3C1 refers to a part of the Investment Company Act of 1940 which allows private funds to avoid the requirements of the Securities and Exchange Commission (SEC). 3C1 is the abbreviation of exception 3 (c) (1) provided for in article 3 of the law. It reads in part:
c) Notwithstanding paragraph a), none of the following persons is an investment company within the meaning of this title:
(3) Any issuer whose securities in circulation (other than short-term bills) are beneficially owned by a maximum of one hundred people and who does not currently make and does not offer to make an offer to the public of its securities.
Funds that meet the conditions of 3C1 are not considered to be investment companies. This allows private funds with 100 investors or less and no plans for an initial public offering to bypass SEC registration and other requirements, such as continuous disclosure and restrictions on trading in derivatives. 3C1 funds are also called 3C1 companies or 3 (c) (1) funds.
Breaking down 3C1
3C1 is often used by hedge fund companies to avoid the SEC’s control that other investment funds, such as mutual funds and other publicly traded funds, are under. That said, investors in 3C1 funds must be accredited investors, that is, investors with annual income greater than $ 200,000 or net worth greater than $ 1 million.
The difference between 3C1 funds and 3C7 funds
Private equity funds are generally structured as 3C1 funds or 3C7 funds, the latter referring to exemption 3 (c) (7). The 3C1 and 3C7 funds are exempt from the SEC registration requirements under the Investment Company Act of 1940, but the nature of the exemption is slightly different. While the 3C1 exemption is based on a maximum of 100 accredited investors, a 3C7 fund must maintain a total of 2000 qualified buyers or less. Qualified buyers must cross a higher bar, with more than $ 5 million in assets, so a 3C7 fund is allowed to have more of these people or entities participating as investors.
Challenges for 3C1 compliance
Although 100 accredited investors seem to be an easy limit to monitor, this can be a tricky area for fund compliance. Private funds are generally protected in the event of involuntary transfer of shares, for example, the death of a large investor results in the distribution of shares between family members. However, they encounter problems with the shares granted as employment incentives. Well-informed employees, including managers, administrators and partners, do not count in the fund count. However, if the employee leaves the shares with him, he will be charged against the limit of 100 investors. Because so much relies on exemption from investment companies and 3C1 status, private funds put a lot of effort into ensuring their compliance.