The Investment Company Act of 1940 runs three primary exemptions against a private mortgage fund — §3(c)(1), §3(c)(7), and §3(c)(5)(C). The §3(c)(1) and §3(c)(5)(C) frameworks run on different operational disciplines, and the choice runs against the fund’s investor-base framework, asset-class framework, and growth framework. This article walks the side-by-side framework against each.

Investor base

Section 3(c)(1) runs the exemption against a private fund with one hundred or fewer beneficial owners. The framework runs against an accredited and non-accredited investor base under Reg D Rule 506(b) on a no-general-solicitation framework. Section 3(c)(5)(C) runs the exemption against an unlimited beneficial-owner base subject to the Securities Act offering framework. The framework runs against an accredited-investor base under Reg D Rule 506(b) on a no-general-solicitation framework or under Rule 506(c) on a general-solicitation framework. The fund that runs against an unlimited-investor framework runs against §3(c)(5)(C) on the asset-class discipline.

Asset framework

Section 3(c)(1) runs no asset-class framework against the fund. The fund runs against a self-directed asset framework — whole mortgage loans, B-notes, mezzanine loans, agency MBS, equity positions, and other real-estate-related interests on the fund’s own discipline. Section 3(c)(5)(C) runs the two-tier asset framework against the fund — the qualifying-interest framework at the fifty-five-percent floor and the real-estate-related framework at the eighty-percent floor. The fund that runs against §3(c)(5)(C) runs the asset-class discipline against the SEC no-action position framework on each measurement date.

Offering framework

Both §3(c)(1) and §3(c)(5)(C) run the Securities Act offering framework against the fund’s offering. The fund runs the Reg D Rule 506(b) or Rule 506(c) offering framework against the Securities Act §4(a)(2) private-placement exemption. The fund runs the NSMIA preemption framework on the Rule 506 offering against state registration and runs the Form D filing framework with the SEC within fifteen days of the first sale under Rule 503. Both frameworks run the state notice-filing framework against each state where the fund runs an offer.

Operational discipline

Section 3(c)(1) runs no asset-classification discipline against the fund — the operational framework runs against the fund’s offering documents, operating agreement, and the §3(c)(1) beneficial-owner cap. Section 3(c)(5)(C) runs the asset-classification discipline on the quarterly cycle against the fund’s balance sheet — the framework runs the qualifying-interest and real-estate-related tests against the measurement-date balance sheet, runs the documentation framework against the auditor and SEC counsel, and runs the annual review framework against the calendar-year cycle. The §3(c)(5)(C) framework runs the higher operational discipline against the fund’s SEC counsel cost framework.

Growth framework

Section 3(c)(1) runs the one-hundred-investor cap against the fund’s growth framework. A fund that runs against an aggressive capital-raise framework runs into the one-hundred-investor cap on a defined growth cycle. Section 3(c)(5)(C) runs the unlimited-investor framework against the fund’s growth framework. A fund that runs against an aggressive capital-raise framework runs the §3(c)(5)(C) framework against an unlimited investor count on the asset-class discipline. The fund that runs against a long-horizon growth framework runs against §3(c)(5)(C) on the discipline.

Choosing the framework

The choice runs against the fund’s strategic framework. A small mortgage fund on a closed-end framework against a defined investor base runs against §3(c)(1) on the beneficial-owner cap and runs no asset-class discipline. A growing or open-end mortgage fund on an unlimited-investor framework runs against §3(c)(5)(C) on the asset-class discipline. The fund’s SEC counsel runs the choice against the fund’s growth framework, the fund’s asset framework, and the fund’s operational discipline framework.

Related Topics

This article is educational and does not constitute legal advice. The §3(c)(5)(C) framework runs under the Investment Company Act of 1940 against an entity primarily engaged in the business of purchasing or acquiring mortgages and other liens on and interests in real estate. The qualifying-interest classification runs against the SEC no-action position framework. Consult qualified SEC counsel on the specific asset-classification and operational framework against any private mortgage fund.

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