Section 3(c)(1)

Section 3(c)(1) of the provides one of the primary exemptions that allow hedge funds to operate without registering as investment companies with the SEC. This exemption is fundamental to many hedge fund structures. It is particularly important for smaller funds or those with primarily high-net-worth individual investors.

The core limitation under Section 3(c)(1) restricts fund ownership to 100 or fewer . For funds meeting the definition of a qualifying venture capital fund, this limitation increases to 250 beneficial owners.

Additionally, the fund must not undertake or intend to undertake a public offering of its securities. For domestic funds, all investors count against this limit. Offshore funds generally apply the restriction only to U.S. investors. This applies provided the fund qualifies as a and has no limit on non-U.S. investor participation.

When calculating beneficial ownership for Section 3(c)(1) purposes, individual investors generally represent one beneficial owner each. However, the SEC recognizes certain scenarios where multiple people can be combined or aggregated:

• A husband and wife investing jointly count as a single beneficial owner. However, separate investments by each spouse count as two owners.
• An individual combined with his or her counts as one beneficial owner.
• An individual and his or her self-directed IRA are treated as one beneficial owner.
• Two or more trusts sharing identical beneficiaries count as a single beneficial owner.

When an entity investor acquires 10% or more of a Section 3(c)(1) fund's voting securities, special rules may apply. If the entity is itself a , another Section 3(c)(1) fund, or a fund, fund managers must use a "look-through" approach. This means they must count each owner of that entity toward the beneficial owner count, rather than counting the entity as a single owner.

Similarly, if a fund determines that an entity investor was created primarily for the purpose of investing in the fund, a look-through obligation arises. This determination is presumed to be true if the investor commits more than 40% of its assets to the Section 3(c)(1) fund.

Additionally, if investors in an entity have discretion regarding their participation in the entity's fund investment, each beneficial owner of that entity must be counted toward the fund's 100-owner limit.

For trust investors, whether look-through is required generally depends on whether one or more trustees or beneficiaries possess the ability to revoke the trust. An irrevocable trust not formed specifically to invest in a Section 3(c)(1) fund would typically be treated as a single beneficial owner.

In funds structured as limited partnerships, the is generally not counted as a beneficial owner for purposes of the 100-beneficial-owner limit. This applies provided the general partner interest represents a genuine management role and therefore does not constitute a security.

However, this exception does not apply to persons holding indirect interests in the general partner. An indirect owner of a general partner interest must be counted toward the beneficial owner limit if that indirect interest could reasonably be characterized as a security. This might occur in cases where the holder maintains a passive ownership stake in the general partner.

For many emerging managers, the 3(c)(1) exemption provides a more accessible path to launch a fund compared to the requirements of 3(c)(7). However, the 100-investor limitation can eventually constrain growth. This leads some successful 3(c)(1) funds to either convert to 3(c)(7) status or launch parallel 3(c)(7) vehicles as they mature.

This exemption allows funds to pursue investment strategies involving significant leverage, , , and concentrated positions that would be restricted for registered funds. It also permits structures.

A qualifying venture capital fund under Section 3(c)(1) may have up to 250 beneficial owners and still qualify for the exemption. To meet this definition, a venture capital fund must maintain aggregate capital contributions and uncalled committed capital of no more than $12 million. This threshold was adjusted by SEC rule amendment that took effect on September 20, 2024. The threshold is subject to inflation-indexed adjustments every five years.

Beyond the capital limit, qualifying venture capital funds must meet several additional requirements. They must maintain at least 80% of committed capital in qualifying equity investments. They must restrict leverage to no more than 15% of total fund size with required repayment within 120 days. They must also limit investor redemption rights to extraordinary circumstances.