A hedge fund doesn't need to register with the SEC as being an investment company as long as they meet the guidelines as stated by Section 3(c)(1) and Section 3(c)(7) of the Investment Company Act of 1940. Section 3(c) (1) says that a hedge fund can remain exempt as long as it has 100 people or less that own securities. Due to this fact, it's important to know how the SEC counts people. When the commission is determining the number of investors in a hedge fund, under normal circumstances each person would be counted individually. The definition given in the Act itself says that a person is considered "a natural person or a company."
When determining the number of investors in a hedge fund, the SEC will take it upon themselves however to look at a company invested in a hedge fund and consider them an individual investor if the company is registered as an investment firm, or if they own more than 10 percent of the voting shares. When they are looking at an offshore hedge fund, especially ones that take on tax exempt US investors, only those investors in the US are counted as part of the 100 person limit. People such as directors, general partners, executive officers, advisory board members, and trustees are not ever counted toward the 100 person limit.
If a hedge ever starts to get to close to reaching its limit of investors, a manager cannon circumvent this by merely creating another fund that is exactly the same as the previous one. As a step to help prevent identical hedge funds from being creating when funds get close to reaching their investor limit, the SEC uses what it calls the integration doctrine. If there is ever a case of two funds or more being managed by the same person or company, and they are somewhat similar, the SEC proceeds to integrate the funds. This is done so that they will make up one issuer. If two or more funds are integrated, the number of investors is combined as well. Then the SEC will go on in determining the number of investors in a hedge fund is greater the 100 person limit.
After determining the number of hedge fund investors, the SEC will not, however, integrate two funds if one was found to have been formed under an exemption from Section 3(c)(1) of the Investment Company Act of 1940 and the other one under Section 3(c)(7). The SEC also will usually not integrate funds that are domestic partnerships with the offshore funds that go with them.
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