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. SEC Form N-54C

    SEC Form N-54C is a form completed by an investment company in ...
  3. Exempt Transaction

    An exempt transaction is a type of securities transaction where ...
  4. SEC Form 26

    SEC Form 26 is a form filed by an exchange to notify the SEC ...
  5. Accredited Investor

    Accredited investor has the financial sophistication and capacity ...
  6. Exempt Income

    Exempt Income refers to earnings that are protected from federal ...
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

    Liquidation Blues: When Mutual Funds Close

    Underperforming mutual funds can be liquidated, leaving investors down and out.
  4. Investing

    Side-By-Side Management May Favor Hedge Over Mutual Funds

    Having your firm handle both investments can spell disaster for your returns.
  5. Investing

    Money Market Funds: Enough Regulation Already?

    Since September, the Securities and Exchange Commission (SEC) has been sitting on proposed rules for money market mutual funds that would affect 61 million individual investors plus untold businesses ...
  6. Financial Advisor

    Top 5 American Funds for Retirement Diversification in 2016

    Discover five mutual funds from industry leader American Funds with high yields that are perfect for retirement savings diversification.
  7. Investing

    How to Invest in Private Equity

    Private equity might be a pricey investment, but the payoff could be big. Here's why and where you should invest in private equity.
  8. Investing

    Closing Mutual Funds: Investment Protection Or Trap?

    Discover the characteristics of closing funds, the reasons why they close and key factors to consider.
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