What Is the 3(c)(7) Exemption?
The 3(c)(7) exemption refers to a portion of the Investment Company Act of 1940 that allows private investment companies an exemption from some Securities and Exchange Commission (SEC) regulation, providing that they meet certain criteria. 3C7 is shorthand for the 3(c)(7) exemption.
Key Takeaways
- The 3(c)(7) exemption refers to the Investment Company Act of 1940's section permitting qualifying private funds exemption from some SEC regulations.
- Private funds must not plan to issue an IPO, and their investors must be qualified purchasers to qualify for the 3C7 exemption.
- 3C7 funds with over 1,999 investors are required to register with the SEC.
History of the 3(c)(7) Exemption
The Investment Company Act of 1940 defines an “investment company” as an issuer that “holds itself out as being engaged primarily or proposes to engage primarily, in the business of investing, reinvesting or trading in securities.”The Act regulates the organization of companies whose securities are offered to the public. Companies must disclose their financial condition and investment policies regularly.
However, 3C7 is one of two exemptions in the Investment Company Act of 1940 that hedge funds, venture capital funds, and other private equity funds use to avoid SEC restrictions. This frees up these funds to use tools like leverage and derivatives that most publicly traded funds cannot. Hedge funds, private equity funds, venture capital funds, and other private investment vehicles are commonly organized to fall outside the purview of the Investment Company Act of 1940.
Claiming 3C7 Exemption
3C7 funds are not required to register with the Securities and Exchange Commission or provide ongoing disclosure. They are also exempt from issuing a prospectus that would outlineinvestment positions. 3C7 funds are also referred to as 3C7 companies or 3(c)(7) funds.
There is no limit on the number of investors under Section 3(c)(7), however, the fund can have up to 1,999 investors before registration would be required under the Securities Exchange Act of 1934.
To qualify for the 3C7 exemption, the private investment company must show that they have no plans of making an initial public offering (IPO) and that their investors are qualified purchasers. A qualified purchaser is a higher standardthan an accredited investor and is defined as:
- Individuals or family-owned businesses that own no less than $5 million in investments
- A trust managed by qualified purchasers
- An individual acting for their account or the account of someone else who owns and invests at least $25,000,000 in investments
- Any entity solely owned by qualified purchasers.
3C7 Funds vs. 3C1 Funds
Both 3C7 and 3C1 funds are exempted from the requirements imposed on “investment companies” under the Investment Company Act of 1940 (the “Act”). However, there are differences between them. 3C7 funds take investments from qualified purchasers, whereas 3C1 funds work with accredited investors.
Investors in 3C7 funds are held to a higher wealth measure than those in 3C1 funds, which can limit the investor pool for a fund hoping to raise money. 3C1 funds are capped at 100 investors, limiting the number of investors the fund can take in from the pool they can pull from.
What Happens to a Fund That Does Not Comply With 3C7 Rules?
3C7 funds must maintain their compliance to continue utilizing the exemption from the 1940 Act. If a fund were to fall out of compliance by taking in investments from non-qualified purchasers, it would open itself to SEC enforcement actions and litigation from its investors and any other parties it has contracts with.
What Types of Investments Are Not Defined As an Investment Company?
Some investment pools that do not qualify as an “investment company” inSection 3(a) of the Investment Company Actinclude charitable organizations, pension plans, and church plans.
What Is the Difference Between an Accredited Investor and a Qualified Purchaser?
Accredited investors typically must meet income and net worth requirements to purchase financial investments, such as securities or real estate. Companies such as financial institutions screen participants and must determine who is an accredited investor.The qualified purchaser is a legal term not based on net worth or income but on investment holdings. Qualified purchasers must meet higher standards so that funds with a small group of private equity investors can buy and sell public assets.
The Bottom Line
The 3(c)(7) exemption is part of the Investment Company Act of 1940 and allows private funds to avoid some SEC regulations, which include SEC registration and public disclosure. Investment in a 3C7 fund is limited to qualified purchasers.
FAQs
3(c)(7) A 3(c)(7) fund is a pooled investment vehicle that is excluded from the definition of investment company in the Investment Company Act because it is limited to investors that are qualified purchasers and otherwise meets criteria outlined in Section 3(c)(7) of the Investment Company Act.
What is the rule 3a 7 exemption? ›
rule 3a-7 under the Investment Company Act of 1940 (the "Act"), to exclude issuers that pool income-producing assets and issue securities backed by those assets ("structured financing") from the definition of "investment company." The rule permits structured financings to · offer their securities publicly In the United ...
What qualifies for exclusion from the definition of investment company under section 3 c 7 of the Investment Company Act of 1940? ›
Section 3(c)(7) excepts from the definition of investment company any issuer whose outstanding securities are owned exclusively by persons who, at the time of acquisition of such securities, are qualified purchasers and that is not making and does not at that time propose to make a public offering of such securities.
Who is a qualified client for a 3C7 fund? ›
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.
What is the difference between 3C1 and 3c7 funds? ›
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.
What is the Section 7 exemption? ›
The 7(i) overtime exemption is a section of the FLSA (specifically concerned with retail or service employees) that determines whether or not someone needs to be paid overtime, or if their regular wages and commissions combined suffice for overtime pay.
What is exemption rules? ›
To exempt a person or thing from a particular rule, duty, or obligation means to state officially that they are not bound or affected by it.
What is the exemption limit? ›
Tax-free Income Limit in India
Under the old tax regime, an individual below the age of 60 years is exempt up to Rs. 2.5 lakhs, senior citizens (60-80 years) are exempt up to Rs. 3 lakhs and super senior citizens (above 80 years) are exempted up to Rs. 5 lakhs.
What is the exemption clause main purpose rule? ›
The “main purpose” rule: when constructing an exclusion clause the court will also consider the main purpose rule, which means that the court presumes that the clause was not intended to defeat the main purpose of the contract.
What is Section 3 C of the Investment Company Act? ›
Section 3(c)(1) exempts private funds of any size, provided that they have no more than 100 beneficial owners, all of whom are accredited investors.
In other words, even if it doesn't consider itself as an investment-related business, an operating company that has 40% or more of its assets invested in stocks, bonds, or other securities (even conservative corporate bonds held for cash preservation purposes) is an "investment company" and is subject to the ...
What is Section 7 of the Investment Company Act? ›
Section 7(b) of the 1940 Act generally prohibits any depositor or trustee of or underwriter for any investment company, organized or otherwise created under the laws of the United States or of a state, without a board of directors, from, among other things, offering, selling, or delivering after sale, any security or ...
What is the 3c 7 exemption? ›
The 3(c)(7) exemption refers to the Investment Company Act of 1940's section permitting qualifying private funds exemption from some SEC regulations. Private funds must not plan to issue an IPO, and their investors must be qualified purchasers to qualify for the 3C7 exemption.
What is the rule 3a 7 under the Investment Company Act? ›
Rule 3a-7 under the Investment Company Act of 1940 (the Act) excludes issuers of asset-backed securities (ABS) from the definition of "investment company" upon the satisfaction of certain conditions.
What makes a qualified client? ›
A qualified client (QC) is an individual or entity that meets any of the following criteria: has $1.1M or more of assets under management with the investment adviser after the investment in the fund. has a net worth of $2.2M prior to the investment in the fund (excluding the value of the investor's primary residence)
What is exemption 7c? ›
Exemption 7(C) provides protection for personal information in law enforcement records. This exemption is the law enforcement counterpart to Exemption 6, which is the FOIA's fundamental privacy exemption.
What is the exemption number 3 for the IRS? ›
Organizations organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, educational, or other specified purposes and that meet certain other requirements are tax exempt under Internal Revenue Code Section 501(c)(3).
What does federal exemption 3 mean? ›
Exemption 3 of the Freedom of Information Act incorporates into the FOIA certain. nondisclosure provisions that are contained in other federal statutes. Specifically, Exemption. 3 allows the withholding of information prohibited from disclosure by another federal statute.
