Reference
Accredited investor or qualified purchaser: a $4 million gap
One needs $1 million in net worth. The other needs $5 million in investments. Confusing them is the most common error in private fund work, and it decides which fund you can build.
These two terms get used interchangeably in conversation and they are not interchangeable in law. They come from different statutes, they test different things, and the gap between them decides whether you are running a hundred-investor fund or an unlimited one.
Accredited investor — the Securities Act test
This is the Rule 506 concept. It governs who may buy your securities. For a natural person there are two main routes, and either will do.
Any natural person whose individual net worth, or joint net worth with that person’s spouse or spousal equivalent, exceeds $1,000,000 … [t]he person’s primary residence shall not be included as an asset.
Any natural person who had an individual income in excess of $200,000 in each of the two most recent years or joint income with that person’s spouse or spousal equivalent in excess of $300,000 in each of those years and has a reasonable expectation of reaching the same income level in the current year.
The primary-residence exclusion is what keeps the definition meaningful. Without it, house-price inflation alone would have made most homeowners in several metros accredited.
Qualified purchaser — the Investment Company Act test
This is the 3(c)(7) concept. It governs whether your fund escapes the Investment Company Act without a hundred-investor cap. It is a different question with a different number.
[A]ny natural person … who owns not less than $5,000,000 in investments, as defined by the Commission.
Note the word: investments, not net worth and not income. A person with a $4 million house, a good salary and $800,000 in a brokerage account is comfortably accredited and nowhere near a qualified purchaser.
Why the gap decides your structure
| Accredited investor | Qualified purchaser | |
|---|---|---|
| Statute | Securities Act, Rule 501 | Investment Company Act § 2(a)(51) |
| Tests | Net worth or income | Investments owned |
| Threshold | $1m net worth, or $200k/$300k income | $5m in investments |
| Governs | Who may buy | Whether you need an investor cap |
Every qualified purchaser is accredited. The reverse is emphatically not true, and the population difference is large. That is why a 3(c)(7) fund has no investor cap but a smaller addressable market: the ceiling comes off, and the floor rises.
What funds actually do
From the filing record
In 2025, 48% of pooled funds claimed 3(c)(1) — the accredited-investor world with a hundred-investor cap — and 51% claimed 3(c)(7).
In 2016 the split was 37% / 60%. The lower-threshold structure has gained eleven points in a decade.
Read alongside the rest of the record — hedge fund formation flat, overall formation up 82% — that shift is consistent with a market forming more, smaller funds. A fund built for people with $5 million in investments is a different business from one built for people with $1 million in net worth, and more managers are choosing the second.
One thing to check before relying on any of this
Both definitions have more limbs than the two quoted here. Entities, trusts, knowledgeable employees, holders of certain professional licences and family offices all have their own routes in, and the accredited-investor definition in particular has been amended more than once. If a specific investor is close to a line, read the current text of the whole definition rather than the headline number.
Primary sources
- Accredited investor definition — 17 C.F.R. § 230.501(a) (via Cornell LII)
- Qualified purchaser definition — 15 U.S.C. § 80a-2(a)(51)
Quotations are from the official text as published, retrieved 2026-08-30. Statutes and rules change; check the current text before relying on any of this.
This is general information about how private funds are structured. It is not legal advice, it is not a recommendation, and it is not a substitute for advice about your own facts.
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