Investment Company Act 3(c)(1) and 3(c)(7): What They Mean for a Syndication
Two exclusions in the Investment Company Act of 1940 are the ones most private real estate syndications look at: Section 3(c)(1) and Section 3(c)(7). Section 3(c)(1) applies to a private issuer with 100 or fewer beneficial owners. Section 3(c)(7) applies to a private issuer whose owners are all qualified purchasers, and it has no cap on the number of investors. Both require that the issuer is not making a public offering.
Those exclusions are a separate question from the Securities Act exemption that covers the sale itself. A raise under Rule 506(b) or 506(c) of Regulation D answers the question "may we sell these interests without registering them?" The Investment Company Act question is "is the entity itself an investment company that must register?" A sponsor needs an answer to both.
Why real estate syndications raise this question
The Investment Company Act regulates companies that invest mainly in securities. A typical syndication is a limited liability company or limited partnership that owns one apartment property. Its main asset is real estate, not securities, so it usually does not fall within the definition of an investment company in the first place.
The question still comes up for three reasons. Some sponsors hold several properties through a fund, some hold loans or interests in other entities, and some invest in other funds. Each of those structures can change the asset test. Counsel also looks at the Act because a fund that is an investment company and sells without an exclusion would have to register, which is a heavy burden for a single-deal raise.
The statute also turns on who the owners are. Section 3(c)(1) counts beneficial owners, so the number of people behind an entity matters. Section 3(c)(7) turns on whether each owner meets the qualified purchaser test at the time they invest.
Section 3(c)(1): the 100-owner limit
Section 3(c)(1) excludes an issuer whose outstanding securities are beneficially owned by no more than 100 persons, and that is not making and does not presently propose to make a public offering.
In practice this means a sponsor who wants this exclusion must track every investor, including people who hold through an intermediate entity where the rules look through to the individuals. A raise capped below the limit is a common design, and the count has to hold through transfers, estate transfers and any later sale of interests. Once the count goes over 100, the entity can lose the exclusion.
Section 3(c)(1) has no qualified purchaser requirement, so it is often simpler to use when investors are not qualified purchasers. The trade-off is the cap on owners.
Section 3(c)(7): qualified purchasers and no cap
Section 3(c)(7) excludes an issuer whose outstanding securities are owned exclusively by persons who are qualified purchasers at the time they acquire them, and that is not making a public offering.
A qualified purchaser is defined in Section 2(a)(51) of the Act. For an individual, it generally means a natural person who owns at least $5 million in investments. A family-owned company can also qualify on its own. Any other person can qualify if it owns and invests on a discretionary basis at least $25 million in investments.
The qualified purchaser test has to be met when the investor buys. A sponsor generally checks it at subscription and keeps a record of how it was met. This is the main reason 3(c)(7) raises usually limit investors to people who can show the investments the statute requires.
How the two exclusions compare
| Question | Section 3(c)(1) | Section 3(c)(7) |
|---|---|---|
| Investor count | Up to 100 beneficial owners | No numerical cap |
| Investor test | None beyond the count | Every owner must be a qualified purchaser |
| Public offering | Not making one | Not making one |
| Main tracking task | Count beneficial owners, including transfers | Verify and record qualified purchaser status |
Neither exclusion replaces a securities exemption. Both sit alongside Regulation D, and a raise that sells to the public or to people who do not qualify under the Securities Act exemption can fail even when the Company Act exclusion holds.
What a sponsor should ask counsel
Before you rely on either exclusion, ask your securities attorney:
- Is the issuer an investment company at all, given its assets and any interests in other entities?
- If an exclusion applies, which one, and how will the count or the qualified purchaser test be tracked?
- How do transfers, inheritances and pass-through owners affect the count?
- Does the same answer hold across every entity in a multi-property structure?
The answers depend on the entity's documents, your investors and your states, so this article does not decide which exclusion fits your deal.
Sources
- 15 U.S.C. 80a-3, exceptions from the definition of investment company (Cornell LII)
- 15 U.S.C. 80a-2, definitions including qualified purchaser (Cornell LII)
- SEC release IC-22597, implementing the 1996 amendments to the Investment Company Act (sec.gov)
- Regulation D and Rule 506(b), SEC small business guide
This article is general information as of October 2026, not legal, tax or investment advice. The Investment Company Act and its exclusions turn on the facts of each entity, so confirm the exclusion you rely on with a securities attorney. DoorRaise is not a law firm, broker-dealer, investment adviser or funding portal.