3C1 refers to a portion of the Investment Company Act of 1940 that allows private investment companies to be considered exceptions to certain regulations and reporting requirements stipulated by the Securities and Exchange Commission (SEC).However, these firms must satisfy specific requirements to maintain their exception status.
Key Takeaways
- 3C1 refers to a portion of the Investment Company Act of 1940 that exempts certain private investment companies from regulations.
- A firm that's defined as an investment company must meet specific regulatory and reporting requirements stipulated by the SEC.
- 3C1 allows private funds with100 or fewer investors and no plans for an initial public offering to sidestep certain SEC requirements.
Understanding 3C1
3C1 is shorthand forthe 3(c)(1) exemption found in section 3 of the Act.To fully understand section 3C1, we must first review the Act's definition of an investment company and how it relates to earlier sections of the Act: 3(b)(1) and 3(c). An investment company, as defined by the Investment Company Act, are companies that primarily engage in the business of investing, reinvesting, or trading securities.If companies are considered investment companies, they must adhere to certain regulations and reporting requirements.
3(b)(1)
3(b)(1) was established to exclude certain companies from being considered an investment company and having to adhere to the subsequent regulations. Companies are exempt as long as they are not primarily in the business of investing, reinvesting, holding, owning, or trading in securities themselves, or through subsidiaries, or controlled companies.
3(c)
3(c) takes it a step further and outlines specific exceptions to the classification of an investment company, which include broker-dealers, pension plans, church plans, and charitable organizations.
3(c)(1)
3(c)(1) adds to the exceptions list in 3(c) citing certain parameters or requirements that, if satisfied, would allow private investment companies to not be classified as investment companies under the Act.
3(c)(1) exempts the following from definition of investment company:
"Any issuer whose outstanding securities (other than short-term paper) are beneficially owned by not more than one hundred persons (or in the case of a qualifying venture capital fund, 250 persons) and that is not making and does not presently propose to make a public offering of such securities."
In other words, 3C1 allows private funds with100 or fewer investors (and venture capital funds with fewer than 250 investors) and no plans for an initial public offering to sidestep SEC registration and other requirements, including ongoing disclosure and restrictions on derivatives trading.3C1 funds are also referred to as 3C1 companies or 3(c)(1) funds.
The result of 3C1 is that it allows hedge fund companies to avoid the SEC scrutiny that other investment funds, such as mutual funds, must adhere to under the Act. However, the investors in 3C1 funds must be accredited investors, meaninginvestors who have an annual income of over $200,000 or a net worth in excess of $1 million.
3C1 Funds vs. 3C7 Funds
Private equity funds are usually structured as 3C1 funds or 3C7 funds, the latter being a reference to the 3(c)(7) exemption. Both 3C1 and 3C7 funds are exempt from SEC registration requirements underthe Investment Company Act of 1940, but the nature of the exemption is slightly different. Whereas the 3C1 exemption hinges on not exceeding 100 accredited investors, a 3C7 fund must maintain a total of 2,000 or fewer qualified purchasers. However, qualified purchasers must clear a higher bar and have over $5 million in assets, but a 3C7 fund is permitted to have more of these people or entities participating as investors.
3C1 Compliance Challenges
Although 100 accredited investors sound like an easy limit to monitor, it can be a challenging area for fund compliance. Private funds are generally protected in the case of involuntary share transfers. For example, the death of an investor results in shares being split up among family members would be considered an involuntary transfer.
However, these funds can run into issues with shares given as employment incentives. Knowledgeableemployees, including executives, directors, and partners,donot count against the fund's tally. However, employees who leavethe firm carrying the shares with them willcount against the 100 investor limit. The one hundred person limit is so critical to the investment company exemption and 3C1 status, that private funds put a great deal of effort into making certain they are in compliance.
FAQs
3C1 funds are privately traded funds that are exempt from SEC registration through the Investment Company Act of 1940. Private Investment Fund: Non-public Investments Like Hedge Funds. A private investment fund is a fund that is not open to regular investors or the general public in most cases.
What is 3c1? ›
What is 3c1? 3c1 refers to a Securities and Exchange Commission (SEC) regulation that exempts private investment funds with fewer than 100 beneficial proprietors from SEC registration requirements. What is a 3c1 fund? A 3c1 fund is a hedge fund that meets the 3c1 exemption requirements.
Who is beneficial owner Section 3 C 1 of the Investment Company Act? ›
For the purpose of section 3(c)(1) of the Act, beneficial ownership by a com- pany owning 10 per centum or more of the outstanding voting securities of any issuer which is a small business in- vestment company licensed to operate under the Small Business Investment Act of 1958, or which has received from the Small ...
Can a 3 C )( 1 fund be a qualified purchaser? ›
For instance, a qualified purchaser is often allowed to invest in funds that are exempt from the Securities and Exchange Commission (SEC) registration under both Sections 3(c)(1) and 3(c)(7) of the Investment Company Act, whereas an accredited investor would only be allowed to invest in a Section 3(c)(1) fund.
What is the look through rule for 3c1? ›
When counting beneficial owners of a 3(c)(1) fund, there will be a "look-through" to (i) the investor's underlying investors, if the investor owns 10% or more of the 3(c)(1) fund and the investor is (a) a fund-of-funds, (b) any other passive investment vehicle (including a family vehicle) relying upon Section 3(c)(1) ...
What is the difference between 3c1 and 3c7 exemptions? ›
A 3(c)(1) fund allows only 100 accredited investors, or 250 accredited investors if the fund size is less than $10M. A 3(c)(7) fund can accept up to 2,000 qualified purchasers.
How much is 3c1? ›
Answer and Explanation:
Comparing it with the general form of the combination, n C r , we can see that , and . Knowing these, the combination is solved as follows. Thus, the value of the combination is 3 C 1 = 3 .
How to solve 3P1? ›
3P1=3! (3−1)! =3!
What is the meaning of 3C2? ›
There are 3 selections possible from a total of 3 objects taking 2 objects at a time and we write 3C2= 3.
Who qualifies as a beneficial owner? ›
A beneficial owner is an individual who either directly or indirectly: (1) exercises substantial control over a reporting company (see Question D.2), or (2) owns or controls at least 25 percent of a reporting company's ownership interests (see Question D.4).
Beneficial Ownership is a requirement from the Financial Crimes Enforcement Network (FinCEN), under the Bank Secrecy Act, which mandates all covered financial institutions collect and verify from certain non-exempt legal entities specific information about the beneficial owners of the entity at the time a new account ...
Who is included in beneficial owner? ›
Definition. In March 2019, an Inter-American Development Bank (IADB) report defined beneficial owners as "always natural persons who ultimately own or control a legal entity or arrangement, such as a company, a trust, a foundation".
What is the 3c1 investor limit? ›
In order to be exempt from registering as an investment company under the two most frequently used exemptions under the Act, the fund must (1) not make, or propose to make, a public offering of its securities and (2) either (a) limit the fund to no more than 100 investors (the 3(c)(1) exemption) or (b) limit the fund ...
How do you prove you are a qualified purchaser? ›
The Securities and Exchange Commission (SEC) of the US defines a qualified purchaser as: A natural person owning a property, corporation, or having investments in a joint venture of more than $5 million (including their spouse's mutual holdings)
Can anyone invest in a qualified opportunity fund? ›
A qualified opportunity zone fund can be established by any taxpayer by filing Form 8996 and submitting it with their federal income tax return. The purpose of this form is to certify individuals, partnerships or corporations as organizations for investing in qualified opportunity zones.
What is Section 3 A 1 of the Investment Company Act of 1940? ›
Section 3(a)(1) of the 1940 Act defines the term “investment company.” Specifically, Section 3(a)(1)(A) of the 1940 Act defines “investment company” to mean “any issuer which is or holds itself out as being engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting, or trading in ...
What is the accredited investor exemption rule? ›
The most widely used rule under Regulation D allows any company to offer an unlimited number of securities to investors who satisfy at least one of a broad set of criteria that qualify them as “accredited.” The criteria for being an accredited individual investor in many cases use high income and wealth as proxies for ...
What is a 3c5 exemption? ›
What does that mean? A qualified interest is basically just mortgages or leans on real estate. Meaning that if you want to file a 3(c)5 you're looking at allocating at least 55% of your portfolio directly to real estate. The remaining 45% is broken down even further into two more tiers.
What is considered a qualified purchaser? ›
A qualified purchaser is defined as an investor who owns at least $5 million of investments or who invests an aggregate of at least $25 million on a discretionary basis for other qualified purchasers.
