10.5.2: Note on Side Funds

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Abstract

If a side fund is organized, there is a danger that the exception in the Investment Company Act of 1940, Section 3(c)(1) for 100 or fewer investors in the side fund and main fund taken together exceeds 100 (albeit not more than 100 in either) and the two funds are "integrated." Of course, if the side fund is composed entirely of "knowledgeable employees" or "qualified purchasers" as defined in Section 3(c)(7), the problem is solved. But assume the side fund is for "friends and family" ... lawyers for the fund and others who might help with widening the deal stream. The most helpful SEC 'no-action' letter, involves Welsh, Carson, Anderson & Stowe ("Welsh Carson") and the Staff's response. 'No-action' letters are not controlling precedents and the SEC is not bound to follow its prior positions in future cases. However, in the absence of controlling...