A qualified client is an investor with $2.2 million in net worth or $1.1 million under management with the adviser. This standard comes from Rule 205-3 under the Investment Advisers Act and governs performance-based compensation. If your fund charges carried interest or an incentive allocation and you are a registered investment adviser or an exempt reporting adviser, your investors generally must meet the qualified client threshold to pay that fee.
This requirement catches many emerging managers off guard. An investor can be accredited (meeting the $1 million net worth test) but not a qualified client (falling short of the $2.2 million threshold). That investor can invest in your fund, but you cannot charge them a performance fee. If you do charge a performance fee to a non-qualified client, you are in violation of the Advisers Act, regardless of what your fund documents say.
Qualified purchasers and knowledgeable employees are deemed qualified clients by definition, so this issue primarily affects investors who meet only the accredited investor standard.
The SEC adjusts the qualified client thresholds periodically for inflation, so verify the current dollar amounts when onboarding new investors. The most recent adjustment took effect in 2021.
See Accredited Investor vs. Qualified Purchaser vs. Qualified Client for a full comparison of all three investor classifications.
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