Section 3(c)(1) Exemption

What Is a Section 3(c)(1) Exemption?

The Section 3(c)(1) exemption is a rule in the Investment Company Act of 1940, the main U.S. law regulating mutual funds and similar pooled investment vehicles. Normally, a fund that pools investors' money and invests in securities must register with the Securities and Exchange Commission as an investment company. Section 3(c)(1) removes that requirement for a fund that meets two conditions: it has no more than 100 beneficial owners, and it does not make, and does not propose to make, a public offering of its securities.

The exemption is commonly used by hedge funds and private equity funds that raise money privately from a limited group of investors. Because the offering is private, these funds are often sold under Regulation D, a set of SEC rules for private placements.

How the Test Works

Counting is based on beneficial owners, not just the investors who sign subscription documents. Under the rules, a fund usually looks through certain entities that hold its interests, so a single investor vehicle with many underlying owners can count as several people. Funds track this count carefully, because exceeding 100 beneficial owners can remove the exemption.

Section 3(c)(1) is often compared with Section 3(c)(7), which allows a fund to have more investors, provided every one of them is a qualified purchaser. Fund sponsors choosing between the two must weigh the trade-offs.

Why It Matters to Investors

For individual investors, the exemption explains why many private funds are not registered like mutual funds. Such funds are generally not available to the public, and they usually have less standardized disclosure, limited withdrawal options, and higher minimum investments. Investors in these funds typically must meet accredited investor standards, and the investment carries risks such as restricted liquidity and reduced transparency. Understanding the exemption helps explain why a fund's offering documents, rather than a public prospectus, are the main source of information about it.