The qualified purchaser test looks like a wealth test and is not one: it counts only assets held for investment, at market value or cost, less the debt incurred to acquire them, against 5,000,000.
A natural person is a qualified purchaser if they own at least 5,000,000 of "investments" as defined in Rule 2a51-1, valued at market or cost, less any debt incurred to acquire them. It is not a net worth test. An illustrative couple with a net worth of 10,050,000 holds 5,300,000 of qualifying investments, owes 1,150,000 of acquisition debt against them, and so has 4,150,000: they are not qualified purchasers, although they clear the accredited investor test several times over.
Worked in full in The Private Fund Compliance Officer by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
A fund relying on section 3(c)(7) of the Investment Company Act may only sell to qualified purchasers, and the status is tested at the time of each investment. Get it wrong and the fund's exemption is at stake, not just one subscription. The compliance officer's job is to recompute the investor's number from the components, because the box ticked on the subscription form is the investor's own reading of a definition most people have never seen.
| Holding | Value | Counted? |
|---|---|---|
| Brokerage account, listed securities | 2,150,000 | Yes |
| Self-directed IRA | 1,100,000 | Yes |
| Rental condominium held for investment | 1,650,000 | Yes |
| Money market fund held for investment | 400,000 | Yes |
| Primary residence | 3,200,000 | No: not held for investment |
| Vacation home, personal use | 900,000 | No: personal use |
| 60% of the family operating company (private) | 2,500,000 | No: controlled, private issuer |
| Art collection | 300,000 | No: not an investment under the rule |
| Total assets | 12,200,000 |
Debts: a 900,000 mortgage taken to buy the condominium, a 250,000 margin loan used to buy securities, and a 1,000,000 mortgage on the primary residence. Total debts are 2,150,000 and net worth is 10,050,000.
Investments = Σ qualifying assets at market value or cost − debt incurred to acquire them ≥ 5,000,000
In Excel, with values in B2:B9, a 1 or 0 flag for qualifying assets in C2:C9, debts in B12:B14 and a 1 or 0 flag for acquisition debt in C12:C14: =SUMPRODUCT(B2:B9,C2:C9)-SUMPRODUCT(B12:B14,C12:C14), then =IF(D1>=5000000,"QP","Not QP").
Step 1: keep only investments. Securities, cash and cash equivalents held for investment, real estate held for investment and assets in retirement accounts the investor directs all count. The home, the vacation home used personally, the art and the stake in the controlled private company do not. Gross investments: 2,150,000 + 1,100,000 + 1,650,000 + 400,000 = 5,300,000. The excluded assets total 6,900,000, more than the counted ones.
Step 2: deduct acquisition debt. The condominium mortgage and the margin loan were incurred to acquire counted investments: 900,000 + 250,000 = 1,150,000 comes off. The home mortgage does not, because the home is not counted.
Step 3: compare. 5,300,000 − 1,150,000 = 4,150,000, short of 5,000,000 by 850,000. Not a qualified purchaser. Net worth is 2.42 times the qualifying figure.
Because the couple subscribes jointly, investments held jointly or as community property, and each spouse's own investments, can be combined. A spouse subscribing alone could still count jointly held and community property investments, but not the other spouse's separate holdings.
| Case | Investments | Against 5,000,000 | Result |
|---|---|---|---|
| Base case | 4,150,000 | −850,000 | Not QP |
| Family company stake were listed | 6,650,000 | +1,650,000 | QP |
| Condominium valued at its cost of 1,200,000 | 3,700,000 | −1,300,000 | Not QP |
| Margin loan repaid from the money market fund | 4,150,000 | −850,000 | Not QP |
| Mistake: primary residence included | 7,350,000 | +2,350,000 | Wrongly QP |
| Mistake: acquisition debt not deducted | 5,300,000 | +300,000 | Wrongly QP |
| Mistake: net worth used | 10,050,000 | +5,050,000 | Wrongly QP |
Three points stand out. Securities of a company the investor controls are excluded unless that company is listed or meets one of the rule's other exceptions, so the same 2,500,000 stake decides the outcome. The rule allows market value or cost, and the choice is the investor's; recording which was used matters when the two differ by 450,000, as they do here. And repaying the margin loan from the money market fund changes nothing: it removes 250,000 of investments and 250,000 of deducted debt together.
Treating qualified purchaser status as a larger version of accredited investor status. The accredited test is net worth, home excluded, and this couple's 7,850,000 clears its 1,000,000 bar easily; the method is worked in the accredited investor net worth calculation. The qualified purchaser test asks a different question, what is held for investment, and every one of the three wrong answers in the table above passes a fund that should have declined the subscription.
A schedule of the investments counted, with the date, the value and whether market value or cost was used; the exclusions, each with its reason; and the acquisition debt deducted, with evidence of what it financed. For this couple that is four counted lines, four excluded lines and two deductions, enough for an examiner to recompute 4,150,000 without asking anyone. A single figure typed into the subscription form is not a record of a calculation, and a fund that cannot show the workings for an investor near the line has not really tested it.
Illustrative only, not legal advice. Rule 2a51-1 has further detail, including how to treat commodity interests, family companies, trusts and entities that must meet a 25,000,000 threshold; the fund's counsel should settle any case near the line.
The book's onboarding and beneficial owner record, with the fees and testing workbook, is in the free workbook for this case.
No. Real estate counts only if held for investment purposes, so the primary residence and a vacation home used personally are out. In this example including the 3,200,000 home would turn 4,150,000 of investments into 7,350,000 and a fail into an apparent pass, which is exactly the error a subscription document review should catch.
Only debt incurred to acquire or for the purpose of acquiring the investments counted. Here the 900,000 mortgage on the rental condominium and the 250,000 margin loan are deducted; the 1,000,000 mortgage on the primary residence is ignored, because the residence is not counted either.
An entity that owns and invests on a discretionary basis at least 25,000,000 of investments, for its own account or for other qualified purchasers, qualifies. Family companies owned by related persons need 5,000,000, and some trusts qualify through their settlors and trustees. Each route has conditions, so the subscription file should record which one was relied on and the figures behind it.
This article is one calculation from The Private Fund Compliance Officer. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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