100 Holder Rule relating to the Investment Company Act

Quick Definition

The Investment Company Act of 1940 governs all entities that would be considered investment companies, including hedge funds. Private funds (such as hedge funds) are generally not registered investment companies and must seek an applicable exemption from being considered an investment company, and the 100 Holder Rule is the most common means by which this is achieved. There are three exemptions for private funds, and one must be utilized: 3(c)(1), 3(c)(5), or 3(c)(7). 3(c)(5) is only for certain qualifying real estate funds, and is therefore not useful for most hedge funds, which must utilize either of 3(c)(1) or 3(c)(7) as a result. 3(c)(7) allows for an effectively unlimited number of investors in a private fund, but only if all investors are "qualified purchasers", which is a high standard beyond the means of many hedge funds. A qualified purchaser generally means an individual with at least $5m in investment assets, or an entity with $25m. That leaves 3(c)(1), which does not impose investor qualification restrictions (although restrictions will still come into play, just by virtue of other acts such as the Securities Act or the Investment Advisers Act). 3(c)(1) says that an otherwise would-be registered investment company that has 100 or fewer investors is exempt, and this is essentially the same thing as the 100 Holder Rule.