How do you count investors toward the 100-owner limit?
Beginners · Video 6 of 12 · 1:02 ·
Section 3(c)(1) lets a fund avoid registering as an investment company with 100 beneficial owners or fewer, and the count has rules. A person counts as one. An LLC or other entity usually counts as one, but if it was set up just to invest in your fund, you count its owners; and if it's another fund owning 10% or more of yours, its investors count instead. Knowledgeable employees aren't counted, and a stake received by gift or inheritance counts as the original owner's. Past 100, a fund needs 3(c)(7), where every investor is a qualified purchaser, or must register.
Everything here is for educational purposes only and is not legal, tax or investment advice, or an offer to buy or sell any security. Laws and thresholds change and depend on your facts, so talk to a qualified attorney before acting.
Key facts
- Section 3(c)(1): 100 beneficial owners or fewer, and no public offering.
- An entity investor generally counts as one owner.
- An entity formed to invest in the fund is looked through to its owners (SEC staff position).
- A fund investor owning 10% or more of the voting securities is looked through to its own investors (Section 3(c)(1)(A)).
- Knowledgeable employees are not counted (Rule 3c-5).
- Stakes received by gift, bequest or divorce count as the original owner's (Rule 3c-6).
- Past 100: Section 3(c)(7), with every investor a qualified purchaser (generally $5 million in investments for a person), or register.
Transcript
Operator: Your fund has 100 investors. Number 101 wants in. You say no.
Founder: Say no to money? Why?
Operator: Most small funds rely on 3(c)(1). It works with 100 owners or fewer. And counting them is trickier than it sounds.
Operator: A person is one owner. Easy.
Operator: An LLC that invests? Also one owner. Usually.
Founder: Usually?
Operator: If that LLC was set up just to invest in your fund, you count every owner inside it.
Operator: Same if it's another fund that owns 10% or more of yours. Its investors count, not the fund.
Founder: So one investor can turn into twenty.
Operator: It can. Some people don't count at all: knowledgeable employees, like your senior people and investment staff.
Operator: And if someone inherits a stake, or gets it as a gift, it still counts as the original owner.
Founder: So I just stop at 100.
Operator: Many managers stop short, to leave room for counting surprises.
Operator: Past 100, you need 3(c)(7), where every investor is a qualified purchaser, generally $5 million in investments. Or you register like a mutual fund.
Founder: So when number 101 wants in...