Specifically, hedge funds are restricted under Regulation D under the Securities Act of 1933 to raising capital only in non-public offerings and only from “accredited investors,” or individuals with a minimum net worth of $1,000,000 or a minimum income of $200,000 in each of the last two years and a reasonable …

The 3(c)(7) exemption refers to the Investment Company Act of 1940’s section permitting qualifying private funds an exemption from certain SEC regulations. Private funds must not plan to issue an IPO and their investors must be qualified purchases to qualify for the 3C7 exemption.

Failures to deliver can result in fines, losses as well as reputational harm, and in rare circumstances there’s also a risk they could lead to a reduction of market liquidity.

Combinatorics and Pascal’s Triangle

This rule provides that if another 3 (c) (1) hedge fund (the “Investor Fund”) owns more than 10% of another 3 (c) (1) hedge fund (the “Investee Fund”) then the Investee Fund would count all of the investors of the Investor Fund as investors as well.

Hedge funds and other private funds also engage in private placements. When reviewing private placement documents, you may see a reference to Regulation D. Regulation D includes three SEC rules—Rules 504, 505 and 506—that issuers often rely on to sell securities in unregistered offerings.

Generally speaking investors in Section 3 (c) (1) hedge funds will be both accredited investors and qualified clients. A 3 (c) (1) fund must limit its investors to qualified clients if it wants to charge a performance fee. Other related articles include: Investment Company Act of 1940

New laws such as the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank 2010) and the Jumpstart Our Business Startups Act (JOBS Act 2012) added risk and liability to the hedge fund landscape.