Reg D & Compliance
3(c)(1) vs. 3(c)(7): The Fund Exemptions Sponsors Must Choose
Most sponsors know they need a Reg D exemption to avoid registering their securities. Far fewer realize there's a second registration regime they also have to dodge: the Investment Company Act of 1940. A pooled vehicle that invests in securities can be deemed an 'investment company' — like a mutual fund — and subjected to a heavy registration and regulatory framework that no private fund could bear. The two exemptions sponsors rely on to avoid that fate are Section 3(c)(1) and Section 3(c)(7), and choosing between them shapes who a fund can accept and how large it can grow.
By One Million Media5 min read
This guide is for sponsors and GPs structuring a real estate fund — particularly fund-of-funds and vehicles that invest in other entities' securities — who need to understand these exemptions. A single-asset syndication that directly owns real estate often isn't an investment company at all, but the moment a sponsor pools capital to invest in securities (LP interests, other funds), the 1940 Act is in play. Knowing 3(c)(1) from 3(c)(7) is essential to building a fund that stays exempt. This is educational information; structure any fund with securities counsel.
Why the Investment Company Act matters
The 1940 Act regulates 'investment companies' — vehicles primarily engaged in investing in securities. Registered investment companies (like mutual funds) face strict rules on structure, leverage, disclosure, and governance that are incompatible with how private funds operate. Private real estate funds therefore structure to fit an exemption so they aren't treated as investment companies at all.
- A fund that directly owns and operates real estate may qualify for a separate real-estate exemption (often under Section 3(c)(5)(C)) and avoid the issue.
- A fund that invests in securities — including LP/LLC interests in other deals, like a fund-of-funds — is more likely to be an 'investment company' and needs 3(c)(1) or 3(c)(7).
- These exemptions are about the Investment Company Act, and are separate from (and in addition to) the Reg D exemption for the securities offering itself.
- Both 3(c)(1) and 3(c)(7) funds also sell their interests privately under Reg D — the two regimes stack.
3(c)(1) vs. 3(c)(7): the core trade-off
Both exemptions exclude a privately offered fund from investment-company registration, but they draw the line on investors very differently — and that difference drives the choice:
| Section 3(c)(1) | Section 3(c)(7) | |
|---|---|---|
| Investor standard | Accredited investors (for a 506 raise) | Qualified purchasers (a higher bar) |
| Investor cap | Up to 100 beneficial owners | Up to ~2,000 before public-reporting issues |
| Who can invest | Broader — accredited individuals | Wealthier — generally $5M+ in investments |
| Best for | Smaller funds, broader investor base | Larger funds targeting wealthy/institutional capital |
The trade-off is access versus scale. A 3(c)(1) fund can accept ordinary accredited investors but is capped at 100 beneficial owners — a real constraint that limits how much you can raise from smaller checks. A 3(c)(7) fund can have far more investors (effectively up to around 2,000 before other reporting thresholds bite) but every investor must be a 'qualified purchaser,' generally meaning $5 million or more in investments — a much smaller, wealthier pool.
The qualified purchaser bar
The 3(c)(7) exemption hinges on the 'qualified purchaser' standard, which sits well above accredited-investor status. Understanding the gap is key to choosing the right exemption:
- Accredited investor (the 3(c)(1) standard for a 506 raise): roughly $1M net worth excluding primary residence, or $200k/$300k income — a relatively broad group.
- Qualified purchaser (the 3(c)(7) standard): generally an individual or family with at least $5 million in investments, or an entity with at least $25 million in investments — a much narrower, wealthier group.
- Every investor in a 3(c)(7) fund must clear the qualified-purchaser bar, so the fund trades a broader investor base for a higher per-investor wealth requirement and a higher investor count.
- A 3(c)(1) fund's 100-owner cap counts beneficial owners, so even small investors consume a 'slot' — pushing some sponsors toward 3(c)(7) as they scale.
This is why the two exemptions suit different businesses. A sponsor raising a modest fund from a network of accredited professionals typically uses 3(c)(1) and lives within the 100-owner cap. A sponsor building a large institutional-quality fund, raising bigger checks from very wealthy individuals and institutions, uses 3(c)(7) to accommodate more investors — accepting that everyone must be a qualified purchaser.
Choosing the right structure
The decision flows from your fund's size, target investors, and growth plans. A useful way to think about it:
- First ask whether you even need 3(c)(1)/3(c)(7): a fund that directly owns operating real estate may fit the 3(c)(5)(C) real-estate exemption instead.
- If you're pooling capital to invest in securities (a fund-of-funds or fund investing in other deals' interests), you likely need 3(c)(1) or 3(c)(7).
- Choose 3(c)(1) for a smaller fund with a broader accredited-investor base, accepting the 100-owner ceiling.
- Choose 3(c)(7) for a larger fund targeting qualified purchasers, gaining a higher investor count at the cost of a wealthier-only base.
- Confirm the analysis with securities counsel — the investment-company determination is fact-specific and the penalties for getting it wrong are severe.
Getting this layer right is part of what separates a casually-assembled syndication from a properly structured fund. The Reg D exemption handles the securities offering; the 1940 Act exemption handles the fund's status as a vehicle. A real estate fund sponsor needs both, and the 3(c)(1)-versus-3(c)(7) choice — broad-but-capped versus wealthy-but-scalable — is one of the foundational decisions in designing the fund. Make it deliberately, with counsel, and in line with the investor base you actually intend to raise from.
Frequently asked questions
What are the 3(c)(1) and 3(c)(7) exemptions?
They are exemptions under the Investment Company Act of 1940 that let a privately offered fund avoid registering as an investment company (like a mutual fund). They're separate from the Reg D exemption for the securities offering — a private fund that invests in securities typically needs both: Reg D for the offering and 3(c)(1) or 3(c)(7) for its status as a vehicle.
What's the difference between 3(c)(1) and 3(c)(7)?
A 3(c)(1) fund can accept accredited investors but is capped at 100 beneficial owners. A 3(c)(7) fund can have far more investors (up to roughly 2,000 before other thresholds) but every investor must be a 'qualified purchaser' — generally $5 million or more in investments. The trade-off is a broader investor base (3(c)(1)) versus greater scale with a wealthier base (3(c)(7)).
What is a qualified purchaser?
A higher standard than an accredited investor: generally an individual or family with at least $5 million in investments, or an entity with at least $25 million in investments. Every investor in a 3(c)(7) fund must meet this bar, which is why 3(c)(7) suits larger funds raising bigger checks from very wealthy individuals and institutions.
Does a real estate syndication need a 3(c)(1) or 3(c)(7) exemption?
Often not. A single-asset syndication that directly owns and operates real estate may qualify for a separate real-estate exemption (Section 3(c)(5)(C)) and avoid the investment-company issue. The 3(c)(1)/3(c)(7) analysis becomes important when a sponsor pools capital to invest in securities — such as a fund-of-funds or a fund investing in other deals' LP interests.
Which exemption should a fund sponsor choose?
It depends on size and target investors. Choose 3(c)(1) for a smaller fund with a broader accredited-investor base, accepting the 100-owner cap. Choose 3(c)(7) for a larger fund targeting qualified purchasers, which allows many more investors but limits the base to very wealthy ones. The determination is fact-specific and should be confirmed with securities counsel.
Keep reading
This article is for educational purposes only and is not legal, investment, tax, or securities advice. Securities offerings are regulated; always work with your securities attorney to structure and run your offering. One Million Media is a marketing and lead-generation provider — not a broker-dealer, investment adviser, or law firm.
