3(c)(1) vs 3(c)(7) Exclusion Explained
Section 3(c)(1) and Section 3(c)(7) are the two common ways a private fund avoids registering as an investment company. A 3(c)(1) fund can have no more than 100 beneficial owners and cannot offer its securities publicly. A 3(c)(7) fund has no fixed cap on investors but can sell only to qualified purchasers, generally individuals with at least $5 million in investments. Each has its own counting and look-through rules.
Why the exclusions matter
The Investment Company Act of 1940 regulates companies that primarily invest in securities, with detailed rules on governance, custody, leverage and fees. A private fund cannot practically comply, so it relies on an exclusion. If a fund does not qualify for an exclusion, it may have to register or stop operating, so the choice is made before the first investor is admitted.
Side by side
| Section 3(c)(1) | Section 3(c)(7) | |
|---|---|---|
| Investor cap | 100 beneficial owners | No fixed cap, though other securities-law thresholds apply |
| Who can invest | Typically accredited investors in a Regulation D offering | Qualified purchasers only |
| Qualified purchaser | Not required | Individuals owning at least $5 million in investments, with higher thresholds for entities |
| Public offering | Not allowed | Not allowed |
| Best for | Smaller funds with a modest investor count | Funds seeking wealthy investors in larger numbers |
Counting investors under 3(c)(1)
The 100-owner limit counts beneficial owners, not just record holders. Look-through rules can require counting the owners of an entity investor if that entity owns 10 percent or more of the fund and was formed to invest in it. Knowledgeable employees of the sponsor are generally not counted. A sponsor planning to grow needs to track the count carefully and leave room.
Qualified purchasers
Most individuals do not meet the qualified purchaser standard, which generally requires $5 million in investments, not net worth. Investments are defined by statute and exclude a primary residence. Certain family businesses and entities with at least $25 million in investments also qualify. Investors usually represent their status in a subscription questionnaire, and the sponsor should have a reasonable basis for relying on it.
Other exclusions
- Real estate funds that hold real property directly may not be investment companies at all, depending on what they own. Some qualify under Section 3(c)(5)(C) when they hold mortgages and real estate interests.
- Venture capital funds have a separate exemption under the Advisers Act, which is a different law.
See real estate fund vs syndication and what a private fund is.
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Book Free ConsultationFrequently asked questions
Can a fund use both 3(c)(1) and 3(c)(7)?
A single fund relies on one. A sponsor may run parallel funds, one under each exclusion, for different investor types.
What happens if a 3(c)(1) fund exceeds 100 investors?
It loses the exclusion unless it restructures. Track investor counts and any look-through carefully.
Does a fund have to file anything for the exclusion?
The exclusions are self-executing and require no filing, but they affect what the fund and its manager must do under other laws.
Is net worth the same as investments for qualified purchasers?
No. The test counts specific investment assets and excludes a primary residence.