What is a 3(c)(7) Fund?

By: Daniel A. Perry 

A 3(c)(7) fund applies to a private equity fund in relation to Section (3)(c)(7) of the Investment Company Act of 1940. This specific regulatory act was enacted because of The Stock Market Crash of 1929 and the ensuing Great Depression. It provided numerous safeguards to the investing public. This specific section of the Investment Company Act allows certain private equity funds to be exempt from registration with the Securities and Exchange Commission (“SEC”).

Specifically, Section (3)(c)(7) of the Investment Company Act of 1940 provides the following:

Notwithstanding subsection (a), none of the following persons is an investment company within the meaning of this title

Any issuer, the outstanding securities of which are exclusively owned by persons who, at the time of acquisition of such securities, are qualified purchasers, and which is not making and does not at that time propose to make a public offering of such securities

Essentially, there are two requirements for a private equity fund to be exempt from registration under Section 3(c)(7). First, the investors must be qualified purchasers. This is a different standard than accredited investor. A qualified purchaser is an investor who has at least $5 million in investments. Second, there must be no plans of making an Initial Public Offering (“IPO”) of this private equity fund for it to be exempt from registration with the SEC under Section (3)(c)(7).

There is much more that can be said about Section 3(c)(7) funds, such as why these funds are used in the private equity fund market and why hedge funds and venture capital funds tend to use this exemption. For this article, however, I am just providing a general overview of the Section 3(c)(7) funds. More is to come about these funds in future articles.

The rules and regulations for starting a private equity fund, venture capital, hedge fund, or any other fund are quite complex, especially when it comes to claiming the correct exemption from registration. You should never start a private equity fund without discussing your business decision and your private equity fund with an attorney.

For more information:

If you are considering starting a private equity fund and would like to speak with an attorney, please contact us by calling our office at (513) 241-0400 or visiting our website. We look forward to hearing from you.