“Charitable Corporations as Qualified Purchasers of 3(c)(7) Funds”

The SEC’s Division of Investment Management has issued a No-Action Letter (the “Goldman Sachs Letter”) addressing the circumstances under which charitable foundations that (1) qualify for tax-exempt status under Section 501(c)(3) of the Internal Revenue Code and (2) are formed as non-profit, non-stock corporations (“Charitable Corporations”) may be treated as qualified purchasers for purposes of determining the status of hedge funds, private equity funds, or other private investment vehicles (“Private Funds”) under Section 3(c)(7) of the Investment Company Act of 1940, as amended (the “Act”).  Section 3(c)(7) of the Act exempts certain issuers from the definition of investment company. Private Funds that qualify for exemption under Section 3(c)(7) of the Act (so-called “3(c)(7) funds”) are able to rely on this exemption to avoid having to register under the Act.

The definition of qualified purchaser covers a broad range of investor categories.  However, this definition is not specifically tailored to the organizational nature of a Charitable Corporation and, prior to the Goldman Sachs Letter, there had been no clear guidance as to whether certain Charitable Corporations fell within the definition of qualified purchaser.

This issue has been particularly important to Boards and Sponsors of Charitable Corporations (many of which are founded by wealthy individuals and families) that are seeking to invest their assets in Private Funds. Because 3(c)(7) funds are open to investment only by qualified purchasers, the issue is also of interest to Private Funds and in particular to the Marketing and Legal staffs of 3(c)(7) funds that are trying to determine whether potential investors are qualified purchasers.

In the Goldman Sachs Letter, the SEC issued its non-binding views on the methods by which Charitable Corporations could attain qualified purchaser status. This Stroock Special Bulletin discusses the Goldman Sachs Letter and its implications r Charitable Corporations and Private Funds.