Key takeaways
– “3(c)(1)” (often written 3C1) refers to the 3(c)(1) exemption in Section 3 of the Investment Company Act of 1940. It lets certain private investment funds avoid registering as investment companies with the SEC if they meet specific conditions.
– The exemption is primarily numeric: generally no more than 100 investors (with special rules for venture capital funds). Investors must be accredited; other exemptions (like 3(b)(1) and 3(c) generally) set the broader statutory context.
– 3(c)(1) differs from 3(c)(7): 3(c)(1) limits the number of accredited investors (100), while 3(c)(7) permits up to 2,000 investors who meet the higher standard of “qualified purchaser” (typically $5 million+ of investments).
– Maintaining 3(c)(1) status requires careful investor counts, controls over share transfers, and documentation of investor accreditation or status.
Key definitions
– Investment company: A firm whose primary business is investing, reinvesting, owning, holding, or trading securities. If a firm is an “investment company” under the Act, it must register and follow the Act’s disclosure and governance rules.
– 3(b)(1): A provision that excludes certain companies from investment company status if they are not primarily in the securities-investment business.
– 3(c): A set of exemptions in Section 3 that lists categories of entities the Act does not treat as investment companies (for example, certain broker-dealers, pension plans, charitable entities).
– 3(c)(1) / 3C1: The exemption allowing private funds with limited numbers of investors to remain unregistered under the Act (commonly called “3(c)(1) funds”).
– Accredited investor: An investor meeting certain financial thresholds (see SEC guidance). Accredited status is a typical eligibility requirement for investors in many private funds.
– Qualified purchaser: A higher standard than accredited investor (usually individuals or entities with $5 million or more in investments); used for 3(c)(7) eligibility.
How 3(c)(1) sits inside the Act (overview)
– The Act first defines what qualifies as an “investment company.” Sections like 3(b)(1) carve out entities that are not primarily in the securities-investment business. Section 3(c) lists additional exceptions. One of those, 3(c)(1), gives private funds an exemption if they meet the numerical investor test and other conditions.
– Practically, a fund that relies on 3(c)(1) does not have to register under the Investment Company Act and therefore is not subject to many of the Act’s ongoing disclosure, governance, and certain trading restrictions that registered funds (like mutual funds) must follow.
Who 3(c)(1) covers (plain language)
– Private funds with 100 or fewer investors can use 3(c)(1) to avoid registration. Venture capital funds often use special counting rules (commonly referenced as having a higher de facto investor cap, e.g., below 250), depending on the fund’s facts and SEC guidance.
– Investors in a 3(c)(1) fund are generally expected to be accredited investors (financial thresholds apply).
– By contrast, a 3(c)(7) fund may have up to 2,000 investors, but those investors must be “qualified purchasers,” a substantially higher wealth test (commonly $5 million+ in investments