Section 3(c)(10)(A)(ii) of the Investment Company Act of 1940 generally exempts a private investment fund from registering as an investment company if it is maintained by a charitable organization and is organized and operated exclusively for religious, education, benevolent, fraternal, chartable or reformatory purposes (“Permitted Purposes”) for the collective investment and reinvestment of certain assets.  Recently, the SEC provided new guidance to alleviate concerns related to the use of this exemption.

The SEC’s Division of Investment Management clarified that a private investment fund that is a legal entity distinct from the charitable organization[1] maintaining the fund and that is organized and operated for the purpose of earning investment returns for charitable organizations will be able to use the exclusion under Section 3(c)(10)(A)(ii).  A fund must still conform to the other conditions Section 3(c)(10) and the staff’s corresponding existing no-action positions.

The staff recognized that a fund technically might not be “organized and operated exclusively” for Permitted Purposes, even though its proceeds are used exclusively for Permitted Purposes.  The staff, however, confirmed that they believe this is the type of entity that Congress intended to be exempt from Section 3(c)(10) because the fund will be used solely for the investment of permitted assets of charitable organizations that, in turn, will use the proceeds for Permitted Purposes.

In addition to the proscribed requirements, the staff has based no-action relief for funds seeking to rely on Section 3(c)(10)(A)(ii) on a number of related representations, which include:

(i) no part of the net earnings of the fund will inure to the benefit of any private shareholder or individual,

(ii) each investor will be a Section 501(c)(3) organization,

(iii) each investing organization will only invest funds over which it has immediate, unrestricted and exclusive use, benefit and enjoyment, and

(iv) on an annual basis, the fund will provide a written report on its financial condition and results of operation, including audited financial statements.

For more information, please speak with Elizabeth Kemery Sipes, Mark Weakley, another member of our Fund Formation Team or your Bryan Cave contact(s).

[1] A charitable organization means an organization described in Section 170(c)(1)-(5) or Section 501(c)(3) of the Internal Revenue Code.