  • Non-qualified investors have limited access, often restricted to registered securities such as mutual funds or exchange-traded funds (ETFs). These investments are subject to stricter reporting and regulatory safeguards.

This structure ensures that investors with greater resources and expertise can pursue advanced opportunities, while those with less financial capacity are shielded from outsized risks.

The Difference between a Qualified Investor and a Qualified Institutional Buyer

A qualified institutional buyer (QIB) is a corporation that is deemed a qualified investor. Such corporations invest a minimum of $100 million in securities on an unrestricted basis, the threshold for investing in a broker-dealer being $10 million. Including in the definition of a corporation under the QIB rule are financial institutions, insurance companies, and employee benefit plans. However, the QIB must be an entity, whether domestic or foreign, and cannot be an individual.

Qualified Investor vs. Qualified Purchaser

A qualified purchaser is a separate regulatory category under the Investment Company Act of 1940. The key differences include:

  • Qualified Investor: Meets income, net worth, or knowledge standards (e.g., $200,000 income or $1 million net worth).
  • Qualified Purchaser: Must own at least $5 million in investments (for individuals) or $25 million (for institutions).

Qualified purchasers have access to an even wider range of private funds and investment vehicles than accredited/qualified investors. This distinction matters because many hedge funds and private investment companies limit participation exclusively to qualified purchasers.

Frequently Asked Questions

1. What is the main purpose of qualified investor rules?

They ensure only financially sophisticated investors take on high-risk, unregistered securities, protecting less experienced investors.

2. Can I qualify without meeting the income or net worth tests?

Yes. Holding certain licenses (Series 7, 65, 82) or being a knowledgeable employee of a private fund can also qualify you.

3. What investments are restricted to qualified investors?

Private equity, hedge funds, venture capital, real estate syndications, and other private placements are typically limited to qualified investors.

4. How is a qualified investor different from a qualified purchaser?

A qualified purchaser must have significantly higher investment assets ($5M+), granting access to exclusive private funds unavailable to regular accredited investors.

5. Do qualified investors have fewer protections?

Yes. Unlike public securities, private offerings have limited disclosures, meaning qualified investors must accept more responsibility for due diligence.

If you believe that you are a qualified investor, and you are ready to invest in securities being offered to only those who are in fact qualified, you can post your legal need on UpCounsel’s marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.