Somewhere around investor number ninety, every successful U.S. fund manager runs into the same wall: the fund is working, money wants in, and the exemption the whole fund is built on says the guest list stops at 100. Most managers treat 99 as the real ceiling — the general partner’s interest can occupy a seat, and nobody wants to litigate the last chair. The natural conclusion is that the fund is full. The more interesting conclusion, the one the structure in this article is built on, is that the fund is only full of Americans.
Where the 99-investor problem comes from
Most U.S. private funds — venture funds, private equity funds, hedge funds, real estate funds — never register as investment companies. They rely on Section 3(c)(1) of the Investment Company Act of 1940, which excludes a fund whose securities are beneficially owned by not more than 100 persons and which isn’t making a public offering. Alongside it, the fund raises under a private placement exemption — typically Regulation D. This quiet corner of U.S. securities law is not small: SEC data shows Regulation D offerings raised about US$2.4 trillion in 2025 — several times what companies raised in registered public markets.
The 100-person cap is where growth stops. The statute offers two escape hatches, and both are narrow. A fund can convert to Section 3(c)(7) and accept an unlimited number of investors — but only “qualified purchasers,” generally individuals with US$5 million in investments, a far smaller audience than accredited investors. Or a “qualifying venture capital fund” can take 250 investors — but only if the entire fund stays under US$10 million (indexed), which for most managers is a rounding error. Neither hatch helps the mid-sized fund that has 99 investors and a waiting list.
The limit counts residents, not passports
Here is the piece most founders of funds hear about second-hand and don’t quite believe. In a line of positions going back to the 1980s (beginning with Touche, Remnant & Co.) and confirmed in the Goodwin, Procter & Hoar no-action letter in 1997, the SEC staff took the view that a non-U.S. fund offered privately in the United States counts only its U.S. resident beneficial owners against the 100-person limit — residency measured by Regulation S’s definition of a “U.S. person,” which turns on where the investor lives, not citizenship. The staff also confirmed that a U.S. private placement and a simultaneous offshore offering conducted under Regulation S are not integrated into one offering, so long as there are no “directed selling efforts” into the United States.
Put those two positions together and the wall becomes a door. An investor in Toronto, London, or Singapore who buys into a fund organized outside the United States is simply not a number the U.S. count has to absorb. The capital arrives; the count stands still.
How the parallel Canadian LP works
The structure is less exotic than it sounds. The sponsor forms a second fund — commonly an Ontario limited partnership — alongside the Delaware vehicle. The same general partner (or an affiliate) controls both. The two funds invest side by side: every deal the U.S. fund does, the Canadian LP does at the same time, on the same terms, pro rata to committed capital. An investor in either fund owns the same portfolio; only the wrapper differs.
The discipline is in who goes where. U.S. residents go into the U.S. fund, up against the 100-person cap. Canadian and other non-U.S. investors go into the Canadian LP, which is offered entirely outside the United States under Regulation S. Run cleanly — no U.S. persons in the Canadian vehicle, no marketing of it into the U.S. — the Canadian LP’s investors never touch the U.S. count, and there is no practical ceiling on how many of them there can be.
| Route past the cap | Who can invest | The catch |
|---|---|---|
| Convert to a 3(c)(7) fund | Unlimited “qualified purchasers” | US$5M-in-investments threshold shrinks the audience dramatically; existing 3(c)(1) investors complicate conversion |
| Qualifying venture capital fund | Up to 250 investors | Whole fund capped at US$10M (indexed) — too small for most managers |
| Parallel non-U.S. fund (Canadian LP) | Unlimited non-U.S. investors | Must be structured and offered properly — Regulation S offshore, no U.S. persons, Canadian compliance |
Why Canada, specifically
For decades the reflexive answer was the Cayman Islands. It still works, but the optics have aged badly: institutional investors, tax authorities, and banks all look harder at tax-haven vehicles than they used to. A Canadian limited partnership does the same structural job from a G7 country nobody has to explain to an investment committee.
Mechanically, a Canadian LP is well suited to the role. Like a Delaware LP, it is a flow-through: the partnership itself is not a taxpayer, and each partner is taxed under its own rules at home. It is formed by filing a simple declaration under Ontario’s Limited Partnerships Act, with limited liability for limited partners and minimal ongoing filings. Ontario is deliberately courting this business, and global sponsors — not just Canadians — increasingly choose Ontario LPs for exactly this reason. There is also a commercial one: Canadian institutions and family offices often simply prefer writing cheques to a Canadian vehicle, the same way U.S. companies expanding north discover that Canadian counterparties prefer dealing with a Canadian entity.
The Canadian rulebook still applies
Selling LP units to Canadians is a distribution of securities in Canada, and Canada has its own private placement regime. The workhorse is the accredited investor exemption in National Instrument 45-106 — Canada’s definition of an accredited investor resembles the U.S. one but is not identical, and the fund must verify status against the Canadian test, not the American one. Each closing into Canada triggers a report of exempt distribution, and someone has to be legally entitled to do the selling: dealer registration analysis — who is in the business of trading, and whether an exemption applies — is the piece U.S. managers most often miss. The mechanics will feel familiar to anyone who has raised money from accredited investors on either side of the border; the citations are just different.
Where this goes wrong
The structure fails at the seams, not the centre. A “Canadian” investor who actually lives in Florida is a U.S. person no matter what their passport says — residency is the test, and one misplaced investor in the Canadian LP can put the count in play. A fund-of-funds that takes 10% or more of the U.S. vehicle can be looked through to its investors, quietly multiplying the count. A deck that finds its way to a U.S. inbox can look like directed selling efforts into the United States. And a sponsor who treats the two funds as interchangeable pockets — different terms, different deals, side letters that blur the line — invites the argument that they were one fund all along.
None of these are reasons to avoid the structure. They are reasons it gets papered by securities counsel on both sides of the border — U.S. counsel for the ’40 Act and Regulation S analysis, Canadian counsel for the LP formation, the 45-106 exemptions, and the filings. Done properly, it is one of the rare corners of securities law where the border works in the fund’s favour.
The 100-investor limit is real, and the SEC takes it seriously. It just isn’t a wall. It’s a door — and it happens to open on the Canadian side.
Common questions
What is the 100-investor limit under Section 3(c)(1)?
Section 3(c)(1) of the U.S. Investment Company Act of 1940 excludes a fund from investment company registration if its securities are beneficially owned by not more than 100 persons and it is not making a public offering. Most U.S. private funds — venture, private equity, hedge, and real estate funds — rely on it.
Why do people say 99 investors instead of 100?
The statute says 100 beneficial owners, but the general partner’s own interest can count as one of them, so sponsors conventionally cap outside investors at 99 to leave a margin of safety.
Do investors in a parallel Canadian LP count toward the U.S. fund’s 100-person limit?
No — if the structure is run properly. The Canadian LP is a separate non-U.S. issuer offered outside the United States under Regulation S, and under long-standing SEC staff positions a non-U.S. fund counts only U.S. resident beneficial owners toward the limit. Non-U.S. investors in the Canadian LP never enter the U.S. count.
Can U.S. investors buy units of the Canadian LP?
They shouldn’t. The clean version of the structure keeps every U.S. person in the U.S. fund and every non-U.S. investor in the Canadian LP. A U.S. resident inside the Canadian vehicle would count toward the 100-person limit and undermine the Regulation S offering. Residency — not citizenship — is the test.
Why use a Canadian LP instead of a Cayman Islands fund?
Both work structurally. A Canadian limited partnership offers the same flow-through tax treatment and limited liability from a G7 jurisdiction, without the tax-haven optics that increasingly bother institutional investors, banks, and tax authorities. Canadian investors also tend to prefer investing through a Canadian vehicle.
Does a Canadian LP pay Canadian tax on its investments?
A limited partnership is a flow-through for Canadian tax purposes — the partnership itself does not pay income tax; each partner is taxed under its own rules. Whether the LP has Canadian filing obligations depends on factors like whether it carries on business in Canada and who its partners are, so the tax design belongs with cross-border tax counsel.
What Canadian securities rules apply to selling the LP units?
Selling units to Canadian investors is a distribution of securities in Canada. Most fund placements rely on the accredited investor exemption in National Instrument 45-106, file reports of exempt distribution after each closing, and need a dealer registration analysis to confirm who may lawfully sell the units.
What is the difference between a parallel fund and a feeder fund?
A parallel fund invests directly in each portfolio deal alongside the main fund, pro rata, as a separate partnership. A feeder fund instead invests all of its capital into the main fund itself — which makes the feeder’s investors beneficial owners to count carefully. Cross-border structures for the 100-person limit typically use parallel funds because they keep the investor pools cleanly separate.