What Is a Qualified Purchaser? Definition and Tests
Qualified purchaser is the eligibility test behind section 3(c)(7) private funds in the United States. This guide sets out the statutory definition, what counts as "investments", worked examples for individuals, family companies, trusts and institutions, how the test compares with accredited investor and qualified client status, and how fund managers and administrators check it at subscription.
Private funds in the United States avoid registration as investment companies by fitting one of two exclusions. Section 3(c)(1) caps a fund at 100 beneficial owners. Section 3(c)(7) has no numerical cap but restricts the fund to qualified purchasers. Which investors clear that bar, and how a fund proves it, is therefore a routine question in every subscription booklet, side-letter negotiation and transfer request.
This guide reflects the statute and SEC rules as published on 29 October 2026. It is a summary for compliance, operations and investor-relations teams, not legal advice. Our companion guide covers the accredited investor requirements, the lower test used by most other private offerings.
Where the Qualified Purchaser Definition Comes From
Congress added the qualified purchaser concept in 1996 to let funds sold only to large, sophisticated investors escape the 100-investor limit. The statute sets the dollar thresholds; the SEC's rules fill in what counts as an investment and how to treat entities, trusts and employees.
| Item | Detail |
|---|---|
| Statute | Section 2(a)(51) of the Investment Company Act of 1940, 15 U.S.C. 80a-2(a)(51) |
| Origin | Added by the National Securities Markets Improvement Act of 1996 (Pub. L. 104-290, 11 October 1996), which also created the section 3(c)(7) fund exclusion |
| Definition of "investments" | SEC Rule 2a51-1 (17 CFR 270.2a51-1), adopted under the Act's instruction that the Commission define the term |
| Where it bites | Section 3(c)(7): a fund that is not making a public offering and whose securities are owned exclusively by qualified purchasers (and knowledgeable employees under Rule 3c-5) is not an investment company |
| Related rules | Rule 2a51-2 (beneficial owners of excepted funds), Rule 2a51-3 (companies formed to invest), Rule 3c-5 (knowledgeable employees), Rule 3c-6 (transfers by gift, bequest, divorce or death) |
The Four Qualified Purchaser Tests
Section 2(a)(51)(A) lists four categories. An investor needs to fit only one of them, measured at the time it acquires the fund's securities.
| Test | Who qualifies | Threshold |
|---|---|---|
| (A)(i) Natural person | An individual, including one who holds a joint, community-property or similar shared interest in the fund with a spouse who is a qualified purchaser | Owns not less than US$5,000,000 in investments |
| (A)(ii) Family company | A company owned directly or indirectly by two or more natural persons related as siblings or spouses (including former spouses) or direct lineal descendants by birth or adoption, their spouses, their estates, or foundations, charities or trusts established by or for them | Owns not less than US$5,000,000 in investments |
| (A)(iii) Trust | A trust that is not a family company and was not formed for the specific purpose of acquiring the fund's securities, where the trustee (or other decision-maker) and every settlor or contributor of assets is itself a qualified purchaser under (i), (ii) or (iv) | No separate dollar test; each decision-maker and contributor must qualify |
| (A)(iv) Large investor | Any person acting for its own account or the accounts of other qualified purchasers: institutions, companies, pension plans, funds and individuals | Owns and invests on a discretionary basis not less than US$25,000,000 in investments |
Three further rules decide how entities are treated:
- Funds investing in funds (section 2(a)(51)(C)). A company that would be an investment company but for section 3(c)(1) or 3(c)(7) is not a qualified purchaser unless every beneficial owner who acquired its securities on or before 30 April 1996, and every such owner of any excepted fund that directly or indirectly owns it, consents to that treatment (beneficial owners being determined under section 3(c)(1)(A)). A fund formed after that date has no pre-1996 owners to consent, so in practice it qualifies in the ordinary way: through the US$25 million test or because all of its owners are qualified purchasers.
- Entities formed to invest (Rule 2a51-3). A company formed for the specific purpose of acquiring the securities of a 3(c)(7) fund is not a qualified purchaser under tests (ii) or (iv) unless each of its beneficial owners is a qualified purchaser. The same rule confirms that any company may be treated as a qualified purchaser if each beneficial owner of its securities is one, whatever the company's own investments.
- Knowledgeable employees (Rule 3c-5). Executive officers, directors, trustees, general partners and advisory board members of the fund or its affiliated manager, and employees who, for at least 12 months, have taken part in the investment activities of the fund, other private funds or investment companies managed by the same affiliated manager, or have performed substantially similar duties elsewhere (not clerical or administrative staff), may invest in a 3(c)(7) fund without being qualified purchasers. Their holdings are also ignored when counting a 3(c)(1) fund's 100 owners.
Each fund investor, and where relevant each of its owners, therefore needs a recorded eligibility category, in the same way that the know-your-investor file records identity and beneficial ownership.
What Counts as "Investments"
Rule 2a51-1 does the heavy lifting. It lists the asset types that count, excludes the assets that do not, and sets the valuation and deduction rules.
| Counts as an investment (Rule 2a51-1(b)) | Notes |
|---|---|
| Securities (as defined in section 2(a)(1) of the Securities Act) | Excludes securities of an issuer that controls, is controlled by or is under common control with the investor, unless the issuer is an investment vehicle, a public company, or a company with shareholders' equity of at least US$50 million |
| Real estate held for investment purposes | A home, holiday property or business premises used by the investor or a related person generally does not count (paragraph (c)) |
| Commodity interests held for investment purposes | Futures and related options; valued at the initial margin or option premium deposited |
| Physical commodities held for investment purposes | For example precious metals held as an investment |
| Financial contracts entered into for investment purposes | To the extent they are not securities, such as swaps |
| Binding capital commitments | For a 3(c)(7) fund, a 3(c)(1) fund or a commodity pool, amounts payable to it on demand under a firm agreement or similar binding commitment |
| Cash and cash equivalents held for investment purposes | Includes foreign currencies, bank deposits and instruments, and the net cash surrender value of insurance policies |
Valuation (paragraph (d)). Investments are valued at fair market value on the most recent practicable date or at cost. The rule allows either basis; funds commonly ask the investor to state which one it used.
Deductions (paragraphs (e) and (f)). Any outstanding debt incurred to acquire the investments is deducted. For a family company, debt incurred by its owners to acquire the investments is deducted too. Margin loans and acquisition financing therefore reduce the figure.
Spouses and joint holdings (paragraph (g)(2)). An individual may count investments held jointly with a spouse, as community property or in a similar shared arrangement. Spouses who invest jointly may each count the other's investments, with the debt deductions applied to both.
Retirement accounts (paragraph (g)(4)). Investments in an IRA or similar account directed by and held for the benefit of the investor count.
Qualified institutional buyers (paragraph (g)(1)). A qualified institutional buyer under Rule 144A that acts for its own account, for another qualified institutional buyer or for a qualified purchaser is deemed to be a qualified purchaser, except that a dealer must own and invest at least US$25 million in securities of unaffiliated issuers. An employee benefit plan or trust fund whose beneficiaries make their own investment decisions is not treated as acting for its own account, other than for decisions made solely by the fiduciary, trustee or sponsor.
Reasonable belief (paragraph (h)). A 3(c)(7) fund, or a person acting for it, may treat an investor as a qualified purchaser if it reasonably believes the investor meets the definition. That belief is what the subscription questionnaire is designed to support.
Worked Examples
The examples below apply the rules above. They are illustrations, not advice on any particular investor.
Why It Matters: Section 3(c)(1) and Section 3(c)(7) Funds
The qualified purchaser test exists to serve section 3(c)(7). The table compares the two exclusions a private fund can rely on.
| Feature | Section 3(c)(1) fund | Section 3(c)(7) fund |
|---|---|---|
| Investor limit | Not more than 100 beneficial owners (250 for a qualifying venture capital fund with no more than US$12 million in aggregate contributions and uncalled commitments, the threshold set by Rule 3c-7 from 30 September 2024) | No numerical limit in the Investment Company Act |
| Who may invest | Any investor who fits the offering exemption; most funds use Rule 506 and accept accredited investors | Only persons who are qualified purchasers at the time they acquire the securities, plus knowledgeable employees |
| Look-through | A company that owns 10 per cent or more of the fund's voting securities and is, or would be but for 3(c)(1) or 3(c)(7), an investment company is looked through to its owners (section 3(c)(1)(A)) | An investing entity must itself be a qualified purchaser: the US$25 million test, or every beneficial owner a qualified purchaser (Rule 2a51-3); a company formed to invest in the fund is looked through |
| Public offering | Not permitted | Not permitted |
| Transfers | Transfers to the transferor's estate, by gift or bequest, under a legal separation or divorce agreement, or to a company set up exclusively for those persons are attributed to the transferor (Rule 3c-6) | Securities received from a qualified purchaser (other than the fund itself) by gift or bequest, or through legal separation, divorce, death or another involuntary event, are treated as held by a qualified purchaser (section 3(c)(7)(A), Rule 3c-6) |
| Parallel funds | A 3(c)(1) fund and a 3(c)(7) fund run side by side are not treated as a single issuer for either test (section 3(c)(7)(E)) | Same |
Two consequences follow for fund operations. First, status is tested at the time of acquisition, so a fund re-checks eligibility on every subsequent subscription, every transfer and every conversion between share classes, not only at the first closing. Second, section 3(c)(7)(D), like the equivalent provision for 3(c)(1) funds, keeps a 3(c)(7) fund within the limits on investments by registered funds in section 12(d)(1), which matters when registered funds of funds want to allocate to it.
Pre-1996 investors are covered by a transition rule in section 3(c)(7)(B): a fund that previously relied on 3(c)(1) may keep up to 100 non-qualified purchasers who bought on or before 1 September 1996, provided it told investors that future sales would be limited to qualified purchasers and gave each holder a reasonable chance to redeem.
Qualified Purchaser vs Accredited Investor, Qualified Client and QIB
Subscription documents for US funds typically ask the investor to confirm several statuses at once. They answer different questions and come from different statutes.
| Test | Individuals | Entities | Used for |
|---|---|---|---|
| Accredited investor (Rule 501(a), Regulation D) | Net worth above US$1 million excluding the primary residence; or income above US$200,000 (US$300,000 with a spouse or spousal equivalent) in each of the last two years with the same expected in the current year; or an SEC-designated professional licence | Most entity types with total assets above US$5 million; entities with more than US$5 million in investments; family offices with more than US$5 million under management; entities owned entirely by accredited investors | Private placements under Rule 506, including most 3(c)(1) funds |
| Qualified client (Advisers Act Rule 205-3) | At least US$1.4 million under the adviser's management, or net worth above US$2.7 million excluding the primary residence (amounts effective 29 June 2026) | Same tests; also qualified purchasers and certain knowledgeable employees | Whether an SEC-registered adviser may charge performance fees or carried interest |
| Qualified purchaser (section 2(a)(51)) | At least US$5 million in investments | Family companies at US$5 million; other entities US$25 million invested on a discretionary basis; or every owner is a qualified purchaser | Section 3(c)(7) funds |
| Qualified institutional buyer (Rule 144A) | Not available to individuals | Institutions that own and invest on a discretionary basis at least US$100 million in securities of unaffiliated issuers; registered dealers at US$10 million; banks also need audited net worth of at least US$25 million | Resales of restricted securities under Rule 144A |
The thresholds move. The SEC raised the qualified client amounts by order with effect from 29 June 2026, and on 6 October 2026 the Federal Register published an SEC proposal (Release IA-7022, comments due 7 December 2026) that would replace the qualified client dollar tests with the accredited investor definition. The qualified purchaser amounts, by contrast, are fixed in the statute and have not changed since 1996. For the accredited investor tests in detail, and the equivalent regimes in Singapore, Hong Kong, the UK and the EU, see our guide to accredited investor requirements.
How Funds Verify Qualified Purchaser Status
Unlike Rule 506(c) for accredited investors, neither the Act nor Rule 2a51-1 prescribes verification steps. The standard is the fund's reasonable belief. A defensible process usually looks like this.
Ask the right question in the subscription booklet
The investor questionnaire should set out the four tests and the knowledgeable employee category, ask the investor to tick the one it relies on, and ask entities whether they were formed for the purpose of investing in the fund and, if so, to confirm the status of each beneficial owner. Our guide to fund subscription documents describes where this sits in the booklet.
Collect the supporting detail
For individuals: the category of investments relied on and confirmation that acquisition debt has been deducted. For family companies: the family relationship of the owners. For trusts: the identity and status of the trustee and every settlor. For institutions: confirmation of discretionary management and the aggregate amount. Evidence such as statements is not mandatory, but many funds request it above a risk threshold or where the representation looks marginal.
Look through entities where the rules require it
Where a company was formed to invest in the fund, or relies on the all-owners test, obtain and record each owner's status. This overlaps with beneficial ownership tracing for AML purposes, but the two tests use different thresholds and should be documented separately.
Record the basis for the fund's belief
Keep the signed representation, any evidence, the date, and the name of the reviewer. Status is tested at acquisition, so each later subscription and transfer needs its own record.
Re-test on transfers and conversions
A transferee must be a qualified purchaser unless Rule 3c-6 applies (transfers to the transferor's estate, by gift or bequest, under a legal separation or divorce agreement, or to a company set up exclusively for those persons). Build the check into the transfer approval workflow rather than relying on the original closing file.
Keep eligibility and KYC distinct but together
Qualified purchaser status is a securities-law eligibility question. Identity verification, beneficial ownership, sanctions and PEP screening are AML obligations, which for SEC-registered advisers are set out in the FinCEN investment adviser AML rule. The same onboarding file should hold both, with separate sign-offs.
How One Constellation Supports Fund Managers
One Constellation runs the KYC and AML side of investor onboarding for fund managers, administrators and transfer agents: an investor onboarding portal that collects documents and declarations, identity verification, KYB and beneficial-ownership tracing, sanctions, PEP and adverse-media screening, risk assessment, transaction monitoring, and case management with STR and SAR workflows. Eligibility representations such as qualified purchaser status stay in your subscription documents, and the completed file sits alongside the AML record for each investor. See investor onboarding and AML compliance for fund managers.
Frequently Asked Questions
What is a qualified purchaser?
A qualified purchaser is an investor who meets one of the tests in section 2(a)(51) of the Investment Company Act of 1940: an individual or family-owned company with at least US$5 million in investments, a trust whose trustee and settlors are all qualified purchasers, or a person or entity that owns and invests on a discretionary basis at least US$25 million in investments. Funds relying on section 3(c)(7) may sell only to qualified purchasers and knowledgeable employees.
How much money do you need to be a qualified purchaser?
An individual needs at least US$5 million in investments, as defined by SEC Rule 2a51-1, after deducting any debt used to buy them. A company owned by members of one family also qualifies at US$5 million. Other entities need at least US$25 million invested on a discretionary basis, or every owner must be a qualified purchaser.
Is a qualified purchaser the same as an accredited investor?
No. Accredited investor is a lower test under Rule 501(a) of Regulation D: net worth above US$1 million excluding the primary residence, or income above US$200,000 (US$300,000 with a spouse). Qualified purchaser requires at least US$5 million in investments. A qualified purchaser is almost always an accredited investor, but most accredited investors are not qualified purchasers.
Can an entity be a qualified purchaser?
Yes. A family company qualifies with US$5 million in investments. Any other entity qualifies if it owns and invests on a discretionary basis at least US$25 million, or if every beneficial owner of its securities is a qualified purchaser. An entity formed specifically to invest in a 3(c)(7) fund is looked through to its owners under Rule 2a51-3.
What is a 3(c)(7) fund?
A private fund that is not an investment company under section 3(c)(7) of the Investment Company Act because it makes no public offering and its securities are owned exclusively by qualified purchasers (plus knowledgeable employees). Unlike a 3(c)(1) fund, it is not limited to 100 beneficial owners.
Do funds have to verify qualified purchaser status?
The Act and Rule 2a51-1 do not prescribe verification steps. Under Rule 2a51-1(h) the fund may rely on a reasonable belief that the investor qualifies, which funds support with a signed investor questionnaire, look-through confirmations for entities, and a record of the basis for the belief at each subscription and transfer.
Sources
- 15 U.S.C. 80a-2(a)(51): definition of "qualified purchaser" (Investment Company Act section 2(a)(51))
- 15 U.S.C. 80a-3(c)(1) and (c)(7): private fund exclusions
- 17 CFR 270.2a51-1: definition of investments for section 2(a)(51)
- 17 CFR 270.2a51-2: beneficial owners of excepted investment companies
- 17 CFR 270.2a51-3: certain companies as qualified purchasers
- 17 CFR 270.3c-5: knowledgeable employees
- 17 CFR 270.3c-6: transfers of interests in 3(c)(1) and 3(c)(7) funds
- 17 CFR 230.501(a): accredited investor definition
- 17 CFR 230.144A: qualified institutional buyer definition
- SEC Release IC-35305: Qualifying Venture Capital Funds Inflation Adjustment (effective 30 September 2024)
- SEC Order IA-6961 adjusting the rule 205-3 qualified client thresholds (91 FR 23520, 1 May 2026)
- SEC proposed rule: Investment Adviser Performance-Based Compensation Modernization (Release IA-7022, 91 FR 63676, 6 October 2026)
This article is general information, not legal advice. Requirements change — check the current text with the regulator before relying on it.
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