Understanding the Investment Company Act

The Investment Company Act

In the wake of the 1929 stock market crash, Congress enacted the Investment Company Act of 1940 (the “Act”), empowering the Securities and Exchange Commision (“SEC”) to oversee investment companies. An investment company, as defined by the SEC, is any company engaged in selling securities.

Venture capital and private equity funds typically operate as closed-end funds, often seeking exemptions from registration under Section 3(c)(1) or Section 3(c)(7) of the Act.

Sections 3(c)(1) and 3(c)(7):

These sections provide exemptions for private funds, which are limited to specific investor types.

Section 3(c)(1) Funds:

• Exempts private funds with up to 100 beneficial owners, all of whom must be accredited investors.
• Allows up to 250 beneficial owners if a private fund is classified as a qualifying venture capital fund, characterized by having $12 million or less in AUM and adhering to a venture capital strategy.

A venture capital fund is defined by the Investment Advisers Act of 1940 as one that:

• Holds at least 80% of its commitment capital in direct investments in qualifying private companies
• Limits leverage to 15% of total fund size and repays within 120 days.
• Restricts LP redemption rights to extraordinary circumstances.
• Represents a venture capital strategy to investors.

Section 3(c)(7) Funds:

Allows a private fund to have up to 2000 beneficial owners if all are qualified purchasers, exempting it from registering as an investment company.

Comparison:

This structured regulatory framework ensures that investment companies operate within defined boundaries while providing exemptions for specific fund types.

How do investor limits impact deals on Sydecar

See below for a demonstration of how investor limits are utilized while running a deal on Sydecar: