What is '3C1'

3C1 refers to a portion of the Investment Company Act of 1940 that allows private funds to avoid the requirements of the Securities and Exchange Commission (SEC). 3C1 is shorthand for the 3(c)(1) exemption found in section 3 of the act. It reads in part:

(c) Notwithstanding subsection (a), none of the following persons is an investment company within the meaning of this title: 

(3) Any issuer whose outstanding securities (other than short-term paper) are beneficially owned by not more than one hundred persons and which is not making and does not presently propose to make a public offering of its securities.

Funds that meet the terms of 3C1 are not considered investment companies. This allows private funds with 100 or fewer investors and no plans for an initial public offering to sidestep SEC registration and other requirements, like ongoing disclosure and restrictions on derivatives trading. 3C1 funds are also referred to as 3C1 companies or 3(c)(1) funds.

BREAKING DOWN '3C1'

3C1 is often used by hedge fund companies to avoid the SEC scrutiny that other investment funds, like mutual funds and other publicly traded funds, are under. That said, the investors in 3C1 funds must be accredited investors, meaning investors who have an annual income over $200,000 or a net worth in excess of $1 million.

The Difference Between 3C1 Funds and 3C7 Funds

Private equity funds are usually structured as 3C1 funds or 3C7 funds, the latter being a reference to the 3(c)(7) exemption. Both 3C1 and 3C7 funds are exempt from SEC registration requirements under the Investment Company Act of 1940, but the nature of the exemption is slightly different. Whereas the 3C1 exemption hinges on not exceeding 100 accredited investors, a 3C7 fund must maintain a total of 2,000 or fewer qualified purchasers. Qualified purchasers must clear a higher bar, with over $5 million in assets, so a 3C7 fund is permitted to have more of these people or entities participating as investors. 

Challenges for 3C1 Compliance

Although 100 accredited investors sounds like an easy limit to watch out for, this can be a tricky area for fund compliance. Private funds are generally protected in the case of involuntary share transfers, for example, the death of a large investor results in shares being split up among family members. They do, however, run into problems with shares given as employment incentives. Knowledgeable employees, including executives, directors and partners, do not count against the fund's tally. However, if the employee leaves carrying the shares with him, he will count against the 100 investor limit. Because so much counts on the investment company exemption and 3C1 status, private funds put a great deal of effort into making certain they are in compliance.

RELATED TERMS
  1. 3C7

    3C7 is a segment of the Investment Company Act of 1940 that allows ...
  2. Private Investment Fund

    A private investment fund is a fund that is not open to regular ...
  3. SEC Form N-54C

    SEC Form N-54C is a form completed by an investment company in ...
  4. Alternative Asset

    An alternative asset is any non-traditional asset with potential ...
  5. Accredited Investor

    Accredited investor has the financial sophistication and capacity ...
  6. Mutual Fund

    Mutual funds combine money from many investors to invest in a ...
Related Articles
  1. Taxes

    Are You Missing Out On These Tax Exemptions?

    To lower your tax bill, make sure that you're taking all the exemptions that apply to you.
  2. Financial Advisor

    5 Characteristics of Strong Mutual Fund Shares

    Discover some of the basic characteristics shared by good mutual funds that investors can use to help them in selecting funds.
  3. Investing

    How To Start a Hedge Fund In the United States

    A general overview of how to start a hedge fund firm in the United States, including complying with state and federal regulations.
  4. Investing

    Mutual Funds: Does Size Really Matter?

    The growth of mutual funds isn't always cause for celebration. Read on to find out why.
  5. Managing Wealth

    How to become an accredited investor

    Accredited investors have more opportunities that non-accredited investors but, surprisingly, there is no set process for becoming one.
  6. Investing

    The 4 Best American Funds for Growth Investors in 2016

    Discover four excellent growth funds from American Funds, one of the country's premier mutual fund families with a history of consistent returns.
  7. Investing

    Breaking The Buck: Why Low Risk Is Not Risk-Free

    Money market funds have been assumed to be safe investments, and they are - but only to a point.
  8. Investing

    The 5 Best American Funds

    Discover five of the best-performing mutual funds offered by American Funds, based on the funds' five-year average annualized returns.
RELATED FAQS
  1. What are some examples of money market funds?

    Learn more about different types of money market mutual funds, including those that invest in government paper versus commercial ... Read Answer >>
Trading Center