What is meant by 3C1 codes for investment?

3C1 Codes refers to part of the Investment Company Act of 1940, which allows private investment companies to be regarded as exemptions from certain regulations and reporting requirements of the Securities and Exchange Commission (SEC). However, these companies must meet certain requirements in order to receive their exemption status.


look at a glance

— 3C1 refers to a portion of the Investment Company Act of 1940 that exempts certain private investment companies from regulation.

— A firm that is defined as an investment company must meet certain regulatory and reportable requirements from the SEC.

— 3C1 enables private funds with 100 or fewer investors and no plans to go public to bypass certain SEC requirements.




Realization of 3(C)1

3C1 is the abbreviation for the exception under 3(c)(1) contained in Section-3 of the Act. To fully understand Section-3(C)(1), we must first review the definition of an investment company in the Act and how it relates to previous sections of the Act: 3(b)(1) and 3(c). An investment company within the meaning of the Investment Company Act is companies that are mainly active in the investment, reinvestment or trading in securities. Investment companies must comply with certain regulations and reporting requirements to be considered as the ‘Investment company’.



3(b)(1) was created to exclude certain companies from being viewed as investment companies and to adhere to the following provisions. Companies are excluded as long as they are not primarily engaged in the investment, reinvestment, holding, holding or trading in securities themselves or through subsidiaries or controlled companies.



3(c) goes a step further, outlining specific exceptions to an investment firm’s classification, which include broker-dealers, retirement plans, church plans, and nonprofits.



3(c)(1) supplements the list of exceptions in 3 (c) by specifying certain parameters or requirements that would enable private investment companies not to be classified as investment companies within the meaning of the law if they were fulfilled.


3(c)(1) exempts the following from definition of investment company:

“Any issuer whose outstanding securities (other than short-term paper) are beneficially owned by not more than one hundred persons (or in the case of a qualifying venture capital fund, 250 persons) i.e., not making and doesn’t presently propose to make a public offering of such securities.”

In other words, 3C1 permits private funds with 1-100 investors (and venture capital funds with fewer than 250 investors) and no plans for an initial public offering (I.P.O) to sidestep SEC registration and other requirements, including ongoing disclosure and restrictions on derivatives trading. 3C1 funds are also referred to as 3C1 companies or 3(c)(1) funds.

The result of 3C1 is that it allows hedge fund companies to avoid the SEC scrutiny that other investment funds, such as mutual funds, must adhere to under the Act. However, the investors in 3C1 funds must be accredited investors, meaning investors who have an annual income of over $200,000 or a net worth in excess of $1 million.


3C1 Funds vs. 3C7 Funds

The funds of Private equity funds are usually structured as 3(C)1 or 3(C)7 funds, the latter referring to the exception to number 3(c) (7). Both 3(C)1 and 3(C)7 funds are exempt from SEC registration requirements under the Investment Companies Act 1940, but the nature of the exemption is slightly different. While the 3C1 exemption depends on there being no more than 100 qualified investors, a 3(C)7 fund must have a total of 2,000 qualified buyers or fewer. Qualified buyers need to raise the bar and have assets in excess of $ 5 million, however, but a 3(C)7 fund can have more of these people or companies as investors.

3C1 Compliance Challenges

While 100 recognized investors may seem like an easy limit to monitor, keeping funds afloat can be a challenge. In the event of an unintentional transfer of shares, personal resources are fundamentally protected. For example, the death of an investor or the sharing of shares among family members would be treated as an unwanted transfer.

However, there may be problems using these funds as incentives to work. Smart employees, including officers, directors and partners, do not count on the Fund’s balance sheet. However, employees who leave the company with shares count within the limit of 100 investors. The 100-person limit is so important to corporate escape and 3C1 status that private funds go to great lengths to meet it.


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