To pull the pieces together, private funds are exempt from the Investment Company Act under Section 3(c)(1) or Section 3(c)(7). Under (1) the fund is limited to 100 investors. Under (7), there is no limit on the number of investors, but the investors have to be “Qualified Purchasers.”
The definition of “qualified purchaser” in Section 2(51)(A) includes individuals as
(i) any natural person … who owns not less than $5,000,000 in investments, as defined by the Commission;
Which leads us to seeking out the definition of “investments” for purposes of the “qualified purchaser” definition. That was published by a SEC rule-making in 1997 and can be found in Section 270.2a51-1(b).
The first issue to tackle is marriage or spousal equivalent.
The rule provides that, in determining whether a natural person is a qualified purchaser, the person may include in the amount of his or her investments any investments held jointly with the person’s spouse (“Joint Investments”). Thus, a person who owns $3 million of investments individually and $2 million of Joint Investments would be a qualified purchaser. The spouse also would be a qualified purchaser if he or she owned, individually, an additional $3 million of investments.
A married couple investing jointly can include their joint assets. If only one spouse is investing, that spouse can use the assets in his or her own name and the joint assets to reach $5 million.
For individuals there are six items that can be considered investments.
- Securities, as defined in section 2(a)(1) of the Securities Act of 1933. Excluded are securities in a company controlled by the person, unless that company is (i) an investment company or one of the exclusions from the definition, (ii) a company with publicly traded securities, or (iii) showing at least $50 million in shareholders’ equity on its financial statements.
- Real estate held for investment purposes. That excludes your principal residence, your vacation home and the office you work in.
- Commodity interests held for investment purposes. That means you have to be primarily in the business of trading commodity interests.
- Physical commodities held for investment purposes. That means you have to be in business of trading commodities. Your Babe Ruth baseball card is not going to count unless your business is trading baseball cards.
- Financial contracts held for investment purposes that fall outside the definition of securities.
- Cash and cash equivalents held for investment purposes. That’s going to exclude your checking account, but you can probably include your savings account.
Add that stuff together if its in the person’s name or held jointly. If it adds up to $5 million. That person is a “qualified purchaser.” You just have to have a reasonable belief that the person is a qualified purchaser.