SEC REJECTS REQUEST TO CREATE PRIVATE SUPER-FUND
The SEC rejected a no-action request to allow the merging of a 3(c)(7) fund and a 3(c)(1) fund into one super-fund with an unlimited number of qualified purchasers but less than 100 non-qualified accredited investors. The requesting fund sponsor managed two parallel fund-of-funds that were very similar except that one fund relied on the 3(c)(7) qualified purchaser exemption and the other relied on the 3(c)(1) private fund exemption (fewer than 100 holders). The sponsor argued that combining the funds into one super-fund would benefit the investors because costs would be spread among the investor base of the two funds. The sponsor made several policy arguments attempting to justify the proposed structure as fitting within the investor protection goals of the Investment Company Act. In a short response, the SEC explained that it had consistently rejected efforts to raise the 100-holder limit in Section 3(c)(1).
OUR TAKE: The SEC is not sympathetic to efforts that allow sponsors to avoid regulation under the Investment Company Act. In fact, the SEC has been attempting to make it more difficult to create private funds by proposing to raise the bar on investor standards. It is not surprising that it rejected this request to create what would essentially be a new exemption under the 1940 Act.