This article is the third and final part in a series discussing trusts in the context of certain common investor thresholds for investment in private securities. This article will examine trusts as “qualified purchases” under the Investment Company Act.

What is the Investment Company Act and Why Does It Matter?

The Investment Company Act of 1940 regulates “investment companies,” which are entities that primarily engage in buying, selling, and holding securities. Typically, the Company Act requires entities that fall under the definition of an investment company to register with the SEC. However, many private offerings rely on exclusions from the definition of investment company under Section 3(c)(1) and Section 3(c)(7).

• Section 3(c)(1) excludes from the definition of investment company entities with fewer than 100 investors.
• Section 3(c)(7) excludes from the definition of investment company entities whose securities are owned solely by “qualified purchasers” and which are not making or intend to make a public offering of their securities. This section is crucial for funds targeting institutional investors and ultra-high-net-worth individuals.

For trusts, investing in private securities through a Section 3(c)(7) fund requires meeting the qualified purchaser criteria, which are more stringent than those for accredited investors or qualified clients.

How Trusts Can Qualify as Qualified Purchasers

A trust may qualify as a qualified purchaser in three ways:

1. Large Investment Trusts:
   A trust qualifies if it owns or invests at least $25 million in investments on a discretionary basis. It must meet this threshold independently, even if the trustee is a qualified purchaser.
2. Family Companies:
   If a trust is a family company (established for the benefit of two or more related individuals such as siblings, spouses, direct lineal descendants by birth or adoption, or their spouses (including former spouses)) and holds at least $5 million in “investments,” it qualifies as a qualified purchaser.
3. Non-Family Companies:
   A trust that is not a family company qualifies only if each trustee (or decision-maker) and each settlor (or contributor of assets) is a qualified purchaser.

Why This is Important for Trusts Investing in Private Securities

The qualified purchaser threshold is critical for trusts seeking to invest in private securities under Section 3(c)(7) of the Investment Company Act. As private markets expand and wealth transfers increase, understanding these requirements will become even more essential. Trusts that meet the qualified purchaser criteria can access a wider range of private investment opportunities, including private equity and hedge funds, which often require this designation.

When advising clients, it is vital to ensure that trusts are structured correctly to meet the qualified purchaser threshold. Thereby allowing access to invest in certain private offerings.

The surge in wealth transfers and the growth of private securities will likely lead to more trusts investing in these asset classes.

Advisors to trusts seeking to participate in institutional-grade private funds that rely on Section 3(c)(7) must structure such trusts to meet the qualified purchaser threshold. By doing so, they can help trusts capitalize on the expanding opportunities in private securities, benefiting from both wealth transfer strategies and access to high-growth investments.

For more information, please see the article prepared by Andrew Rosell, Nick Curley, and Sarah Ghaffari, SEC Considerations – Investments in Private Securities.