boltKey takeaways
- A qualified purchaser is defined in section 2(a)(51) of the Investment Company Act; the main tests are $5 million of investments for individuals and family companies and $25 million invested on a discretionary basis for other entities.
- The test counts investments, not net worth: a primary residence, business real estate and operating business interests generally do not count, and debt incurred to buy the investments is deducted.
- Funds relying on section 3(c)(7) may only sell to qualified purchasers (plus knowledgeable employees), but in exchange they avoid the 100-investor cap of section 3(c)(1).
- A vehicle formed to invest in a particular 3(c)(7) fund is generally a qualified purchaser only if each of its owners is one, so look through SPVs and feeder entities.
- Status is tested at the time of each acquisition, so subscription questionnaires, transfer reviews and follow-on investments all need a current QP determination.
A qualified purchaser is an investor wealthy enough, measured by investments rather than income or net worth, that the Investment Company Act lets private funds sell to them without counting toward the usual 100-investor limit. In broad terms, individuals and family-owned companies qualify with at least $5 million in investments, and most other entities qualify by owning and investing at least $25 million on a discretionary basis. The status matters most for funds relying on section 3(c)(7), which may admit only qualified purchasers but can then have many more investors.
Why the definition exists#
A private fund is, in substance, an investment company. To avoid registering under the Investment Company Act of 1940, most private funds rely on one of two exclusions in section 3:
- Section 3(c)(1): no more than 100 beneficial owners (250 for a qualifying venture capital fund) and no public offering.
- Section 3(c)(7): all investors are qualified purchasers at the time they acquire their interests, and no public offering.
Congress added section 3(c)(7) in 1996 on the theory that investors at this level of wealth can evaluate a fund without the protections of registration. Because there is no fixed investor cap, 3(c)(7) is the usual structure for large institutional funds. The practical ceiling instead comes from the Exchange Act, which can require registration of a class of securities once it is held of record by 2,000 persons (or 500 non-accredited persons) and the issuer exceeds a total assets threshold, which is why large 3(c)(7) funds still monitor investor counts.
The categories of qualified purchaser#
Section 2(a)(51)(A) defines four categories. SEC rules add two practical extensions.
| Category | Test |
|---|---|
| Natural person | Owns at least $5 million in investments, including investments held jointly or as community property with a spouse |
| Family company | A company owned directly or indirectly by or for two or more related natural persons (siblings, spouses, lineal descendants and their spouses, and related estates, foundations and trusts) that owns at least $5 million in investments |
| Trust | A trust not formed for the specific purpose of acquiring the fund interest, where the trustee or other decision-maker and each settlor or contributor is a qualified purchaser |
| Other persons | Any person, acting for its own account or for other qualified purchasers, that in the aggregate owns and invests on a discretionary basis at least $25 million in investments |
| Qualified institutional buyer | Under Rule 2a51-1, a QIB under Rule 144A is generally deemed a qualified purchaser, subject to conditions (for example, a dealer must own and invest at least $25 million in securities of unaffiliated issuers) |
| Entity of qualified purchasers | Under Rule 2a51-3, a company formed for the specific purpose of acquiring the fund's securities is a qualified purchaser only if each of its beneficial owners is one; a company owned entirely by qualified purchasers can qualify regardless of its own size |
Two related points come up in fundraising. First, a fund's own "knowledgeable employees" (certain executive officers, directors, general partners and investment professionals of the fund or its adviser, as defined in Rule 3c-5) may invest in a 3(c)(7) fund without being qualified purchasers. Second, an existing private fund that wants to invest as a qualified purchaser in another fund may need consents from its own pre-1996 investors under section 2(a)(51)(C), an issue that now arises mostly with older vehicles.
What counts as "investments"#
The $5 million and $25 million tests are not net worth tests. Rule 2a51-1 defines what can be counted:
- Securities, other than securities of a company the investor controls or is under common control with (the "operating business" exclusion). Interests in other investment vehicles, public company securities and securities of companies with at least $50 million in shareholders' equity count even if controlled.
- Real estate held for investment. Property used as a personal residence or vacation home, or as a place of business, does not count.
- Commodity interests and physical commodities held for investment.
- Financial contracts held for investment.
- Cash and cash equivalents held for investment, including bank deposits and the net cash surrender value of insurance policies.
- Binding capital commitments owed to the investor by its own investors, where the investor is itself a private fund or commodity pool.
Investments may be valued at fair market value on the most recent practicable date, or at cost, applied consistently. The investor then deducts outstanding debt incurred to acquire or for the purpose of acquiring those investments. Spouses may combine jointly held investments, and when they invest jointly each may count the other's investments, with each spouse's acquisition debt deducted.
A worked example#
Assume an individual prospective LP reports the following:
| Item | Value | Counts? | Counted amount |
|---|---|---|---|
| Brokerage account (public equities and bonds) | $3,100,000 | Yes | $3,100,000 |
| Interests in two private funds | $900,000 | Yes | $900,000 |
| Rental condominium held for investment | $1,200,000 | Yes | $1,200,000 |
| Primary residence | $2,500,000 | No | $0 |
| Controlling stake in family operating business | $4,000,000 | No (controlled operating company) | $0 |
| Margin loan used to buy securities | ($400,000) | Deducted | ($400,000) |
| Total investments | $4,800,000 |
Despite a net worth well above $10 million, this investor is not a qualified purchaser: countable investments are $200,000 short of the $5 million test. The investor would likely be an accredited investor and could invest in a 3(c)(1) fund, but not in a 3(c)(7) fund. Jointly held assets with a spouse, or an overlooked brokerage account, could change the answer, which is why the questionnaire needs to capture each component rather than a single total.
How qualified purchaser fits with other investor standards#
Private fund investors are often tested against three different standards at once, each serving a different statute.
| Standard | Purpose | Core individual test |
|---|---|---|
| Accredited investor | Regulation D private offering exemption | $1M net worth excluding primary residence, or $200k income ($300k joint), or certain professional licenses |
| Qualified client | Allows an adviser to charge performance fees (carried interest) | $1.4M under management with the adviser or $2.7M net worth excluding primary residence, for contracts entered into on or after June 29, 2026; qualified purchasers also qualify |
| Qualified purchaser | Section 3(c)(7) fund eligibility | $5M in investments |
A qualified purchaser will almost always also be an accredited investor and a qualified client, but the reverse is not true. As of late 2026, the SEC has also proposed replacing the qualified client dollar tests with the accredited investor standard and requested comment on new professional pathways to accredited status. Neither change affects the qualified purchaser definition, which is set by statute.
Verifying qualified purchaser status#
The fund must have a reasonable belief that each investor is a qualified purchaser at the time of acquisition. In practice that means:
- Use a questionnaire in the subscription agreement that walks through each category and asks for the components of the investments calculation, not just a checkbox.
- Look through purpose-built entities. If an LLC or trust was formed to make this investment, test each owner or the trustee and contributors.
- Watch for red flags. A stated $5 million of investments that is inconsistent with other information in the file, or a commitment that would represent most of the investor's investments, deserves a follow-up question.
- Re-test on transfers and new commitments. Status applies at each acquisition, so secondary transferees and investors making a new commitment to a successor fund need a fresh determination.
- Keep the record. Store the questionnaire, any supporting documents and reviewer sign-off together with the investor's KYC file so the determination can be evidenced to auditors or examiners.
These checks usually run alongside AML and KYC onboarding, which collects much of the same ownership information.
How Privatis helps#
Privatis captures investor eligibility as part of KYC/AML onboarding, alongside risk scoring and beneficial ownership information, and stores the completed subscription and questionnaire documents in the LP portal's data room with an audit trail of every change. When a transfer or new commitment comes through, the investor's prior determinations and supporting documents are already in one place for review.
The qualified purchaser rules have detailed exceptions, especially for entities and trusts, so confirm close cases with counsel.