Private fund managers encounter three distinct investor qualification standards, each from a different regulatory regime. Accredited investor status determines who can invest under Regulation D. Qualified purchaser status determines whether your fund can use the 3(c)(7) exemption under the Investment Company Act. Qualified client status determines whether you can charge performance-based fees. Confusing these three categories, or assuming one satisfies all three, creates real compliance risk.
Accredited Investor
The accredited investor standard comes from SEC Rule 501 of Regulation D. It is the baseline qualification for most private fund investments. If your fund relies on a Rule 506(b) or 506(c) offering, every investor (or at least the vast majority under 506(b)) must meet this threshold.
An individual qualifies as an accredited investor by meeting any one of these tests:
- Income test: $200,000 in individual income (or $300,000 joint with a spouse or spousal equivalent) in each of the last two years, with a reasonable expectation of reaching the same level in the current year.
- Net worth test: $1,000,000 or more in net worth, excluding the value of a primary residence.
- Professional certification: Holders of Series 7, Series 65, or Series 82 licenses in good standing.
- Knowledgeable employee: Directors, executive officers, or certain employees of the fund itself who participate in investment activities.
Entities qualify with $5,000,000 or more in assets, or if all equity owners are individually accredited. Trusts qualify at the same $5,000,000 threshold if the trust was not formed specifically to acquire the securities being offered.
Qualified Purchaser
The qualified purchaser standard comes from Section 2(a)(51) of the Investment Company Act of 1940. It determines whether your fund can rely on the Section 3(c)(7) exemption, which removes the 100-investor cap that applies to 3(c)(1) funds.
The thresholds are substantially higher than accredited investor status, and the measurement is different. Qualified purchaser status looks at investments, not total net worth or income.
- Individuals: $5,000,000 or more in investments.
- Family-owned companies: $5,000,000 or more in investments.
- Trusts: $5,000,000 or more in investments, not formed for the specific purpose of acquiring the offered securities, and directed by a qualified purchaser.
- Entities acting for their own account or for other qualified purchasers: $25,000,000 or more in investments.
"Investments" has a specific definition under SEC rules. It includes securities, real estate held for investment, commodity contracts, cash and cash equivalents held for investment, and certain financial contracts. It does not include your primary residence, property used in a business, or personal-use assets.
Qualified Client
The qualified client standard comes from SEC Rule 205-3 under the Investment Advisers Act. It governs whether an investment adviser can charge performance-based compensation, including carried interest and incentive allocations.
If you charge a performance fee or carried interest to investors who are not qualified clients, you violate the Advisers Act prohibition on performance-based compensation. The thresholds (adjusted periodically by the SEC for inflation) are:
- Net worth test: $2,200,000 or more, excluding the value of a primary residence.
- Assets under management test: $1,100,000 or more under management with the adviser immediately after entering the advisory contract.
- Knowledgeable employees: Qualified employees of the fund's adviser also qualify.
For most private fund managers charging 20% carried interest, every limited partner must meet the qualified client standard. This is separate from whether they are accredited or qualified purchasers.
Side-by-Side Comparison
| Accredited Investor | Qualified Purchaser | Qualified Client | |
|---|---|---|---|
| Governing law | SEC Rule 501 (Regulation D) | Section 2(a)(51), Investment Company Act | SEC Rule 205-3 (Advisers Act) |
| Individual threshold | $200K income or $1M net worth | $5M in investments | $2.2M net worth or $1.1M AUM |
| What is measured | Income or net worth | Investment assets only | Net worth or assets under management |
| What it unlocks | Ability to invest in Reg D offerings | Ability to invest in 3(c)(7) funds | Adviser can charge performance fees |
| Verification | Self-certification (506(b)) or verified (506(c)) | Investor questionnaire and representations | Adviser must have reasonable belief |
How They Interact
These three standards overlap but do not nest neatly inside each other. You can meet one standard while failing another.
A person who earns $250,000 per year and has a $900,000 investment portfolio is accredited (income test) but not a qualified purchaser (under $5M in investments) and likely not a qualified client (under $2.2M net worth). That person can invest in your 3(c)(1) fund under Reg D but cannot invest in a 3(c)(7) fund, and you cannot charge that person performance fees.
A person with $6,000,000 in investment assets is almost certainly all three: accredited, qualified purchaser, and qualified client. In practice, most qualified purchasers also satisfy the other two standards because the $5M investments threshold is the highest bar.
A rare edge case: someone with $5M in illiquid private fund interests (qualifying as a QP) but a total net worth below $2.2M due to large debts would be a qualified purchaser but not a qualified client. This scenario is uncommon but worth checking when your investors have concentrated illiquid holdings.
Which Standard Applies to Your Fund
3(c)(1) Funds
A fund relying on the Section 3(c)(1) exemption must limit itself to 100 beneficial owners. If the fund also relies on Rule 506(b), it can accept up to 35 non-accredited sophisticated investors, with remaining investors being accredited. Under Rule 506(c), all investors must be verified accredited investors.
3(c)(7) Funds
A fund relying on the Section 3(c)(7) exemption has no limit on the number of investors but requires every investor to be a qualified purchaser. This fund still needs a Reg D exemption for the securities offering itself, so your investors must also meet the applicable Reg D standard.
Performance Fees
If your fund charges carried interest, incentive fees, or any other performance-based compensation, every investor who pays that fee must be a qualified client. This requirement applies regardless of which Investment Company Act exemption you use.
Common Mistakes
Assuming accredited investor status means qualified purchaser status
The $1M net worth threshold for accredited status is far below the $5M investments threshold for qualified purchaser status. A fund manager launching a 3(c)(7) fund cannot simply accept all accredited investors.
Not re-verifying investor status for subsequent funds
Investor qualifications must be current at the time of investment. An investor who qualified for Fund I may not qualify for Fund II if circumstances have changed. Collect fresh representations and, where required, fresh verification for each fund.
Using the wrong standard for fee calculations
Some managers verify accredited status but forget to verify qualified client status before charging performance fees. If you charge 20% carried interest to a limited partner who is accredited but not a qualified client, you have violated the Advisers Act.
Confusing net worth with investments
Accredited investor and qualified client standards measure net worth. Qualified purchaser status measures investments specifically. A person with $4M in home equity and $2M in investments has a net worth well above $5M but only $2M in qualifying investments for QP purposes.
How Capital Company Helps
Capital Company provides digital investor onboarding, including subscription documents, investor questionnaires, and qualification verification. Schedule a demo to learn more.
This guide is for informational purposes only and does not constitute legal, tax, or investment advice. Investor qualification thresholds are subject to periodic adjustment by the SEC. The qualified client thresholds cited ($2.2M net worth, $1.1M AUM) reflect amounts effective as of the most recent SEC adjustment and may change. Consult qualified legal counsel for guidance specific to your fund.