Report on Section 3(c)(1) of the Investment Company Act of 1940 and Proposals to Create an Exception for Qualified Purchasers

Section 3(c)(1) reflects a legislative determination that federal regulation of private investment entities is not warranted. Aside from any determination as to the private entity requirement, it is fundamental to capital markets, and the law and practices affecting such markets, that investors with full disclosure should make their own decisions with respect to the risks and potential rewards of a particular investment. It has been recommended that criteria be established for a new exemption from registration for defined sophisticated purchasers. In addition, grandfathering of existing section 3(c)(1) investors should be preserved so that existing section 3(c)(1) funds can be converted into funds for defined sophisticated purchasers without excluding current owners. It is believed that a change in these rules will enhance capital-raising, enable US persons to invest competitively with offshore investors, and preserve investor protection.