A 3(c)(7) fund is a private investment fund that accepts only qualified purchasers and avoids SEC registration under the Investment Company Act of 1940.
A 3(c)(7) fund is a type of private investment fund defined under Section 3(c)(7) of the Investment Company Act of 1940. It is exempt from registering with the Securities and Exchange Commission (SEC) as an investment company, provided it only accepts investors who are 'qualified purchasers' – individuals or entities meeting specific asset thresholds (typically $5 million or more in investments). Unlike public funds, 3(c)(7) funds are unregistered and therefore subject to fewer regulatory disclosure and reporting requirements. This allows them to pursue more sophisticated or illiquid investment strategies, such as private equity, hedge funds, or venture capital. These funds can have an unlimited number of investors as long as all meet the 'qualified purchaser' criteria. They typically operate under Regulation D of the Securities Act of 1933, using Rule 506(b) or 506(c) to raise capital through private placements. While less regulated, they are still subject to anti-fraud provisions, Know Your Customer (KYC), and Anti-Money Laundering (AML) rules. 3(c)(7) funds are commonly employed by sophisticated investors, such as institutions, endowments, and ultra-high-net-worth individuals seeking broader diversification, alpha-oriented returns, or access to less liquid asset classes.
3(c)(7) funds offer wealthy families greater access to advanced investment strategies that may be critical to achieving long-term wealth preservation, alpha generation, and portfolio diversification. These vehicles are often favored in family office structures due to their flexible investment mandates and exemption from onerous SEC registration requirements. By employing 3(c)(7) funds, family offices gain the ability to participate in private placements, reduce compliance burdens, and collaborate more easily with other large investors. However, they must maintain proper investor qualification documentation and ensure appropriate due diligence and risk oversight are conducted.
A family office seeking exposure to venture capital invests $10 million in a 3(c)(7) growth-stage technology fund. The investors in the fund include university endowments, pensions, and high-net-worth individuals, all of whom meet the $5 million asset threshold required to be qualified purchasers. Since the fund does not exceed investor type limitations and meets private placement rules, it operates without SEC registration under the 3(c)(7) exemption.
3(c)(7) Fund vs. 3(c)(1) Fund
While both 3(c)(7) and 3(c)(1) funds are exempt from registering with the SEC, a 3(c)(1) fund is limited to 100 accredited investors, regardless of their asset size. In contrast, a 3(c)(7) fund can accept an unlimited number of qualified purchasers, making it more suitable for larger-scale and institutional investment strategies.
Do all investors need to be qualified purchasers in a 3(c)(7) fund?
Yes, to maintain its exemption from SEC registration, a 3(c)(7) fund must ensure that all investors meet the definition of a qualified purchaser under the Investment Company Act.
Can a 3(c)(7) fund advertise its offering to the public?
Only if the fund uses Rule 506(c) under Regulation D, which allows general solicitation—but all investors must still be qualified purchasers and verified as accredited under SEC rules.
What is the difference between a qualified purchaser and an accredited investor?
A qualified purchaser generally has a higher financial threshold than an accredited investor. For individuals, qualified purchaser status requires $5 million in investments, while accredited investor status starts at $1 million in net worth or $200,000 in annual income.
