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3(c)(7) Exemption

3(c)(7) Exemption

What Is the 3(c)(7) Exemption?

The 3(c)(7) exemption alludes to a portion of the Investment Company Act of 1940 that permits private investment companies an exemption from certain Securities and Exchange Commission (SEC) regulation, giving that they meet certain criteria. 3C7 is shorthand for the 3(c)(7) exemption.

Understanding the 3(c)(7) Exemption

The exemption, found in section three of the act, peruses in part:

Section 3

(3)(c) Notwithstanding subsection (a), none of the accompanying people is an investment company inside the significance of this title:

(7)(A) Any issuer, the outstanding securities of which are owned only by people who, at the hour of acquisition of such securities, are qualified purchasers, and which isn't making and doesn't around then propose to make a public offering of such securities.

To meet all requirements for the 3C7 exemption, the private investment company must show that they have no plans of disclosing an initial offering (IPO) and that their investors are qualified purchasers. A qualified purchaser is a higher norm than a accredited investor; it expects that the investor possesses at least $5 million in investments. The term "qualified purchaser" is defined in Section 2(a)(51) of the Investment Company Act.

3C7 funds are not required to go through Securities and Exchange Commission registration or give continuous disclosure. They are likewise exempt from giving a prospectus that would frame investment positions publicly. 3C7 funds are likewise alluded to as 3C7 companies or 3(c)(7) funds.

The Investment Company Act of 1940 characterizes an "investment company" as an issuer that "holds itself out as being locked in principally or proposes to connect basically, in the business of investing, reinvesting or trading in securities." 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 stay away from SEC limitations.

This opens up these funds to utilize devices like leverage and derivatives to a degree that most publicly traded funds can't. By far most of new hedge funds, private equity funds, venture capital funds, and other private investment vehicles are organized to fall outside the domain of the Investment Company Act of 1940.

All things considered, 3C7 funds must keep up with their compliance to keep using this exemption from the 1940 Act. In the event that a fund were to fall out of compliance by taking in investments from non-qualified purchasers, for instance, it would open itself to SEC enforcement actions as well as litigation from its investors and some other parties it has contracts with.

3C7 Funds versus 3C1 Funds

Both 3C7 and 3C1 funds are exempted from the requirements forced on "investment companies" under the Investment Company Act of 1940 (the "Act"). Nonetheless, there are important differences between them. 3C7 funds, as noted, take investments from qualified purchasers, while 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 that a fund is wanting to fund-raise from. All things considered, 3C1 funds are capped at 100 investors total, limiting the number of investors the fund can take in from the more extensive pool they are permitted to pull from.

3C7 funds don't have a set cap. Nonetheless, 3C7 funds will fall under the regulation that is stipulated in the Securities Exchange Act of 1934 when they arrive at 2,000 investors. As of now, private funds are subject to increased SEC examination and share something else for all intents and purpose with public companies.


  • Private funds must not plan to issue an IPO and their investors must be qualified purchases to meet all requirements for the 3C7 exemption.
  • As opposed to 3C7, 3C1 funds deal without any than 100 accredited investors.
  • The 3(c)(7) exemption alludes to the Investment Company Act of 1940's section allowing qualifying private funds an exemption from certain SEC regulations.
  • There is no maximum limit for the number of purchasers of 3C7 funds.