Eligible purchasers: Overview, definition, and example
What are eligible purchasers?
Eligible purchasers refer to individuals or entities that meet the criteria established by a seller, financial institution, or regulatory body to buy a particular product, asset, or security. These criteria can include specific financial qualifications, legal requirements, or restrictions based on the nature of the product being purchased. In the context of financial products, such as securities or real estate, eligible purchasers may be required to meet certain income, net worth, or experience criteria to qualify for participation in the purchase.
For example, in the case of private equity offerings or restricted securities, eligible purchasers may be institutional investors or high-net-worth individuals (HNWI) who are legally allowed to invest in these products due to their financial sophistication or regulatory status.
Why are eligible purchasers important?
Eligible purchasers are important because they help ensure that a product or asset is sold to individuals or entities that are capable of understanding the associated risks and meeting the legal and financial obligations of the transaction. This helps protect both the buyer and the seller by ensuring that only qualified parties engage in the purchase of specialized or regulated products.
For sellers, knowing who qualifies as an eligible purchaser ensures compliance with regulations, such as securities laws, and helps avoid legal or financial liabilities. For buyers, being considered an eligible purchaser may provide access to exclusive or higher-risk investment opportunities, but it also means they must meet certain financial and legal standards.
Understanding eligible purchasers through an example
Imagine a private company is offering shares of its stock in a private placement, which is only available to accredited investors. These accredited investors must meet specific criteria, such as having a net worth of over $1 million (excluding their primary residence) or earning more than $200,000 annually. The company’s offering documents specify that only individuals or entities that meet these criteria can purchase the shares. As a result, only eligible purchasers—those who meet the accreditation requirements—are allowed to participate in the offering.
In another example, a real estate developer is selling units in a luxury condominium project, but the developer restricts the sale to purchasers who can demonstrate that they have the financial means to pay the asking price without financing or that they can secure financing from a reputable institution. This ensures that only eligible purchasers, with sufficient financial capability, can purchase the property.
An example of an eligible purchasers clause
Here’s how an eligible purchasers clause might appear in a contract or offering document:
“The Seller agrees to sell the Product only to Eligible Purchasers, defined as individuals or entities that meet the following criteria: [Insert Criteria, such as net worth, income, investment experience, etc.]. The Purchaser must provide documentation to demonstrate compliance with these requirements prior to completing the transaction.”
Conclusion
Eligible purchasers are individuals or entities who meet the specific criteria set by sellers, financial institutions, or regulators to qualify for purchasing certain products or investments. These criteria often relate to financial qualifications, legal status, or experience in handling specific types of transactions. Ensuring that only eligible purchasers participate in these transactions helps protect both buyers and sellers by ensuring compliance with legal standards and minimizing risks. For buyers, understanding the qualifications required to be an eligible purchaser provides access to exclusive or higher-risk opportunities.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.