April, 1997
"Qualified Purchasers" May Purchase Securities of Certain Investment Company Funds in Private Offerings
The National Securities Markets Improvement Act of 1996 (the "1996 Act") created a new exclusion from regulation under the Investment Company Act for privately offered investment companies whose investors are all "qualified purchasers." The Securities and Exchange Commission recently adopted a series of rules, which will become effective on June 9, 1997, to implement this new exclusion.
The new exclusion to the Investment Company Act applies to investment companies that sell their securities exclusively in private offerings to "qualified purchasers." These investment companies are known as Section 3(c)(7) Funds. Qualified purchasers include: natural persons who together with their spouses own not less than $5 million in investments; "family companies" that own not less than $5 million in investments; certain trusts which were not created for the purpose of investing in the investment company; and other persons (e.g. institutional investors) who own and invest on a discretionary basis not less than $25 million in investments. Under the new SEC rules, entities which meet the Rule 144A definition of a "qualified institutional buyer" will be generally be considered to be "qualified purchasers." Section 3(c)(7) Funds will be required to reaffirm that a purchaser is a qualified purchaser each time that person acquires securities of the Fund unless the additional investment is made pursuant to a previously outstanding binding commitment to make the additional investment.
Under the new SEC rules, "investments" include securities (except, in some instances, securities that constitute a "control interest" in an issuer), investment vehicles, public companies, private companies that have shareholders' equity of $50 million or more, real estate held for investment purposes (but not personal residences or property used by the prospective qualified purchaser as a place of business), commodity interests, and cash and cash equivalents held for investment purposes. The value of the investments may be either their cost or their fair market value, minus the amount of any indebtedness incurred to acquire the investment. Natural persons who make all of the investment decisions for an IRA or 401(k) account may include the value of the investments held in those accounts for purposes of determining whether they meet the $5 million threshold.
The Investment Company Act also contains an exclusion for investment funds which have fewer than 100 investors. These funds are known as Section 3(c)(1) Funds. Section 3(c)(1) Funds may convert into Section 3(c)(7) Funds without requiring investors who are not qualified purchasers to divest their interest in the fund if, prior to the conversion the fund discloses to each beneficial owner of a Section 3(c)(1) Fund that future investors will be limited to qualified purchasers and that the number of investors is no longer limited to 100, and the fund provides each beneficial owner with a reasonable opportunity to redeem his or her proportionate share of the fund's net assets.
« archived newsletters