An SPV that pools investor money to buy stock in a private company looks, on the face of the statute, like the kind of entity the Investment Company Act of 1940 regulates: an issuer in the business of investing in securities. Registering an SPV as an investment company is not a realistic option, so every SPV needs an exclusion. For most SPVs, that exclusion is Section 3(c)(1), and its central limit is a count of investors. The count is easy to state, but it is easy to get wrong on the details, so it should be built into the documents from the first draft.

The 100-Investor Limit

Section 3(c)(1) excludes from the definition of investment company any issuer whose outstanding securities are beneficially owned by not more than 100 persons and that is not making, and does not presently propose to make, a public offering of its securities. The count applies to the SPV's own investors, not to the portfolio company.

The public offering condition used to be a concern for sponsors who wanted to market openly. The JOBS Act resolved it for Rule 506(c). Offers and sales under Rule 506(c) are not treated as public offerings under the federal securities laws merely because general solicitation was used, so an SPV can rely on 506(c) and Section 3(c)(1) together. The SEC staff confirms this in Securities Act Rules Compliance and Disclosure Interpretation 258.03.

The 250-Investor Limit for Qualifying Venture Capital Funds

Since 2018, Section 3(c)(1) has allowed up to 250 beneficial owners for a "qualifying venture capital fund." That is a venture capital fund, as defined in the SEC's Rule 203(l)-1, with no more than a specified amount of aggregate capital contributions and uncalled committed capital. The statute set that amount at $10 million and directed the SEC to index it for inflation every five years. In 2024 the SEC adopted Rule 3c-7, which raised the threshold to $12 million. The next adjustment is scheduled for on or about November 1, 2029.

To use the higher count, the SPV must actually be a venture capital fund under Rule 203(l)-1. Among other conditions, it must:

  • represent to investors that it pursues a venture capital strategy;
  • hold no more than 20 percent of its aggregate capital contributions and uncalled committed capital in assets other than qualifying investments and short-term holdings, measured immediately after each acquisition;
  • keep borrowing and guarantees within 15 percent of that capital, for non-renewable terms of no more than 120 calendar days (with an exception for certain guarantees of portfolio company obligations); and
  • not give investors redemption rights except in extraordinary circumstances.

A qualifying investment is generally an equity security acquired directly from a qualifying portfolio company, meaning a company that is not public or foreign-traded and is not itself a fund. That has a practical consequence for SPVs. An SPV that buys shares from existing shareholders in a secondary purchase, or that invests in another fund, is not holding qualifying investments. A single-asset SPV that does either can't fit within the 20 percent basket, so it would be limited to 100 investors.

Congress has considered raising both numbers. The INVEST Act, which passed the House in December 2025, would raise the qualifying venture capital fund limits to 500 persons and $50 million. As of this writing it has not become law, so SPVs should be structured under the current limits.

Who Counts

The count is of beneficial owners, and the statute and the SEC's rules adjust it in several ways:

  • Entities usually count as one. A company that invests in the SPV generally counts as a single beneficial owner. The exception is a look-through. If the investing company owns 10 percent or more of the SPV's outstanding voting securities and is itself an investment company, or would be except for Section 3(c)(1) or 3(c)(7), its own securityholders are counted instead. A friends-and-family fund that takes a large share of an SPV can therefore bring all of its investors into the count.
  • Knowledgeable employees are excluded. Under Rule 3c-5, securities held by knowledgeable employees, such as the SPV's or its manager's executive officers and certain employees who take part in its investment activities, are not counted.
  • Some transfers don't add a holder. Under Rule 3c-6, a person who receives an interest by gift, by bequest, or under a legal separation or divorce agreement is treated as the person who transferred it.

A separate concept in Regulation D can also matter. For purposes of counting purchasers under Regulation D, an entity organized for the specific purpose of acquiring the securities offered is counted by its beneficial owners unless it is accredited under Rule 501(a)(8), meaning all of its equity owners are accredited. That rule does not replace the Investment Company Act count, but it raises the same question: who is really behind an entity investor.

The 3(c)(7) Alternative

Section 3(c)(7) is the other common exclusion. It has no investor-count limit in the Investment Company Act, but every investor must be a qualified purchaser. For a natural person, that generally means owning not less than $5 million in investments. Few SPVs can limit themselves to qualified purchasers, but for a deal with large investors or a strong institutional base, it removes the count problem.

Drafting Around the Limits

The exclusion is lost if the count is exceeded, so the documents should prevent that from happening rather than assume it won't:

  • Subscription questionnaire. Ask each entity investor whether it was formed to make this investment, whether it is an investment company or relies on 3(c)(1) or 3(c)(7), and what percentage of the SPV it will hold. Ask individuals whether they are knowledgeable employees, where that applies. The Private Fund Subscription Agreement covers related representations.
  • Operating agreement. Cap the number of members. Give the managing member the right to refuse any transfer that would increase the count past the limit or create a look-through problem. Require investor consent to anything that would change the SPV's strategy enough to lose venture capital fund status if the SPV relies on the 250 limit.
  • Remedies. Give the managing member a way to require a member to sell or withdraw if the member's status puts the exclusion at risk.
  • Tracking. Count at each closing and on each transfer, and keep the analysis with the SPV's records.

Sponsors using a Delaware series LLC should decide, and document, how the count applies to each series. That question is discussed in Series LLC or a New SPV for Every Deal? The SPV's adviser will also need its own exemption under the Advisers Act. Those exemptions, which use the same venture capital fund definition, are covered in Venture Capital Fund Adviser or Private Fund Adviser.

If you're structuring an SPV and want to confirm which limit applies and how to draft for it, we're glad to talk it through. More on our work with sponsors is on the fund formation page.