Exceeding 100 beneficial owners under Section 3(c)(1) can cause the fund to lose its exemption from the Investment Company Act. The consequences are immediate and severe. The fund would need to register as an investment company or restructure entirely. This is not a technical violation you can cure after the fact by redeeming the extra investor.
Registration as an investment company imposes restrictions that are incompatible with how private funds operate:
- Limits on leverage and borrowing
- Restrictions on affiliated transactions
- Board governance and independent director requirements
- Fee structure limitations (including constraints on performance-based compensation)
Prevention through careful monitoring is the only practical approach. Track beneficial owners continuously, apply look-through rules to entity investors, and build a buffer below the 100-person ceiling. Many fund managers set an internal limit of 90 or 95 to maintain a safety margin.
Pay particular attention when accepting entity investors late in a fundraise. A single family office or fund-of-funds that triggers look-through could add dozens of beneficial owners at once.
See Section 3(c)(1) vs. 3(c)(7) for a comparison of the two Investment Company Act exemptions.
This content is for informational purposes only and does not constitute legal, tax, or compliance advice. Consult qualified counsel for guidance specific to your situation. Capital Company is not a law firm and does not provide legal advice.