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    Resources · Regulatory Guide

    Qualified Client vs. Qualified Purchaser

    Two different rules, two different dollar tests, two very different consequences. Here's how to keep them straight when you're structuring a fund, quoting a performance fee, or vetting an investor.

    Bottom line: Qualified Client governs performance fees (Investment Advisers Act, Rule 205-3). Qualified Purchaser governs fund eligibility (Investment Company Act, Section 2(a)(51)). Every Qualified Purchaser is automatically a Qualified Client — not the other way around.

    Qualified Client

    Rule 205-3 · Advisers Act

    Purpose
    Lets an SEC-registered adviser charge a performance-based fee.
    AUM test
    $1.1M invested with the adviser (post-fee).
    Net-worth test
    $2.2M, excluding primary residence.
    Other qualifying statuses
    Qualified Purchaser, executive officer/director of the adviser, or knowledgeable employee.
    Verification cadence
    At the time of contract and each time performance fee is charged.
    Inflation adjustment
    Every 5 years by SEC order (last: Aug 16, 2021).

    Qualified Purchaser

    Section 2(a)(51) · Investment Company Act

    Purpose
    Lets a private fund claim the 3(c)(7) exemption from Investment Company Act registration.
    Individual test
    $5M in investments (not net worth).
    Family-owned entity
    $5M in investments owned by family members.
    Institutional entity
    $25M in investments (own account or discretion of others).
    Verification cadence
    At subscription — and re-confirmed on additional capital calls.
    Inflation adjustment
    Not adjusted; thresholds are statutory.

    How each interacts with private funds

    3(c)(1) fund — up to 100 Accredited Investors. Investors do not need to be Qualified Purchasers, but must each be Qualified Clients before the manager can charge a performance fee (carry).

    3(c)(7) fund — unlimited investors (subject to Section 12(g) reporting), but every one must be a Qualified Purchaser. Because QPs are automatically Qualified Clients, no separate performance-fee test is required.

    Separately Managed Accounts — the client's own status controls. If they aren't a Qualified Client, the SMA agreement can't include performance fees, only a straight asset-based fee.

    Frequently asked questions

    What is the difference between a Qualified Client and a Qualified Purchaser?

    A Qualified Client (SEC Rule 205-3 under the Investment Advisers Act) is an investor an SEC-registered adviser may charge performance-based fees to — currently $1.1M in AUM with the adviser or $2.2M net worth (excluding primary residence). A Qualified Purchaser (Section 2(a)(51) of the Investment Company Act of 1940) is a much higher bar — generally $5M in investments for individuals or $25M for entities — and is what a 3(c)(7) fund uses to stay exempt from registration as an investment company.

    Do Qualified Purchasers automatically satisfy the Qualified Client test?

    Yes. Rule 205-3(d)(1)(iii) treats any Qualified Purchaser as a Qualified Client, so a 3(c)(7) fund composed entirely of Qualified Purchasers can charge performance fees without a separate Qualified Client verification.

    Are the Qualified Client thresholds indexed for inflation?

    Yes. The SEC adjusts the Qualified Client dollar tests every five years under the Dodd-Frank Act. The current thresholds ($1.1M AUM / $2.2M net worth) took effect August 16, 2021. The next adjustment is expected in 2026.

    Does a state-registered RIA need Qualified Clients to charge performance fees?

    State-registered advisers follow their state's rule, which usually adopts Rule 205-3 by reference — but many states add their own overlay (e.g., different net-worth tests or an outright prohibition). Confirm your specific state before quoting a performance fee.

    What happens if my private fund accepts a non-Qualified Purchaser?

    A 3(c)(7) fund loses its Investment Company Act exemption the moment a non-Qualified Purchaser is admitted, which can force registration as a mutual fund. 3(c)(1) funds (which can accept up to 100 Accredited Investors) do not require Qualified Purchaser status — but performance fees still require each investor to be a Qualified Client.

    Automate investor eligibility with InvestPrep

    InvestPrep collects Qualified Client and Qualified Purchaser reps, evidence, and re-certifications inside the subscription workflow — and the audit trail feeds directly into RegReview for your annual review.

    Explore InvestPrep for private funds Talk to a compliance consultant

    Educational content only — not legal advice. Confirm current thresholds with counsel.