Form D is the notice a sponsor files with the SEC after the first sale in a private offering. Its Item 6 lists 13 boxes under the heading Investment Company Act Section 3(c). A sponsor that syndicates one building at a time rarely has reason to tick any of them. When it files for its first pooled fund, it often must, and the decision behind the tick, often framed as 3(c)(1) vs 3(c)(7), comes long before the filing.
The decision has to be settled before the first investor signs, because each route shapes the investor list. Section 3(c)(1) caps a fund at 100 beneficial owners. Section 3(c)(7) sets no numerical cap but admits only qualified purchasers, a wealth test written into the statute. A fund that buys and owns real estate itself may instead rely on Section 3(c)(5)(C), which sets neither limit but depends on what the fund holds. The offering rule sits on top of whichever exclusion applies, as the guide to accredited investor verification under 506(c) explains.
Why a Single Property Syndication Rarely Raises the Question
The Investment Company Act reaches an issuer primarily engaged in investing in securities. It also reaches one whose investment securities are worth more than 40 percent of its total assets, leaving out government securities and cash. A syndication LLC owning one building through a wholly owned subsidiary generally sits outside both tests. Real estate is not a security, and the definition in Section 3 leaves out securities of majority owned subsidiaries that are not investment companies.
A fund changes the facts in two ways. It may buy assets that are securities, such as a minority joint venture stake or a limited partner interest in another sponsor's deal. It also gathers many investors into one issuer for years, so an exclusion based on who owns the fund must hold for its whole life. The comparison of syndication and fund structures covers the wider choice of vehicle.
How Section 3(c)(1) Counts Investors
Section 3(c)(1) excludes an issuer whose outstanding securities are beneficially owned by not more than 100 persons and that is not making, or proposing, a public offering. The limit applies throughout the fund's life, so later closings and transfers count against it. A company that invests counts as one person, with one exception. If it holds 10 percent or more of the fund's outstanding voting securities and is itself an investment company, or would be but for 3(c)(1) or 3(c)(7), the fund counts that company's own holders instead.
Two adjustments help. Under the SEC's knowledgeable employee rule, interests held by executive officers, directors and general partners of the fund or its manager are left out of the count. So are those of employees who have taken part in its investment activities for at least 12 months. The statute also treats an interest passed on through divorce or death as still owned by the person who held it.
3(c)(1) vs 3(c)(7) and the Qualified Purchaser Test
Section 3(c)(7) replaces the cap with a test of who may own the fund. Every holder must be a qualified purchaser when it acquires its interest, and the fund may not make a public offering. Under Section 2(a)(51), a natural person qualifies by owning at least $5 million in investments, and so does a company owned by members of one family. Other entities generally need at least $25 million in investments owned and invested on a discretionary basis. The SEC's rule defining investments counts real estate held for investment but not property used for personal purposes or as a place of business.
The practical difference between 3c1 and 3c7 funds is the size of the pool. A 3(c)(1) fund can admit any investor its offering rule allows, up to the cap. A 3(c)(7) fund can grow past 100 investors but must turn away everyone below the qualified purchaser line. A sponsor may run one fund of each kind side by side, because the statute does not treat a 3(c)(1) fund and a 3(c)(7) fund as a single issuer when their owners are counted.
General solicitation does not change either route. When the SEC adopted Rule 506(c) in Securities Act Release No. 9415 on July 10, 2013, it stated that private funds may use general solicitation under the new rule without losing either exclusion. The JOBS Act provides that such offers are not public offerings under the federal securities laws. The Investment Advisers Act defines a private fund as an issuer that would be an investment company but for 3(c)(1) or 3(c)(7), so the choice can bear on the manager's own obligations.
When the Real Estate Exclusion in 3(c)(5)(C) Applies Instead
Section 3(c)(5)(C) covers a person primarily engaged in purchasing or otherwise acquiring mortgages and other liens on and interests in real estate. It is unavailable to one that issues redeemable securities, face amount certificates of the installment type or periodic payment plan certificates. It has no investor count and no qualified purchaser test. Form D lets an issuer select every exclusion that applies, so a fund can keep a private fund exclusion available as a second route.
What "primarily engaged" means comes from SEC staff positions, not from a rule. The SEC summarized them in an August 31, 2011 concept release that proposed no rule. The staff has generally looked for at least 55 percent of an issuer's assets in "qualifying interests" and most of the rest in real estate type interests. Qualifying interests include ownership of real estate itself and mortgage loans fully secured by real estate. One letter it cites, from August 8, 1991, described plans for at least 25 percent in real estate type interests and no more than 20 percent in other assets.
Those positions draw a line that matters to fund strategy. Securities issued by REITs, limited partnerships and other entities that invest in real estate generally are not qualifying interests. A fund that owns buildings outright fits the exclusion more easily than one taking minority interests in other sponsors' deals. A strategy that drifts toward the second can move the fund outside 3(c)(5)(C). The release noted that the staff had addressed the exclusion case by case, so the percentages describe how the staff has read the exclusion, not a safe harbor.
What Sponsors Can Do Before the First Fund Investor
The exclusion is easiest to settle while the fund exists only on paper. Each step below depends on the one before it.
- Describe the intended portfolio by legal form, separating properties owned through wholly owned subsidiaries from joint venture stakes and interests in other sponsors' deals.
- Choose the primary exclusion and any second route, and record which boxes the fund's Form D will carry.
- Build the investor test into the subscription documents, with qualified purchaser representations for a 3(c)(7) fund and questions that identify large entity investors for a 3(c)(1) fund.
- Keep a running count of beneficial owners across closings and transfers, and make transfers subject to the manager's consent. The guide to real estate fund administration covers which of these records a sponsor can hand off.
- Test the asset mix again before each acquisition if the fund relies on 3(c)(5)(C).
Raveum gives U.S. real estate sponsors a white label platform to run their raises, either on their own with Tier 1 Self-Managed or with Raveum's operations team on Tier 2 Assisted, where the sponsor's own counsel approves every document the team drafts. On Tier 1 the sponsor sets Rule 506(b) or Rule 506(c) per deal, runs accreditation verification per deal and can block purchase and withdrawal requests when a closing or an investor count is reached. Tier 2 adds optional modules chosen per deal on a Service Order, including formation documents and the PPM. See how the Raveum Sponsor Program works.
Reading Form D Before the Fund Exists
The 13 boxes on Form D look like a filing detail, but the answer behind them is a design decision. A 3(c)(1) fund lives with a hard count and a 3(c)(7) fund with a narrow investor pool. A 3(c)(5)(C) fund needs a portfolio that keeps looking like real estate. Each choice reaches into the subscription documents and every acquisition, and none is cheap to change once investors are in. Settled alongside the offering rule, as the guide to accredited investor verification under 506(c) sets out, the box on the fund's first Form D records a decision made before anyone subscribed.
Frequently Asked Questions
What Is the Difference Between 3(c)(1) and 3(c)(7) Funds
A 3(c)(1) fund may have no more than 100 beneficial owners, and its investors need only meet the offering rule, such as verified accredited investor status under Rule 506(c). A 3(c)(7) fund has no numerical cap in the exclusion itself, but every investor must be a qualified purchaser when it buys. Neither may make a public offering, and both are private funds under the Investment Advisers Act.
Who Counts Toward the 100 Investor Limit in a 3(c)(1) Fund
Every beneficial owner of the fund's outstanding securities counts, and an entity investor generally counts as one. The exception is an entity holding 10 percent or more of the voting securities that is itself an investment company, or would be but for 3(c)(1) or 3(c)(7), whose own holders are counted. Knowledgeable employees are left out, and interests passed on through death or divorce stay with the original holder.
What Is a Qualified Purchaser Under the Investment Company Act
Section 2(a)(51) of the Investment Company Act defines it. A natural person qualifies with at least $5 million in investments as the SEC defines them, and so does a company owned by members of one family. Other entities generally need at least $25 million in investments owned and invested on a discretionary basis. Real estate held for investment counts, but a home or a place of business does not.
Can a 3(c)(1) or 3(c)(7) Fund Use General Solicitation Under Rule 506(c)
Yes. In adopting Rule 506(c) in 2013, the SEC stated that private funds relying on either exclusion may use general solicitation without losing it, because the JOBS Act provides that such offers are not public offerings under the federal securities laws. Every purchaser must still be an accredited investor verified through reasonable steps, and a 3(c)(7) fund must still admit only qualified purchasers.
Does a Real Estate Fund That Owns Properties Need 3(c)(1) or 3(c)(7)
Not always. A fund primarily engaged in acquiring interests in real estate may rely on Section 3(c)(5)(C), which has no investor cap or wealth test, if it issues no redeemable securities. SEC staff positions generally look for at least 55 percent of assets in qualifying interests such as owned real estate. Minority stakes in other sponsors' deals generally do not count, so the portfolio decides.
What Happens If a Real Estate Fund Loses Its Investment Company Act Exclusion
A fund that falls outside every exclusion may be an unregistered investment company. Under Section 47(b) of the Act, a contract made in violation of it is unenforceable unless a court finds otherwise, and a court generally may not deny rescission. Investors still bear the deal's own risks, including loss of capital and illiquidity, and an exclusion that held at the first closing has to hold at every later one.
This article is for general education only and is not legal, tax or investment advice. Securities and tax rules change and depend on each sponsor's facts, so work with qualified securities counsel and tax advisors before launching an offering. Real estate investments involve risk, including loss of capital, illiquidity and changes in property values. Offerings on Raveum are available to eligible investors only and are not open to the general public.
