Parallel Fund Structures: How 3(c)(1) and 3(c)(7) Funds Work Together

As a private fund grows, its investor base often becomes more diverse.

Some investors are accredited investors.

Others are qualified purchasers.

Some write smaller checks.

Others make institutional-sized commitments.

And not every investor fits into the same fund structure.

For managers looking to raise capital from different categories of investors, this can create a challenge.

How do you allow those investors to participate in the same investment strategy while maintaining the appropriate legal and regulatory structure?

One potential solution is a parallel fund structure.

Parallel funds allow separate investment vehicles to invest alongside one another in the same underlying opportunities.

For example, one fund may rely on Section 3(c)(1) of the Investment Company Act of 1940, while another relies on Section 3(c)(7).

This arrangement can help accommodate investors who meet different eligibility requirements.

But parallel funds are not simply two versions of the same fund.

They involve separate legal vehicles, separate obligations, and additional administrative complexity.

Before launching parallel funds, managers need to understand how the structure works and what it requires.

This article is for educational purposes only and does not constitute legal, tax, accounting, or investment advice. Every fund and offering is different. Consult qualified securities counsel before making structuring decisions.

The 5 Things to Understand First

What Is a Parallel Fund Structure?

A parallel fund structure generally involves two or more separate investment funds investing alongside one another in the same underlying investments.

Each fund has its own legal structure, governing documents, investor base, and compliance requirements.

However, the funds may pursue the same investment strategy and participate in the same transactions.

A common arrangement involves a 3(c)(1) fund and a 3(c)(7) fund operating in parallel.

Section 3(c)(1) Fund

Section 3(c)(1) provides an exclusion from the definition of an investment company under the Investment Company Act of 1940 for certain privately offered funds.

It is commonly associated with a limit of 100 beneficial owners, subject to applicable counting rules and exceptions.

These funds may accommodate investors who qualify under the relevant offering exemption but do not necessarily meet the qualified purchaser standard.

Section 3(c)(7) Fund

Section 3(c)(7) provides another exclusion for qualifying privately offered funds.

Generally, investors in a 3(c)(7) fund must be qualified purchasers, subject to applicable statutory provisions and exceptions.

The qualified purchaser standard is different from the accredited investor standard.

An investor may qualify as accredited without qualifying as a qualified purchaser.

That distinction can influence which fund vehicle is appropriate for a particular investor.

How the Two Funds Work Together

Under a parallel arrangement, the manager establishes separate vehicles designed to accommodate different investor categories.

The funds then invest alongside each other in underlying opportunities.

The structure may allow the manager to pursue a unified investment strategy while maintaining separate investor eligibility and fund administration processes.

However, the two vehicles remain legally distinct.

That distinction affects nearly every part of fund operations.

Parallel Funds Are Separate Legal Vehicles

One of the biggest mistakes emerging fund managers make is assuming that parallel funds are simply one fund operating under two different names.

They are not.

A parallel fund structure generally involves separate legal entities.

Each vehicle requires its own legal and operational framework.

That typically includes:

• Separate governing documents
• Separate subscription agreements
• Separate investor eligibility analysis
• Separate capital accounts
• Separate financial reporting
• Separate compliance tracking
• Separate fund-level records

The funds may share an investment strategy, manager, or underlying investments.

But they do not automatically share the same legal rights, obligations, or financial records.

The general partner or manager must administer each fund as a separate vehicle while maintaining consistency where required by the structure and governing documents.

This can become increasingly complex as the number of investors and investments grows.

For example, capital contributions, distributions, fees, and expenses must be recorded appropriately for each vehicle.

Even when both funds participate in the same transaction, their individual accounting and reporting obligations remain.

The important principle is simple.

Your Investor Base Should Determine the Structure

Parallel funds often become relevant because the manager has investors who do not all meet the same eligibility standards.

Some may be accredited investors but not qualified purchasers.

Others may meet the qualified purchaser standard.

These differences can make a single fund structure less suitable for the manager's intended investor base.

Accredited Investors

Accredited investor status is generally determined under Regulation D based on applicable financial, professional, or other qualifying criteria.

An accredited investor may qualify to participate in certain private offerings without meeting the separate qualified purchaser standard.

Qualified Purchasers

Qualified purchaser status is a separate classification under the Investment Company Act.

It generally involves higher investment-related thresholds or other qualifying categories.

For example, certain individuals may qualify by owning at least $5 million in investments, as defined under the applicable rules.

Not every accredited investor meets that standard.

Why This Matters

A manager may have an established group of accredited investors who do not qualify as qualified purchasers.

A 3(c)(1) fund may be suitable for that investor group, assuming the structure satisfies the applicable legal requirements.

At the same time, the manager may have relationships with family offices, funds of funds, or institutional investors that qualify as qualified purchasers.

Those investors may be appropriate for a 3(c)(7) vehicle.

A parallel structure can potentially accommodate both groups while allowing them to participate in the same underlying strategy.

But the investor base should justify the additional complexity.

If the manager does not have a meaningful qualified purchaser investor base, establishing a separate 3(c)(7) fund may create administrative costs without providing a corresponding benefit.

Investment Allocation Rules Become Essential

Once two funds invest alongside each other, investment allocation becomes a central operational issue.

The manager must determine how investment opportunities will be divided between the vehicles.

Questions may include:

• What percentage of each investment belongs to each fund?
• Are allocations based on available capital?
• Are allocations based on capital commitments?
• Does each fund have a target ownership percentage?
• How is investor demand considered?
• Do regulatory limitations affect participation?
• What happens when one fund has more available capital than the other?
• How are follow-on investment opportunities allocated?

These questions should be addressed before investment opportunities arise.

Why Allocation Matters

Parallel funds may pursue the same investment strategy, but their available capital and investor commitments can differ.

One fund may raise capital more quickly.

Another may have additional investors joining later.

A particular investment may have limited capacity.

Without a clear allocation framework, the manager risks creating situations in which one fund appears to receive preferential access to investment opportunities.

That can create conflicts between investor groups.

Establishing Allocation Procedures

The manager should establish an allocation approach that is consistent with the fund documents and applicable obligations.

The appropriate methodology depends on the circumstances.

The important issue is not selecting one universal allocation formula.

It is establishing a process that addresses how opportunities will be allocated and how potential conflicts will be managed.

Clear allocation rules can help prevent disputes when both funds want to participate in the same investment.

Aggregator Entities Can Simplify Ownership but Add Complexity

Some parallel fund structures use an aggregator entity.

An aggregator is a separate vehicle that sits between the parallel funds and the underlying investment.

Instead of each parallel fund investing directly into an asset or transaction, the funds may invest through the aggregator.

The aggregator then holds the investment.

Why Use an Aggregator?

An aggregator can simplify the ownership structure at the underlying investment level.

Rather than having multiple parallel funds appear directly as investors, the underlying investment may have a single aggregator entity on its capitalization table.

This can make ownership administration more straightforward at the investment level.

It may also provide a mechanism for tracking the relative economic interests of the participating parallel funds.

However, an aggregator does not eliminate the need to allocate ownership and economics appropriately between the funds.

The Additional Responsibilities

An aggregator creates another legal and operational layer.

That can involve:

• Additional entity formation
• Additional governing documents
• Separate accounting requirements
• Tax considerations
• Ownership tracking
• Reporting obligations
• Management authority provisions

The aggregator may simplify one part of the structure while making another part more complex.

That tradeoff should be evaluated before implementation.

Reporting and Fund Administration Must Remain Consistent

Parallel funds can create reporting challenges because investors participate through separate vehicles while expecting exposure to the same investment strategy.

The manager must maintain accurate records for each fund.

Important considerations include:

• Investment performance reporting
• Fee and expense allocation
• Capital call timing
• Investment allocation
• Tax reporting
• Fund-level disclosures
• Conflicts between vehicles

The funds may have different investors, economic arrangements, or administrative requirements.

Those differences can be legitimate.

But the manager should understand why they exist and ensure that they are consistent with the applicable governing documents and legal obligations.

Performance Reporting

Investors need accurate information about their fund's performance.

Even when parallel funds hold interests in the same underlying investments, their net returns may differ because of fees, expenses, ownership percentages, or other fund-specific arrangements.

Reporting should accurately reflect those differences.

Fee and Expense Allocation

Shared expenses must be allocated appropriately between the vehicles.

The manager should understand which costs belong to each fund and how shared costs are assigned.

The governing documents and applicable allocation policies should support the approach.

Investor Communication

Investors in different vehicles may receive different information or have different reporting requirements.

The manager should understand the basis for those differences and ensure that contractual and applicable disclosure obligations are satisfied.

Parallel funds require professional administration because errors in one vehicle can create complications across the broader structure.

Why Parallel Fund Structures Require More Planning

A parallel fund structure can provide flexibility.

But that flexibility comes with additional responsibilities.

Instead of managing one fund, the manager is coordinating multiple legal vehicles.

Each fund may have its own investor base, governing documents, financial records, and compliance requirements.

At the same time, the vehicles may share investments, management resources, and operational processes.

That creates an important balancing act.

The manager must preserve the legal separation of the funds while coordinating their participation in the same strategy.

Investment allocation, reporting, fees, expenses, and investor communications all need to be addressed as part of the overall structure.

This is why parallel funds should be designed before the operational complexity becomes difficult to manage.

When Does a Parallel Fund Structure Make Sense?

Parallel funds may be appropriate when a manager has a legitimate need to accommodate different investor categories within the same investment strategy.

That may include situations where one group of investors fits a 3(c)(1) vehicle and another group meets the qualified purchaser requirements associated with 3(c)(7).

However, the presence of different investor categories does not automatically mean parallel funds are necessary.

The manager should first determine whether the investor base, investment strategy, and anticipated capital commitments justify the additional structure.

Important questions include:

• Why is one fund insufficient?
• Which investors would participate in each vehicle?
• Does the investor base support a 3(c)(7) fund?
• How will investments be allocated?
• Is an aggregator entity necessary?
• How will fees and expenses be shared?
• How will reporting be coordinated?
• How will conflicts between vehicles be addressed?

The answers help determine whether the added flexibility is worth the operational complexity.

Final Thoughts

Parallel fund structures can help private fund managers accommodate different investor categories through separate vehicles participating in the same investment strategy.

A 3(c)(1) fund and a 3(c)(7) fund may invest alongside each other while maintaining their respective legal and regulatory frameworks.

That can provide flexibility for managers raising capital from both accredited investors and qualified purchasers.

But the structure requires careful planning.

Separate entities need separate documents.

Investment opportunities need clear allocation procedures.

Aggregator vehicles introduce additional responsibilities.

Reporting and expenses must be handled appropriately.

And potential conflicts between vehicles need to be considered before they become problems.

Parallel funds can solve an investor-base challenge.

But they do so by creating a more sophisticated legal and operational structure.

The goal is not to build the most complex fund structure possible.

It is to build the structure that appropriately serves the investment strategy, investor base, and operational capabilities of the manager.

Advanced structures can create flexibility. They do not eliminate the responsibility to manage them correctly.

If you liked this, you'll like this too