Sections 3(c)(1) and 3(c)(7) of the Investment Company Act of 1940 outline two ways private investment funds can be excluded from SEC registration and regulation as investment companies. Private funds don’t face the same strict disclosure and compliance requirements as registered funds, but there are limitations around the number and types of investors that can participate.
What makes a fund private?
A private fund is a type of pooled investment vehicle (PIV) that does not have to register with the Securities and Exchange Commission (SEC) as an investment company because it meets the criteria for exemption under Section 3(c)(1) or Section 3(c)(7). Hedge funds, private equity funds, real estate funds, and venture capital funds may all qualify as private funds.
The Investment Company Act
In response to the stock market crash of 1929, Congress passed the Investment Company Act of 1940, a law that enables the SEC to regulate investment companies. The SEC defines an investment company as any company in the business of selling securities.
There are many types of investment companies, but regulators recognize three main categories:
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Open-end companies (also known as mutual funds)
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Closed-end funds
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Unit investment trusts (UITs)
Most venture capital and private equity funds are closed-end funds that pursue an exemption from registration under Section 3(c)(1) or Section 3(c)(7) of the Investment Company Act.
Sections 3(c)(1) and 3(c)(7)
Section 3(c)(1) and Section 3(c)(7) of the Investment Company Act each outline an exemption that relates to private funds, which are PIVs restricted to certain types of investors.
Section 3(c)(1) funds
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. Under Section 3(c)(1), a fund may have up to 250 beneficial owners if it meets the definition of a qualifying venture capital fund, a 3(c)(1) fund with $10 million or less in assets under management (AUM) and an investment strategy that conforms to the legal definition of a venture capital fund.
The Investment Advisers Act of 1940 defines a venture capital fund as one that:
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At any time holds no more than 20% of the fund’s committed capital in non-qualifying investments (such as debt, secondaries, public issuances, fund-of-fund investments, or digital assets)
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Restricts leverage (borrowing against fund assets) to 15% of the total fund fund size, and repays leveraged debt within 120 days
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Limits LP redemption rights to “extraordinary circumstances”
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Represents to investors and potential investors that it pursues a venture capital strategy
Congress added the definition of a “qualifying venture capital fund” to Section 3(c)(1) as part of the bipartisan Economic Growth, Regulatory Relief, and Consumer Protection Act of 2017-2018. This law also requires the SEC to revisit the $10 million limit on qualifying venture capital funds every five years. In February 2024, the SEC proposed raising the limit to $12 million.
Section 3(c)(7) funds
Under Section 3(c)(7), a private fund can have up to 2000 beneficial owners and still be exempt from registering as an investment company provided that all investors in the fund are qualified purchasers.
Section 3(c)(1) vs. Section 3(c)(7)
The table below summarizes the key differences between the exemptions offered by Section 3(c)(1) and Section 3(c)(7) of the Investment Company Act:
| Section 3(c)(1): Conventional | Section 3(c)(1): Qualifying venture capital fund | Section 3(c)(7) | |
| Beneficial owner limit | 100 | 250 | 2000 |
| Investors | Accredited investors | Accredited investors | Qualified purchasers |
| Fund size limit | None | $10 million venture capital fund | None |
Download the playbook
In addition to regulation at the fund level under the Investment Company Act, managers of private funds are also subject to regulations related to private fund advisers and the fundraising process. For an end-to-end overview of private fund regulations, download the Carta VC regulatory playbook.
