Qualified Purchaser: What the Test Counts, and What It Leaves Out

Why we start with this definition

The law draws a line around who may own certain private funds. We think the people on both sides of that line, investors and the advisers who work with them, deserve a plain account of where it sits and what it costs.

Sandbox's funds are available only to qualified purchasers who are accredited investors. That audience is narrow by law. We would rather say so in the first lines than in the fine print, because being plain about who we serve is part of earning trust.

Sebastian J. Harris, Sandbox's founding partner, writes in Foundations: "Wealth is an outcome. Capital is a capability." The qualified purchaser test looks only at the first. It counts what an investor holds and treats that as a stand-in for the ability to look after yourself. Once an investor clears it, much of the statute's protective machinery steps back. That is a real cost, and the rest of this piece names it.

Who counts as a qualified purchaser

There are four ways in, and every one is an ownership threshold [1][2]:

• Individuals who own at least $5 million in investments. The definition also covers a spouse holding a joint or community property interest in a 3(c)(7) fund alongside a qualified purchaser spouse.
• Family companies that own at least $5 million in investments and are owned by or for two or more people related as siblings, spouses (including former spouses), or direct lineal descendants by birth or adoption, together with their spouses, estates, and related foundations, charitable organizations, or trusts.
• Certain trusts that were not formed to buy the specific securities on offer, where the trustee or other decision-maker, and every settlor or contributor of assets, is a qualified purchaser under the individual, family-company, or $25 million test. The test looks through the trust to those people.
• Anyone else who owns and invests at least $25 million on a discretionary basis, for its own account or for other qualified purchasers.

A company can also qualify when every beneficial owner of its securities is a qualified purchaser. A company formed specifically to buy into a 3(c)(7) fund does not qualify unless every one of its owners does [3].

None of the categories looks at experience, judgment, or the capacity to absorb a loss.

What counts as an "investment"

The $5 million and $25 million figures are not net worth. They count a defined set of holdings, listed in Rule 2a51-1(b) [2]:

• Securities
• Real estate held for investment
• Commodity interests and physical commodities held for investment
• Financial contracts entered into for investment, to the extent they are not securities
• For a purchaser that is itself a private fund or commodity pool, capital its investors are bound to contribute on demand
• Cash and cash equivalents held for investment, including bank deposits, certificates of deposit, bankers acceptances and similar bank instruments, and the net cash surrender value of an insurance policy

The exclusions do as much work as the list. Real estate does not count if the purchaser or a related person uses it for personal purposes or in a trade or business. Investments count at fair market value on the most recent practicable date, or at cost. Commodity interests count at the initial margin or option premium deposited. Debt taken on to acquire the investments is subtracted, and for a family company that includes debt an owner took on [2].

In plain terms: a home generally does not count, an operating business generally does not count, and money borrowed to build a portfolio shrinks the number. Two families with identical net worth can land on opposite sides of the line.

Why the line exists: the bargain behind a 3(c)(7) fund

Section 3(c) lists issuers that are not investment companies under the Act [4]. Private funds mostly rely on two of them, including funds in private credit and private equity.

• Section 3(c)(1) covers a fund owned by no more than 100 beneficial owners, or 250 for a qualifying venture capital fund, that is not making and does not presently propose a public offering. It may admit investors who are not qualified purchasers, but it has to count heads.
• Section 3(c)(7) covers a fund owned exclusively by people who were qualified purchasers when they bought in, and that is not making and does not at that time propose a public offering. That paragraph sets no cap on the number of owners, but every owner must clear the higher bar [4].

A 3(c)(7) fund is not a registered investment company, so the Act's registration requirement, its limits on interested directors, its restrictions on transactions with affiliated persons, and its limits on senior securities do not govern it [6][7][8][9]. In their place sit negotiated documents, valuations produced by the manager, restrictions on transferring your interest, and no continuous statutory disclosure.

That is the trade. Managers use the structure to run strategies the registered-fund rules were not built for, and investors accept fewer outside guardrails in return. Qualified purchaser status describes an investor. It makes that investor eligible to own a vehicle that operates outside those protections.

A wealth test, not a judgment test

The qualified purchaser line decides who may invest. It is silent on how well anyone involved makes decisions.

In Foundations, Seb treats judgment as the defining capability of an investment institution. A dollar threshold cannot measure it. It is a number a regulator can check, which makes it a useful line for the law and a poor proxy for judgment, for investors and managers alike.

So the room the law leaves falls to the investor to fill. In any 3(c)(7) fund, an investor relies on the documents, the manager's reporting, and their own diligence. Capital can be locked up for years, an interest can be hard to sell, valuations are estimates rather than market prices, and the whole amount invested can be lost. Anyone weighing a private fund should read its documents closely and question the manager hard, ideally alongside their own adviser.

Foundations also argues that capital is entrusted to an institution as an act of confidence, and that the duty attached to it comes before any broader philosophy. A private structure does not make that duty smaller. It means fewer of the Investment Company Act's rules are there to enforce it.

Qualified purchaser and accredited investor are separate tests

The two terms come from different statutes and sit at different heights. Accredited investor is a Securities Act concept that governs who may buy in a Regulation D offering. For an individual, the tests are net worth over $1,000,000 excluding the primary residence, or income over $200,000 ($300,000 jointly) in each of the two most recent years with a reasonable expectation of the same this year [11]. Qualified purchaser is an Investment Company Act concept that governs who may own a 3(c)(7) fund, and it counts investments rather than net worth or income [1][2]. Someone buying into a 3(c)(7) fund sold under Rule 506(c) has to clear both. A fuller comparison is a separate article.

How qualified purchaser status is verified

A 3(c)(7) fund that advertises publicly relies on Rule 506(c). The two layers use different standards.

Accredited status has to be verified. Rule 506(c) requires every purchaser to be an accredited investor and requires the issuer to take reasonable steps to verify it. The rule lists non-exclusive methods, including review of IRS forms for the two most recent years, recent asset documents with a consumer report, and written confirmation from a registered broker-dealer, an SEC-registered investment adviser, a licensed attorney, or a CPA [10].

In March 2025, SEC staff agreed that an issuer takes reasonable steps when it requires minimum investment amounts, coupled with the written representations described in the request, and has no actual knowledge that the purchaser is not accredited or that the minimum is financed by a third party for the specific purpose of the investment [12]. The request described minimums of at least $200,000 for natural persons and $1,000,000 for legal entities [13]. The letter reflects staff views and has no legal force [12].

Qualified purchaser status runs on reasonable belief. Under Rule 2a51-1(h), the term means someone who meets the definition, or whom the fund or someone acting for it reasonably believes meets it [2]. There is no menu of approved methods. The fund carries the risk of getting it wrong, and the question is whether its belief was reasonable given what it gathered, in practice subscription representations and supporting detail.

Eligibility also differs by access route, covered in the guide to how private credit is accessed.

Frequently asked questions

Does a qualified purchaser have to be an individual?

No. The definition also covers family companies with at least $5,000,000 in investments, certain trusts, and any person owning and investing at least $25,000,000 on a discretionary basis [1]. A company can also qualify when each beneficial owner of its securities does [3], as can a qualified institutional buyer acting for its own account or for qualifying accounts [2].

Does net worth count toward the $5 million?

Not as such. The test counts investments as the SEC defines them. Real estate used for personal purposes or in a business is left out, and debt taken on to acquire the counted investments is subtracted [2]. Wealth held in a home or an operating business generally does not count.

Can a trust be a qualified purchaser?

Yes, in two ways. It can qualify as a family company if it owns at least $5,000,000 in investments and is held by or for the specified family members. Or it can qualify under the trust clause if it was not formed to buy the securities offered and the trustee, along with each settlor or contributor of assets, is a qualified purchaser [1].

Does status have to be re-established after the purchase?

Section 3(c)(7) tests status at the time of acquisition [4]. Securities received from a qualified purchaser as a gift or bequest, or through legal separation, divorce, death, or another involuntary event, are treated as owned by a qualified purchaser, subject to SEC rules [4]. Any further limit on transfers comes from the fund's own documents.

Do employees of the manager have to be qualified purchasers?

Not if they are knowledgeable employees. Their holdings are left out when testing whether a 3(c)(7) fund is owned exclusively by qualified purchasers [5]. The category covers executive officers, directors, trustees, general partners, and advisory board members of the fund or its manager, and employees who have participated in its investment activities for at least 12 months [5].

Sources

1. [1] U.S. Government Publishing Office — 15 U.S.C. 80a-2 (Investment Company Act Section 2, definitions). https://www.govinfo.gov/content/pkg/USCODE-2023-title15/html/USCODE-2023-title15-chap2D-subchapI-sec80a-2.htm. Accessed 2026-08-12.
2. [2] Electronic Code of Federal Regulations — 17 CFR 270.2a51-1, Definition of investments for purposes of section 2(a)(51). https://www.ecfr.gov/current/title-17/chapter-II/part-270/section-270.2a51-1. Accessed 2026-08-12.
3. [3] Electronic Code of Federal Regulations — 17 CFR 270.2a51-3, Certain companies as qualified purchasers. https://www.ecfr.gov/current/title-17/chapter-II/part-270/section-270.2a51-3. Accessed 2026-08-12.
4. [4] U.S. Government Publishing Office — 15 U.S.C. 80a-3 (Investment Company Act Section 3, definition of investment company). https://www.govinfo.gov/content/pkg/USCODE-2023-title15/html/USCODE-2023-title15-chap2D-subchapI-sec80a-3.htm. Accessed 2026-08-12.
5. [5] Electronic Code of Federal Regulations — 17 CFR 270.3c-5, Beneficial ownership by knowledgeable employees. https://www.ecfr.gov/current/title-17/chapter-II/part-270/section-270.3c-5. Accessed 2026-08-12.
6. [6] U.S. Government Publishing Office — 15 U.S.C. 80a-8, Registration of investment companies. https://www.govinfo.gov/content/pkg/USCODE-2023-title15/html/USCODE-2023-title15-chap2D-subchapI-sec80a-8.htm. Accessed 2026-08-12.
7. [7] U.S. Government Publishing Office — 15 U.S.C. 80a-10, Affiliations or interest of directors, officers, and employees. https://www.govinfo.gov/content/pkg/USCODE-2023-title15/html/USCODE-2023-title15-chap2D-subchapI-sec80a-10.htm. Accessed 2026-08-12.
8. [8] U.S. Government Publishing Office — 15 U.S.C. 80a-17, Transactions of certain affiliated persons and underwriters. https://www.govinfo.gov/content/pkg/USCODE-2023-title15/html/USCODE-2023-title15-chap2D-subchapI-sec80a-17.htm. Accessed 2026-08-12.
9. [9] U.S. Government Publishing Office — 15 U.S.C. 80a-18, Capital structure of investment companies. https://www.govinfo.gov/content/pkg/USCODE-2023-title15/html/USCODE-2023-title15-chap2D-subchapI-sec80a-18.htm. Accessed 2026-08-12.
10. [10] Electronic Code of Federal Regulations — 17 CFR 230.506, Exemption for limited offers and sales. https://www.ecfr.gov/current/title-17/chapter-II/part-230/section-230.506. Accessed 2026-08-12.
11. [11] Electronic Code of Federal Regulations — 17 CFR 230.501, Definitions and terms used in Regulation D. https://www.ecfr.gov/current/title-17/chapter-II/part-230/section-230.501. Accessed 2026-08-12.
12. [12] U.S. Securities and Exchange Commission, Division of Corporation Finance — Response to Latham & Watkins LLP, Rule 506(c) interpretive request, March 12, 2025. https://www.sec.gov/rules-regulations/no-action-interpretive-exemptive-letters/division-corporation-finance-no-action/latham-watkins-503c-031225. Accessed 2026-08-12.
13. [13] Latham & Watkins LLP — Request for Rule 506(c) Interpretative Guidance, March 6, 2025, published by the SEC. https://www.sec.gov/files/corpfin/no-action/latham-watkins506c-031225-incoming.pdf. Accessed 2026-08-12.