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3(c)(1) vs 3(c)(7): Which Investment Company Act Exclusion Fits Your Fund
Both are exclusions from the Investment Company Act that let a private fund avoid registering as an investment company. Section 3(c)(1) limits the fund to 100 beneficial owners but accepts accredited investors, which is the far larger pool. Section 3(c)(7) removes the 100-owner cap but requires every investor to be a qualified purchaser — generally $5 million in investments for an individual and $25 million for most entities.
The choice is a trade between investor count and investor wealth, and it is effectively permanent: converting a 3(c)(1) fund to 3(c)(7) later means every existing investor must qualify, which most first funds cannot deliver. Decide it before the offering documents are drafted, because it shapes the minimum investment, the target raise, and who you are allowed to call.
What Each Exclusion Actually Requires
Neither exclusion is a filing. You do not apply for them — the fund is structured so that it qualifies, and the offering documents state which one it relies on. Getting it wrong means the fund is an unregistered investment company, which is a materially worse problem than any disclosure defect.
- 3(c)(1): no more than 100 beneficial owners. A qualifying venture capital fund under $10 million may count up to 250 under the 2018 amendment.
- 3(c)(7): unlimited owners in principle, but Exchange Act Section 12(g) forces registration at 2,000 holders of record, so 1,999 is the practical ceiling.
- Accredited investor, for 3(c)(1) in practice: $1 million net worth excluding the primary residence, or $200,000 income ($300,000 with a spouse) in each of the last 2 years.
- Qualified purchaser, for 3(c)(7): generally $5 million in investments for an individual or family company, and $25 million in investments for most institutions.
- Both still need a securities exemption for the offering itself — almost always Rule 506(b) or 506(c) under Regulation D, with a Form D filed within 15 calendar days of first sale.
The 100-Owner Cap Is Tighter Than It Sounds
A $25 million fund under 3(c)(1) with 100 slots implies an average commitment of $250,000. If your LP base writes $50,000 checks, the arithmetic fails long before the cap does — 100 investors at $50,000 raises $5 million, and you cannot add the 101st.
Beneficial ownership is also counted through certain entities rather than stopping at the entity itself. An investing LLC formed by 8 friends can count as 8 owners rather than 1 under the look-through rules, which catches managers who assumed a feeder vehicle would conserve slots. Ask counsel to run the count against your actual expected investor list before you set the minimum investment.
Why Most First Funds Choose 3(c)(1)
The qualified purchaser bar is roughly 5 times the accredited investor threshold on net worth, and it is measured in investments rather than net worth — a distinction that excludes people whose wealth sits in a business or a home. For a first-time manager raising from friends, family, and former colleagues, the qualified purchaser pool is usually too thin to fill a fund.
3(c)(7) makes sense when the LP base is institutional or genuinely high net worth and you expect more than 100 investors, or when you want room to grow the same vehicle across years. Funds that expect institutional allocators frequently go 3(c)(7) from the start precisely because converting later is impractical.
Switching Later Is Close to Impossible
There is no mechanism to migrate a 3(c)(1) fund to 3(c)(7) while keeping investors who are accredited but not qualified purchasers. In practice managers do not convert a fund — they raise the next fund under the other exclusion and leave Fund I as it is.
That is the real cost of deciding casually. If you expect Fund II to be institutional, some managers run Fund I under 3(c)(1) and accept that the vehicles will differ, while others set the minimum investment high enough that every Fund I investor happens to be a qualified purchaser. Both are deliberate choices; inheriting one from a template is not.
Typical Terms
The thresholds that drive the decision. Confirm current figures with counsel — the accredited investor definition has been amended more than once and the qualified purchaser test is measured differently.
| Term | Typical range | Notes |
|---|---|---|
| 3(c)(1) owner cap | 100 | Up to 250 for a qualifying venture fund under $10M in assets. |
| 3(c)(7) practical cap | 1,999 | Exchange Act 12(g) forces registration at 2,000 holders of record. |
| Accredited — net worth | $1M | Excluding the value of the primary residence. |
| Accredited — income | $200K / $300K | Individual or joint, in each of the last 2 years, with a reasonable expectation of the same. |
| Qualified purchaser — individual | $5M | In investments, which is a narrower test than net worth. |
| Qualified purchaser — institution | $25M | In investments, for most entity types. |
Typical ranges observed across private funds of this type. Actual terms depend on strategy, track record, and LP negotiation — treat these as orientation, not advice, and confirm your structure with counsel.
Frequently Asked Questions
Can I have both 3(c)(1) and 3(c)(7) investors in one fund?
No. A single fund relies on one exclusion. Managers who need both run parallel funds — a 3(c)(1) vehicle and a 3(c)(7) vehicle investing side by side under the same strategy — which doubles the document set and the administration. It is done, but it is a structural decision with real ongoing cost, not a convenience.
Does 3(c)(1) limit me to 100 investors or 100 owners?
Beneficial owners, which is not always the same thing. Certain investing entities are looked through, so an LLC holding 8 members can consume 8 slots rather than 1. Have counsel run the count against your expected investor list before you commit to a minimum investment, because discovering the difference at the 95th investor is expensive.
How does this interact with 506(b) versus 506(c)?
They are separate questions. The Investment Company Act exclusion governs who may own the fund; the Regulation D exemption governs how you may offer it. A 3(c)(1) fund can raise under either 506(b) or 506(c), and a 3(c)(7) fund can too. You are choosing on both axes, and the combinations have different operational consequences.
What happens if I exceed the 100-owner limit?
The fund loses the exclusion and would be an unregistered investment company, which carries consequences well beyond the offering — including potential rescission rights for investors. This is the failure that structures the entire compliance process around subscription acceptance, and it is why the administrator and counsel track the count rather than the manager doing it from memory.
Is a qualified purchaser the same as a qualified client?
No, and the distinction matters when you charge performance compensation. Qualified purchaser is the Investment Company Act test that governs 3(c)(7) eligibility. Qualified client is an Advisers Act test that governs whether a registered adviser may charge carried interest to that investor. A fund can face both tests at once, and they have different thresholds.
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Start building your fundThis guide is educational material, not legal, tax, or investment advice. Fund Launch is not a law firm and does not provide legal advice; fund formation documents prepared on the platform are reviewed by independent counsel before use. Consult your own advisors about your specific situation.