Investment Company Act of 1940 - Section 3(c)(7) and Rule 2a51-1
Goldman Sachs Asset Management, L.P.

March 13, 2007

Your letter dated March 12, 2007 requests our assurance that we would not recommend enforcement action to the Commission under Section 7 of the Investment Company Act of 1940 (the "Investment Company Act")¹ against Goldman Sachs Asset Management, L.P. and its affiliates ("Goldman"), or investment vehicles managed and/or distributed by Goldman which rely on the exclusion from the definition of "investment company" provided by Section 3(c)(7) of the Investment Company Act (the "Private Funds"), if they treat certain charitable foundations that (a) qualify for tax-exempt status under Section 501(c)(3) of the Internal Revenue Code ("Section 501(c)(3)")² and (b) are formed as non-profit, non-stock corporations ("charitable corporations"), as qualified purchasers under Section 2(a)(51)(A).

Generally, for an issuer to be eligible for the exclusion from the definition of investment company provided by Section 3(c)(7) of the Investment Company Act, all of the outstanding securities of such issuer must be owned by persons who, at the time of acquisition of such securities, are qualified purchasers as defined in Section 2(a)(51)(A) of the Investment Company Act.³ Section 2(a)(51)(A) lists four categories of qualified purchasers. These four categories are "based on minimum standards of financial sophistication,"⁴ and include:

1. any natural person... who owns not less than $5,000,000 in investments⁵... ;
    
2. any company that owns not less than $5,000,000 in investments and that is owned directly or indirectly by or for 2 or more natural persons who are related as siblings or spouse (including former spouses), or direct lineal descendants by birth or adoption, spouses of such persons, the estates of such persons, or foundations, charitable organizations, or trusts established by or for the benefit of such persons;⁶
    
3. any trust that is not covered by clause (ii) and that was not formed for the specific purpose of acquiring the securities offered, as to which the trustee or other person authorized to make decisions with respect to the trust, and each settlor or other person who has contributed assets to the trust, is a person described in clause (i), (ii), or (iv); or
    
4. any person, acting for its own account or the accounts of other qualified purchasers, who in the aggregate owns and invests on a discretionary basis, not less than $25,000,000 in investments.⁷

You generally state that a charitable corporation that does not have the requisite amount of investments to satisfy Section 2(a)(51)(A)(iv) may not meet the definition of qualified purchaser because it is not: (1) a company "owned" by two or more related persons under Section 2(a)(51)(A)(ii);⁸ (2) a trust under Section 2(a)(51)(A)(iii); or (3) a company all of the beneficial owners of the securities of which are qualified purchasers.⁹ You believe, however, that charitable corporations meeting certain criteria should be deemed to be qualified purchasers for purposes of determining the status of the Private Funds under Section 3(c)(7).

In particular, you argue that charitable corporations that satisfy the requirements of Section 2(a)(51)(A)(ii), but for the fact that they are not "owned" in the traditional sense of the word,¹⁰ should be deemed to be qualified purchasers. You argue that because the traditional concept of ownership is not pertinent to charitable corporations, a more natural method of evaluating a charitable corporation's status as a qualified purchaser would be to look to the relationships between the parties who have contributed assets to the corporation. Accordingly, you state that a charitable corporation that has been funded solely by two or more persons having the relationship(s) enumerated in Section 2(a)(51)(A)(ii) should be treated as a qualified purchaser so long as it is not formed for the specific purpose of investing in a Private Fund and owns not less than $5 million in investments, as defined under Rule 2a51-1(b).

You also argue that charitable corporations that satisfy the requirements of Section 2(a)(51)(A)(iii), but for the fact that they are corporations and not trusts, should be deemed to be qualified purchasers. You state that a charitable trust would be a qualified purchaser under Section 2(a)(51)(A)(iii) if it is not formed for the specific purpose of investing in a Private Fund, and if each person authorized to make investment decisions for it, and each person who has contributed assets to it, is a person described in Section 2(a)(51)(A)(i), (ii) or (iv). You argue that there is no apparent reason to treat charitable corporations differently than charitable trusts that are qualified purchasers under Section 2(a)(51)(A)(iii). In particular, you point out the donative purpose, and lack of beneficial owners, of charitable corporations. You also note your view that the financial sophistication that underlies the concept of qualified purchaser in Section 2(a)(51)(A)(iii) is met, and should be sufficient for determining whether a charitable corporation is a qualified purchaser, when such a corporation is funded, and the investment decisions for such corporation are made, by persons who are qualified purchasers under Section 2(a)(51)(A)(i), (ii) or (iv).¹¹

Without necessarily agreeing with your legal analysis, we would not recommend enforcement action to the Commission under Section 7 of the Investment Company Act against Goldman or the Private Funds if Goldman and the Private Funds treat as a qualified purchaser:

1. a charitable corporation (a) that was not formed for the specific purpose of acquiring an interest in a Private Fund, (b) all of the persons who have contributed assets to which are related in one or more of the ways enumerated in Section 2(a)(51)(A)(ii), and (c) which owns not less than $5 million in "investments" as defined in Rule 2a51-1(b) under the Investment Company Act;¹² or
    
2. a charitable corporation (a) that was not formed for the specific purpose of acquiring an interest in a Private Fund, and (b) each person authorized to make investment decisions with respect to the charitable corporation, and each person who has contributed assets to the charitable corporation, is a qualified purchaser within the meaning of subsections (i), (ii) or (iv) of Section 2(a)(51)(A) of the Investment Company Act.

This letter expresses the Division's position on enforcement action only and does not purport to express any legal conclusion on the issues presented. Our position is based upon the facts and representations set forth in your letter, in particular your representations that a charitable corporation relying on Section 501(c)(3) for tax-exempt status does not have "owners" in the traditional sense and that no portion of a charitable corporation's earnings or assets inures to the benefit of any private shareholders or individuals. Any different facts or representations may require a different conclusion.¹³

Ian McGrath
Senior Counsel

Endnotes

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¹ Section 7 generally prohibits any U.S. company that meets the definition of "investment company" from engaging in interstate commerce, and any non-U.S. company that meets the definition of "investment company," from making a public offering in the United States, unless the company is registered under Section 8 of the Investment Company Act.

² Section 501(c)(3) of the Internal Revenue Code of 1986 (the "Internal Revenue Code") exempts certain entities from federal income taxation if they, among other things, are "organized and operated exclusively for religious, charitable... or educational purposes," if none of the entity's earnings inures to any private shareholder or individual, and if the entity does not attempt to influence legislation as a substantial part of its activities or participate in political campaign activity.

³ Such issuer also must not at the time of a person's acquisition of the issuer's securities be making or proposing to make a public offering of such securities. Section 3(c)(7).

⁴ See S.Rep No. 293, 104th Cong., 2d Sess. 10 (1996). The exclusion provided by Section 3(c)(7) of the Investment Company Act reflects Congress' general recognition that financially sophisticated investors (i.e., qualified purchasers) are in a position to appreciate the risks associated with investing in certain investment pools. See id. ("Generally, these investors can evaluate on their own behalf matters such as the level of a fund's management fees, governance provisions, transactions with affiliates, investment risk, leverage, and redemption rights.").

In addition, for purposes of Section 2(a)(51), a company may be deemed to be a qualified purchaser if each beneficial owner of the company's securities is a qualified purchaser. See Rule 2a51-3(b).

⁵ See Rule 2a51-1(b) under the Investment Company Act (definition of "investments" for purposes of Section 2(a)(51)).

⁶ But see Rule 2a51-3(a) (a company shall not be deemed to be a qualified purchaser under Sections 2(a)(51)(A)(ii) and (iv) if it was formed for the specific purpose of acquiring the securities offered by a company excluded from the definition of investment company by Section 3(c)(7) unless each of the beneficial owners of the company's securities is a qualified purchaser).

⁷ Id. See also Rule 2a51-1(b) (definition of "investments" for purposes of Section 2(a)(51)).

⁸ Read literally, Section 2(a)(51)(A)(ii) would include family companies that are owned by charitable corporations that have been established by family members. You state that this layering of corporate entities is cumbersome and not always practical. Further, you state your view that requiring families to establish both a charitable corporation and an investment vehicle through which the charitable corporation may invest its assets serves no additional purpose.

⁹ See Rule 2a51-3(b), supra note 4.

¹⁰ You explain that due to the benevolent purpose of foundations, as well as the restrictions of the Internal Revenue Code, charitable corporations are formed as non-profit, non-stock corporations in which no part of the company's earnings or assets inure to the benefit of any private shareholder or individual. You state that charitable corporations therefore typically do not have "owners" in the sense that no portion of their earnings or assets may inure to the benefit of any private shareholders or individuals.

¹¹ We have previously indicated our view that the requirement in Section 2(a)(51)(A)(iii) that each "person authorized to make decisions" be a qualified purchaser could be satisfied if all persons with investment decision-making authority are qualified purchasers. See section D, ABA American Bar Association Section of Business Law (pub. avail. Apr. 22, 1999). See also Meadowbrook Real Estate Fund (pub. avail. Aug. 26, 1998) ("Meadowbrook").

¹² We have previously stated our view that all economic interests in a company that relies on Section 2(a)(51)(A)(ii) should be held exclusively by persons who satisfy the family relationship requirements of that section. See Meadowbrook at note 14 and accompanying text. We do not modify that position here. Rather, our position in this letter is based on the recognition that no particular person(s) may be said to hold an "economic interest" in a charitable corporation.

¹³ In particular, our position is limited in application to charitable corporations.

Incoming Letter

The Incoming Letter is in Acrobat format.

http://www.sec.gov/divisions/investment/noaction/2007/
gsam031307-3c7.htm