At a Glance
Section 3(c)(1) and Section 3(c)(7) of the Investment Company Act of 1940 (ICA) let special purpose vehicles (SPVs) and private funds operate without Securities and Exchange Commission (SEC) registration.
3(c)(1) caps a vehicle at 100 accredited investors. 3(c)(7) allows up to 2,000 Qualified Purchasers.
Most emerging SPV managers start with 3(c)(1) because the investor qualification bar is lower.
Managers with institutional limited partners (LPs) often use 3(c)(7) because pensions, endowments, and large family offices typically meet Qualified Purchaser thresholds.
Choosing the wrong exemption can limit your LP base or create compliance risk.
What Are 3(c)(1) and 3(c)(7) Exemptions?
Section 3(c)(1) and Section 3(c)(7) are the two primary exemptions under the ICA that allow private investment vehicles to pool investor capital without registering with the SEC as investment companies. Without one of these exemptions, any entity holding securities with more than a handful of investors would face costly registration and reporting requirements.
Accredited Investors vs. Qualified Purchasers
An accredited investor meets one of the following thresholds:
Net worth above $1 million (excluding a primary residence)
Annual income above $200,000 ($300,000 with a spouse) for the past two years
A Qualified Purchaser must meet a higher standard:
Individuals: own at least $5 million in investments
Entities: own at least $25 million in investments (acting for their own account)
Every Qualified Purchaser meets accredited investor standards, but most accredited investors do not qualify as Qualified Purchasers. That gap matters because it determines which exemption your vehicle can use and how many investors you can bring in.
How 3(c)(1) and 3(c)(7) Compare
The core differences come down to three factors: who can invest, how many investors you can accept, and what that means for your growth.
Investor Limits
3(c)(1): Up to 100 beneficial owners Up to 100 beneficial owners. Adding one investor beyond that cap could cause you to lose the exemption.
3(c)(7): Up to 2,000 Qualified Purchasers, giving managers with larger or institutional LP bases significantly more room.
Investor Qualification Requirements
3(c)(1): Investors must be accredited investors. The lower threshold opens your vehicle to a broader pool of LPs.
3(c)(7): Every investor must be a Qualified Purchaser. This narrows the eligible base but provides higher capacity. Institutional investors generally meet this standard, making 3(c)(7) a natural fit for managers with institutional LP relationships.
How to Choose the Right Exemption for Your SPV
Your choice depends on how many investors you expect, who those investors are, and how your vehicles will grow over time.
When 3(c)(1) Makes Sense
3(c)(1) fits managers who:
Run co-invest SPVs with 10 to 50 investors drawn from high-net-worth individuals and family offices
Expect to stay well within the 100-investor cap
Need the simplicity of verifying accredited investor status rather than Qualified Purchaser status
Manage SPVs alongside a blind pool fund
When to Consider 3(c)(7)
Consider 3(c)(7) when:
Your investor count approaches 100 across vehicles
Your LP base includes institutional investors who already qualify as Qualified Purchasers
You manage $500 million or more in assets under management (AUM) and your institutional LPs expect governance aligned with this framework
You need capacity beyond what 3(c)(1) allows
Many institutional LPs prefer 3(c)(7) vehicles because the higher qualification standard aligns with their compliance frameworks and signals robust governance.
Key Considerations and Compliance Risks
Before choosing an exemption, consider these factors:
Look-through rules can affect 3(c)(1) vehicles. When another fund or entity invests in your SPV, the SEC may count each of that entity's underlying investors toward your 100-investor cap.
Exceeding investor limits can cause your vehicle to lose its exemption, forcing SEC registration with significant compliance costs and operational restrictions.
Knowledgeable employees (general partners, directors, and certain executive officers) do not count toward the 3(c)(1) investor cap, which helps managers maximize available slots.
Integration risk arises when the SEC treats related vehicles as a single fund for investor counting purposes. Parallel SPV structures require careful legal planning to avoid this outcome.
Managers should consult legal counsel before choosing an exemption. The rules involve nuances around beneficial ownership counting and entity look-through that require case-specific analysis.
Examples in Practice
Consider an emerging fund manager running a Fund 2 strategy with $40 million in AUM. She raises co-invest SPVs alongside her blind pool fund, drawing from a network of 60 high-net-worth individuals and family offices. Because all of her investors are accredited investors and she stays well below 100 per vehicle, 3(c)(1) gives her the flexibility and simplicity she needs.
Now consider a manager at Fund 4 with $600 million in AUM. His LP base includes pension funds, university endowments, and large family offices, most of which qualify as Qualified Purchasers. He routinely brings 150 or more investors into a single vehicle. 3(c)(7) provides the capacity his business requires, and his institutional LPs expect the governance standards that come with it.
The difference between these two managers lies in both scale and the composition of their LP base, as well as the operational complexity they can support.
Conclusion
The choice between 3(c)(1) and 3(c)(7) comes down to your investor base and your growth trajectory. 3(c)(1) offers simplicity and broad LP access for managers with smaller networks. 3(c)(7) provides the capacity and institutional alignment that larger operations require. Both exemptions carry compliance obligations that benefit from expert guidance. We recommend consulting legal counsel to determine which structure fits your current and future needs.
Sydecar Simplifies SPV Compliance
Navigating exemption requirements means verifying investor qualifications, filing Form D and Blue Sky documents, and maintaining compliance throughout each vehicle's life. Sydecar's SPV administration platform handles Know Your Customer (KYC), Know Your Business (KYB), Anti-Money Laundering (AML), and investor accreditation so managers can focus on sourcing and closing deals.
