Section 3(c)(1) of the Investment Company Act of 1940 provides an exemption from having to register as an investment company under the Act for a hedge fund whose securities are not publicly offered and are owned by not more than 100 persons. Set forth below are the qualification requirements for investors in hedge funds relying on the exemption from registration under Section 3(c)(1) of the Act.

For a hedge fund relying on the Section 3(c)(1) exemption, interests in the fund are typically offered to prospective investors pursuant to an exemption from the public registration requirements for securities offerings under Rule 506 of Regulation D of the Securities Act of 1933. Securities offered under Rule 506 may be sold solely to “accredited investors” and, under certain circumstances, up to 35 “sophisticated investors”.

An “accredited investor” is deemed to include, in part:

  • a natural person with an individual net worth, or joint net worth with his or her spouse, at the time of purchase in excess of $1,000,000 (the new definition under the Dodd-Frank Act excludes the net value of the investor’s personal residence);

  • a natural person with an individual income in excess of $200,000, or in excess of $300,000 with his or her spouse, in each of the two most recent years and who has a reasonable expectation of an income in excess of $200,000 individually, or in excess of $300,000 with his or her spouse, in the current year;

  • any executive officer, director or general partner of the issuer of the securities offered;

  • an employee benefit plan within the meaning of Title I of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), (a) whose investment decisions are made by a plan fiduciary, as defined in Section 3(21) of ERISA, which is either a bank, insurance company or registered investment adviser; or (b) having total assets in excess of $5,000,000; or (c) if self-directed, the investment decisions are made solely by persons that are accredited investors;

  • a trust (and other vehicles), with total assets in excess of $5,000,000 which was not formed for the specific purpose of acquiring an interest in the hedge fund, whose purchase is directed by a sophisticated investor; or

  • an entity in which each of the equity owners are accredited investors.

A person is a “sophisticated investor,” if the investor either alone or with the investor’s purchaser representative(s) has such knowledge and experience in financial and business matters that the investor is capable of evaluating the merits and risks of an investment in the hedge fund.