Why the SEC (and Congress) Should Recognize the 3(C)(1) Plus Exemption

Under the hypothetical 3(c)(1) plus exemption (“3(c)(1) Plus Exemption”), two core private equity funds, one of which is eligible for an exemption under Section 3(c)(1) and the other of which is eligible for an exemption under Section 3(c)(7), would be combined into a single Section 3(c)(1) exempt fund (“3(c)(1) Plus Fund”). The hypothetical 3(c)(1) Plus Fund would be limited to no more than 100 non-qualified purchaser “accredited investor” beneficial owners and an unlimited number of qualified purchaser beneficial owners, and would effectively allow parallel funds to operate as a single legal entity. The nature and quantity of beneficial owners in the 3(c)(1) Plus Fund would be exactly the same as in parallel 3(c)(1) and 3(c)(7) exempt funds, which in turn means that the 3(c)(1) Plus Exemption would continue to be a private Investment Company Act exemption. This article argues that the 3(c)(1) Plus Exemption is optimal from the perspective of Investment Company Act policy and is not contrary to relevant statutory interpretation principles. However, it notes that funds should not rely upon the 3(c)(1) Plus Exemption until it has been recognized by the Commission or introduced as future legislation by Congress