Hedge Fund - Investment Company Registration Exemptions

There are 2 principal exemptions from SEC investment company registration that hedge funds can use.

First, SEC registration as an investment company is not required if the hedge fund has fewer than 101 investors. There is a "look through" rule that generally has the effect of counting each limited partner in a partnership as an investor. So, in general, a hedge fund which is organized as a limited partnership and which has over 100 limited partners will in all likelihood not be able to take advantage of this exemption.

Second, SEC registration as an investment company is not required if all the investors in the hedge fund are "qualified purchasers." A qualified purchaser needs $5 million in "investments" if he is an individual and $25 million in "investments" if it is an institution. So a hedge fund can theoretically have as many qualified purchasers as it wants. In reality, the maximum is 499, to avoid becoming a company that has to file public reports on its operations with the SEC.