# 17 CFR § 270.3c-5 — Beneficial ownership by knowledgeable employees and certain other persons - **Source URL:** https://www.law.cornell.edu/cfr/text/17/270.3c-5 - **Host:** Cornell Law School — Legal Information Institute (LII), e-CFR mirror of Title 17 - **Pinpoint cite:** 17 CFR § 270.3c-5 (Investment Company Act of 1940, Rule 3c-5) — knowledgeable-employee exception - **Codification source note:** [62 FR 17529, Apr. 9, 1997] - **Retrieved-date:** UNKNOWN - **Status:** primary-archived --- ## Full text (verbatim) **§ 270.3c-5 Beneficial ownership by knowledgeable employees and certain other persons.** **(a)** As used in this section: **(1)** The term *Affiliated Management Person* means an affiliated person, as such term is defined in section 2(a)(3) of the Act [15 U.S.C. 80a-2(a)(3)], that manages the investment activities of a Covered Company. For purposes of this definition, the term "investment company" as used in section 2(a)(3) of the Act includes a Covered Company. **(2)** The term *Covered Company* means a Section 3(c)(1) Company or a Section 3(c)(7) Company. **(3)** The term *Executive Officer* means the president, any vice president in charge of a principal business unit, division or function (such as sales, administration or finance), any other officer who performs a policy-making function, or any other person who performs similar policy-making functions, for a Covered Company or for an Affiliated Management Person of the Covered Company. **(4)** The term *Knowledgeable Employee* with respect to any Covered Company means any natural person who is: > **(i)** An Executive Officer, director, trustee, general partner, advisory board member, or person serving in a similar capacity, of the Covered Company or an Affiliated Management Person of the Covered Company; or > **(ii)** An employee of the Covered Company or an Affiliated Management Person of the Covered Company (other than an employee performing solely clerical, secretarial or administrative functions with regard to such company or its investments) who, in connection with his or her regular functions or duties, participates in the investment activities of such Covered Company, other Covered Companies, or investment companies the investment activities of which are managed by such Affiliated Management Person of the Covered Company, provided that such employee has been performing such functions and duties for or on behalf of the Covered Company or the Affiliated Management Person of the Covered Company, or substantially similar functions or duties for or on behalf of another company for at least 12 months. **(5)** The term *Section 3(c)(1) Company* means a company that would be an investment company but for the exclusion provided by section 3(c)(1) of the Act [15 U.S.C. 80a-3(c)(1)]. **(6)** The term *Section 3(c)(7) Company* means a company that would be an investment company but for the exclusion provided by section 3(c)(7) of the Act [15 U.S.C. 80a-3(c)(7)]. **(b)** For purposes of determining the number of beneficial owners of a Section 3(c)(1) Company, and whether the outstanding securities of a Section 3(c)(7) Company are owned exclusively by qualified purchasers, there shall be excluded securities beneficially owned by: **(1)** A person who at the time such securities were acquired was a Knowledgeable Employee of such Company; **(2)** A company owned exclusively by Knowledgeable Employees; **(3)** Any person who acquires securities originally acquired by a Knowledgeable Employee in accordance with this section, provided that such securities were acquired by such person in accordance with § 270.3c-6. [62 FR 17529, Apr. 9, 1997] --- ## Key sections flagged These bear directly on whether a **creator** can hold carry / a beneficial interest in a Clinq 3(c)(1) or 3(c)(7) private fund vehicle *without* being counted against the 100-holder cap (3(c)(1)) or the qualified-purchaser-only requirement (3(c)(7)) — i.e., whether the creator qualifies as a genuine GP-side "Knowledgeable Employee" rather than an outside promoted party. - **§ 270.3c-5(a)(4)(i) — insider-status route (the clean path for a GP-side creator):** > "An Executive Officer, director, trustee, **general partner, advisory board member**, or person serving in a similar capacity, of the Covered Company or an Affiliated Management Person of the Covered Company" A creator who is an actual general partner, advisory-board member, or executive officer of the fund or its manager qualifies on status alone — no tenure test. - **§ 270.3c-5(a)(4)(ii) — participation + 12-month tenure route (for a creator who is an *employee* of the fund/manager):** > "An employee ... **(other than an employee performing solely clerical, secretarial or administrative functions ...)** who, in connection with his or her regular functions or duties, **participates in the investment activities** of such Covered Company ... **provided that** such employee has been performing such functions and duties ... **for at least 12 months.**" Two prongs must both be met: (1) genuine participation in investment activities (not clerical/marketing-only), and (2) at least 12 months performing those (or substantially similar) functions. A creator who is merely a paid promoter/marketer does NOT satisfy the "participates in the investment activities" prong. - **§ 270.3c-5(a)(3) — Executive Officer definition (gates the (a)(4)(i) route):** > "the president, any vice president in charge of a principal business unit, division or function (such as sales, administration or finance), **any other officer who performs a policy-making function**, or any other person who performs similar policy-making functions, for a Covered Company or for an Affiliated Management Person of the Covered Company." Genuine policy-making function is required; a nominal title without policy-making authority does not qualify. - **§ 270.3c-5(b)(1)–(2) — the exclusion payoff (why the classification matters):** > "there shall be excluded securities beneficially owned by: **(1)** A person who at the time such securities were acquired was a Knowledgeable Employee of such Company; **(2)** A company owned exclusively by Knowledgeable Employees ..." Knowledgeable-employee holdings do not count toward the 3(c)(1) 100-beneficial-owner limit and do not break the 3(c)(7) qualified-purchaser-only requirement — so carry granted to a genuine KE creator is "free" against those caps. Status is tested **at the time the securities were acquired.** - **§ 270.3c-5(a)(1) — Affiliated Management Person (extends KE status to manager-side personnel):** > "an affiliated person ... that **manages the investment activities of a Covered Company**." A creator employed by the fund's manager/adviser (not just the fund itself) can still qualify as a KE, provided the (a)(4) tests are met at the manager level. --- ## Caveat for the creator-platform analysis Rule 3c-5 answers only whether a creator's fund interest is *counted* against 3(c)(1)/3(c)(7) headcount/qualified-purchaser limits. It does **not** authorize paying transaction-based compensation to an unregistered person, and it does **not** resolve broker-registration (Exchange Act §15(a) / Rule 3a4-1) or adviser Marketing-Rule (17 CFR 275.206(4)-1) questions raised by paying a creator for promotion or referrals. A creator who is a genuine GP insider under 3c-5 is a different legal posture from an outside promoted party.