United States: Investor Qualification: A Primer

Last Updated: January 14 2016
Article by Michael R. Manley, Eric R. Smith and Nikhil N. Matani

Investor qualification is an integral component of managing an investment fund. The type and character of each investor affect, among other things, (i) whether an investor qualifies to invest, (ii) whether the fund would be required to register with the Securities and Exchange Commission (SEC), and (iii) the fee that can be charged. The terms "accredited investor," "qualified purchaser," and "qualified client" are each defined in separate statutes or regulations and are important for different reasons. This article offers a brief explanation of each term and its relevance to a manager's fund-raising efforts and its ability to collect fees from its investors.

Accredited Investor

Securities Act of 1933

Under the Securities Act of 1933 Act (the 33 Act), a company that offers or sells its securities must register such securities with the SEC, unless an exemption from registration is available. A commonly used exemption is found in Rule 506 of Regulation D under the 33 Act. To get the greatest benefit from this exemption, a company must sell its securities only to "accredited investors." "Accredited Investor" is defined in Rule 501(a) promulgated under the 33 Act (the complete definition can be found here). An individual generally qualifies as an accredited investor if (1) such person's individual net worth, or joint net worth with such person's spouse, exceeds $1,000,000, or (2) for each of the two most recent years, such person's individual income exceeds $200,000 or joint income with such person's spouse exceeds $300,000.1 Accordingly, a fund offering or selling its securities only to "Accredited Investors" would not be required to register such securities with the SEC.

Investment Company Act of 1940

Under the Investment Company Act of 1940 (the 1940 Act), Section 3(c) exempts from the definition of investment company many types of entities that would otherwise be subject to the significant regulatory requirements of the 1940 Act. Section 3(c)(1) excludes privately held investment companies from regulation under the 1940 Act if it satisfies two requirements: (1) it must not make or propose to make a public offering of its securities, and (2) it must not have more than 100 beneficial owners of its securities. Accordingly, a straightforward manner of complying with the first requirement would be to have the fund comply with Rule 506 of Regulation D by, among other items, selling only to accredited investors. To comply with the second requirement, it must not have more than 100 beneficial owners.

Qualified Purchaser

Investment Company Act of 1940

Section 3(c)(7) of the 1940 Act excludes privately held investment companies from falling within the definition of an "investment company" under the 1940 Act if: (1) it is not making or proposing to make a public offering, and (2) the company's outstanding securities are owned exclusively by "qualified purchasers." "Qualified Purchaser" is defined in Section 2(a)(51)(A) of the 1940 Act (the complete definition can be found here). An individual generally qualifies as a "qualified purchaser" if it owns not less than $5 million in investments. Accordingly, by selling securities only to qualified purchasers, the fund itself would be excluded from regulation under the 1940 Act.

Qualified Client

Investment Advisers Act of 1940

As a general proposition, Section 205(a)(1) of the Investment Advisers Act of 1940 (the Advisers Act) prohibits an adviser registered with the SEC from charging clients a performance fee. However, the Advisers Act and the rules promulgated thereunder provide certain exemptions from this restriction. Rule 205-3(a) permits an investment adviser to collection a performance fee, such as carried interest, from "qualified clients," which is defined in such rule. In 2012, the SEC changed the definition of a "qualified client" to be, among other things, one of the following: (i) an individual or a company that, after contracting with the fund, has at least $1 million under the management of the investment adviser, (ii) an individual or company that the manager reasonably believes, immediately after contracting with the fund, has a net worth greater than $2 million (jointly with a spouse if an individual), excluding the value of the individual's primary residence and any indebtedness thereto, or (iii) an individual or company that the adviser reasonably believes is a qualified purchaser (see above). A complete definition of "qualified client" can be found here.

Generally excluded from the "qualified client" requirement are (i) family offices and venture capital fund advisers, (ii) advisers with less than $100 million in assets under management, and (iii) private fund advisers with less than $150 million in assets under management.

In general, every investor in a private fund should be an accredited investor – this allows such a fund to avoid the expensive and cumbersome registration of the fund's securities under the 33 Act. If a fund exceeds 100 investors – even if accredited – it will need to either (i) register as an "investment company" under the 1940 Act or (ii) seek another exemption. In the event that a fund exceeds 100 investors, it can rely on Section 3(c)(7) of the 1940 Act to avoid regulation as an investment company, which requires that the investors in the fund not only be accredited, but also be "qualified purchasers" – in most instances, a significantly higher threshold than that of an accredited investor. To charge clients a performance fee, fund managers generally must evaluate whether such investors are "qualified clients." Fund managers, compliance professionals, and investment professionals should understand the distinctions between these types of investors. Failure to do so could trigger a costly and unnecessary registration process or prohibit a fund manager from collecting performance fees.


1 Certain covered entities with total assets in excess of $5,000,000 – such as select employee benefit plans and entities compliant with section 501(c)(3) of the Internal Revenue Code not formed for the specific purpose of acquiring the offered securities – generally may qualify as accredited investors as well.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
Kramer Levin Naftalis & Frankel LLP
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Kramer Levin Naftalis & Frankel LLP
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions