Regulation

Investment Company Act of 1940

Quick Definition

The Investment Company Act of 1940 is an American act and regulatory regime that governs over entities of any kind that primarily engage in investing in securities. As such, hedge funds that have any amount of securities holdings are likely to fall under the Act. Learn more below!


What is the Investment Company Act of 1940?

Overview:

The Investment Company Act of 1940 (commonly, the “40 Act,” “Investment Company Act” or the “Act“) is an American act and regulatory regime that governs over entities of any kind that primarily engage in investing in securities. As such, hedge funds that have any amount of securities holdings fall under the Act.  Official information about the Act can be found on the SEC’s website.

The Act provides for registration, organizational and disclosure, and other compliance requirements for entities that fall under it. Generally, such entites that offer their securities (i.e. bringing on investors) to the public must become registered, or seek to qualify for an exemption under the Act which excludes the entity from the requirements of the Act. The very act of bringing on investors into an entity that is considered to primarily invest in securities is the sale of a security.

Examples of investment companies that offer their securities publicly include mutual funds or exchange traded funds (“ETFs“). On the other hand, hedge funds generally seek to avoid offering their securities publicly, and as such, look to be exempt from the act. The most common exemption frameworks utliized by hedge funds are called Section 3(c)(1) and Section 3(c)(7). In particular, emerging managers most commonly structure their funds to be 3(c)(1) exempt.

Common exemptions:

Under Section 3(c)(1), there are only two requirements for a hedge fund: (a) it may not publicly offer its securities, and (2) it can have a maximum of 100 investors in the fund at a given time. For funds which are considered qualifying venture capital funds, it is possible to have up to 250 investors under the Act, so long as the total invested and uninvested capital contributions for such a qualifying venture capital fund is less than $10 million.

Under Section 3(c)(7), a hedge fund can have as many as 2000 investors. However, in order to qualify under 3(c)(7) of the Act, such a fund (alongside not offering its securities publicly, just as in 3(c)(1) above) can only sell its securities/bring on investors who meet the threshold of being considered a “Qualified Purchaser” (“QP“). A QP, for a natural person, at least, is a person who has $5 million in investable assets, not including their primary residence, if any. In other words, if even a single investor fails to meet the QP threshold, the 3(c)(7) exemption cannot be claimed.

For more detailed explanations of both 3(c)(1) or 3(c)(7), visit the dedicated pages for either linked herein.

Wrap up:

Any hedge fund that deals in securities should make sure that they understand the Investment Company Act and how their planned or existing fund fits in with its requirements or exemptions.  When using Repool’s services, ultimately, we cannot make a recommendation as to which is suitable or advisable for your facts and circumstances, and you must represent to us which route you intend to take.  If you have any confusion, seek the advice of legal counsel with specialization in investment management and fund compliance practices.

In our experience, most emerging funds tend to rely on 3(c)(1), but 3(c)(7) starts to become more common with larger funds who have access to a wide network of high net worth individuals or institutional investors such as family offices.



Want to gain access to new and diverse fund managers?

Become an investor

Interested in launching your fund quickly and easily?

Disclaimer

Repool, Inc. (“Repool”) serves as an administrator to various pooled investment vehicles.  The content on this site, or any associated distribution platforms and public Repool online social media accounts, platforms, and site (collectively, “Distribution Channels”), is provided for information and discussion purposes only, and should not be construed as or relied upon in any manner as legal, business, tax, investment, or other advice. Repool’s services and information available on Distribution Channels are not a substitute for third-party professionals (including properly licensed and/or registered lawyers, brokers and tax professionals), and you should seek your own professional advisers, including legal counsel. Repool is not licensed to provide legal advice and is not registered as a broker-dealer or investment adviser, and Repool is not otherwise licensed or registered.

Any views expressed in posted content, such as articles, blogposts, commentary, videos, or social media, are those of individual Repool personnel or third-party authors and are not the views of Repool or our affiliates, unless explicitly stated otherwise. Additionally, with respect to any content or views available on Distribution Channels, Repool makes no representations that the information has been validated by independent, licensed third-parties, nor that such information has any enduring accuracy or appropriateness for any given individual or situation.

Laws and regulations applicable to the sale of securities, forming pooled investment vehicles (including private funds), and investment management (including serving as an investment adviser or commodity trading advisor) are complicated and occasionally ambiguous. Relevant law may come from the state, federal, or international level, and you may be under the regulatory oversight of one or many regulatory bodies such as, but not limited to, the Securities and Exchange Commission and the Commodity Futures Trading Commission. It is your responsibility to ensure that, when forming, offering interests of and managing any pooled investment vehicle, whether supported by Repool’s administrative services or not, you are in material compliance with applicable laws including obtaining any and all applicable licenses, permits, registrations, memberships, and approvals that are required in order to form, offer securities of and manage such pooled investment vehicle.  You should not rely upon Repool in making any such determinations or as a replacement for licensed, third-party professionals.

Welcome to the future of fund services

© 2022. Repool, Inc.