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.

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.

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.

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.

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.