Insights · Fund Structure

3(c)(1) vs. 3(c)(7): the cap on who can invest

Every private fund relies on one of two Investment Company Act exemptions. The choice quietly limits who, and how many, can invest. Here is the difference.

Hedge fundsScaling managersAnyone choosing a fund structure

Separate from how you raise (Regulation D), your fund must avoid being regulated as an "investment company" under the Investment Company Act of 1940. Almost every private fund does this through one of two exclusions — Section 3(c)(1) or Section 3(c)(7) — and the choice quietly caps who, and how many, can invest.

The short answer

3(c)(1) caps your fund at 100 investors but accepts accredited investors. 3(c)(7) allows far more investors (~2,000) but every one must be a wealthier "qualified purchaser."

Why this exemption exists

The Investment Company Act was built to regulate mutual funds sold to the public. Its rules would make a private fund unworkable. So private funds rely on an exclusion that says, in effect, "we are not a public investment company because our investors are limited and sophisticated." The two exclusions take different paths to that conclusion.

Section 3(c)(1): the 100-investor fund

  • Investor cap: no more than 100 beneficial owners. (A narrow "qualifying venture capital fund" provision allows up to 250 for small VC funds.)
  • Investor standard: in practice, accredited investors (driven by your Reg D offering) — you do not need the higher qualified-purchaser standard.
  • Best for: smaller funds and emerging managers raising from a limited group of investors who may not all clear the qualified-purchaser bar.
  • The trade-off: the 100-owner ceiling is hard. It can constrain growth and complicate later raises if you fill up.

Section 3(c)(7): the qualified-purchaser fund

  • Investor cap: effectively up to about 2,000 investors before separate Exchange Act reporting is triggered — far more headroom.
  • Investor standard: every investor must be a qualified purchaser — generally individuals with at least $5 million in investments, or entities with at least $25 million. This is a much higher bar than "accredited."
  • Best for: funds targeting institutional and ultra-high-net-worth capital that want room to scale the number of investors.
  • The trade-off: you exclude merely-accredited investors entirely. Everyone has to clear the qualified-purchaser threshold.
SECTION 3(c)(1) 100 investors maximum Accredited investors simpler · smaller raises SECTION 3(c)(7) ~2,000 investors maximum Qualified purchasers only $5M+ bar · scales

Accredited vs. qualified purchaser — the key distinction

These two terms get confused constantly:

  • Accredited investor (the Reg D standard): generally $200k income ($300k joint) or $1M net worth excluding your home, plus certain professional credentials. The lower bar.
  • Qualified purchaser (the 3(c)(7) standard): generally $5M+ in investments for individuals, $25M+ for entities. A much higher bar.

Every qualified purchaser is also accredited; the reverse is not true. That gap is exactly why 3(c)(7) limits you to a wealthier pool.

How the pieces stack

Your investors drive the whole structure

These choices combine with your Reg D path. A manager raising from a tight group of very wealthy investors might run 506(b) into a 3(c)(7) fund. An emerging manager raising from a broader accredited pool might run 506(b) into a 3(c)(1) fund, accepting the 100-owner cap. The offering exemption and the Company Act exemption should be chosen together — see 506(b) vs 506(c) and our raising a fund overview.

Frequently asked

Which should a first-time hedge fund use?

It depends on your investor base. If your investors are very wealthy and you want room to grow the count, 3(c)(7) scales better. If you are raising from a smaller group of merely-accredited investors, 3(c)(1) and its 100-owner cap is often the practical choice. The decision should be made at formation.

Can I convert from 3(c)(1) to 3(c)(7) later?

It is possible but involves restructuring and can require existing investors to qualify under the new standard or be handled carefully. Far better to choose correctly up front based on your realistic investor base and growth plans.

Does the 100-investor cap count my own interest?

The counting rules have nuances about beneficial owners and certain look-through situations. Because miscounting can jeopardize the exemption, the cap should be tracked carefully as part of fund maintenance.

Talk it through

Choosing between 3(c)(1) and 3(c)(7)?

Walk me through your investor base and growth plans, and I will tell you which exemption fits — and how to set it up so you are not restructuring later.

Book a time to talk

Or email hello@randall.law · (435) 612-0422