# Investment Company Act of 1940 — Fund Registration Exemptions

## What It Is

The Investment Company Act of 1940 requires any "investment company" (a pooled vehicle that invests in securities) to register with the SEC. Registration imposes extensive requirements: independent boards, leverage limits, daily NAV calculations, prospectus delivery, and more. These requirements are designed for mutual funds and are incompatible with private fund structures.

Private funds avoid registration by relying on Section 3(c)(1) or Section 3(c)(7).

## Section 3(c)(1) — The 100-Investor Exemption

- **Limit: 100 beneficial owners** of the fund's securities.
- No requirement that investors be accredited or qualified purchasers (though Regulation D imposes its own requirements at the offering level).
- **Look-through rule**: If another fund or entity owns 10% or more of your fund, you must look through to count its underlying owners toward your 100-person limit.
- Entities with fewer than 10% ownership generally count as one beneficial owner.
- **Integration risk**: If you operate multiple funds, the SEC may "integrate" them and count all investors across funds toward a single 100-person limit if the funds invest in substantially similar strategies.

## Section 3(c)(7) — The Qualified Purchaser Exemption

- **No investor count limit.**
- **All investors must be "qualified purchasers":**
  - Individual: $5,000,000+ in investments (not net worth — specifically investments)
  - Family company: $5,000,000+ in investments
  - Trust: $25,000,000+ in investments (not solely for qualified purchaser's benefit)
  - Entity: $25,000,000+ in investments
- "Investments" is specifically defined and excludes real estate used as a residence, certain interests in businesses you control, and other items.
- Higher bar than accredited investor. Most accredited investors are NOT qualified purchasers.

## Which Exemption to Use

| Factor | 3(c)(1) | 3(c)(7) |
|--------|---------|---------|
| Investor limit | 100 | None |
| Investor qualification | None (but Reg D requires accredited) | Qualified purchasers only |
| Typical use | Small/emerging funds | Large institutional funds |
| Practical for Palace Fund | Yes | Unlikely — Korean retail-ish investors may not meet QP threshold |

## Korean Investor Considerations

- Korean investors count toward the 100-person limit under 3(c)(1) regardless of where they reside.
- The qualified purchaser test under 3(c)(7) applies the same dollar thresholds to non-US persons.
- If Korean investors are investing through an entity (e.g., a Korean holding company), the look-through rules may apply.

## Action Items for Palace Fund

1. **Use Section 3(c)(1).** For a small fund with fewer than 100 investors, this is the standard choice.
2. **Track beneficial owner count carefully.** Maintain a running count and implement a hard stop before reaching 100.
3. **Address look-through in subscription documents.** Ask investors to disclose whether they are investing on behalf of others and whether they hold 10%+ of the fund.
4. **If you launch additional funds**, consult counsel about integration risk.
5. **Include the 3(c)(1) exemption statement** in the PPM and operating agreement. Standard language: "The Fund is not registered as an investment company under the Investment Company Act of 1940 in reliance on Section 3(c)(1) thereof."