A real estate fund manager who has spent years sourcing, acquiring, and operating commercial properties might reasonably assume that investment adviser regulation does not apply to what they do. They are buying buildings, not stocks. Their investors are real estate investors, not securities customers. Their fund holds fee interests in real property, not shares of public companies or interests in other investment funds.
That assumption is partially correct and partially dangerous, depending on the structure of the fund. The analysis begins with a question that most real estate practitioners underappreciate: whether the management company is advising about securities, as opposed to advising about real estate. The answer depends significantly on how the fund is structured, what assets it holds, and specifically whether it qualifies for the exclusion from the definition of investment company under Section 3(c)(5)(C) of the Investment Company Act of 1940.
This post addresses the investment adviser registration analysis for real estate fund managers, with particular focus on managers of funds that rely on Section 3(c)(5)(C). It explains why the manager of a genuine direct real estate fund may not be an investment adviser at all, why that analysis changes immediately and completely for fund-of-funds structures, and what triggers registration or exempt reporting adviser status when the 3(c)(5)(C) analysis breaks down.
The Section 3(c)(5)(C) Exclusion: Why the Fund’s Structure Changes the Registration Analysis
What Section 3(c)(5)(C) Provides
The Investment Company Act of 1940 defines what entities are regulated as investment companies and subjects those entities to extensive regulatory requirements. Most private funds avoid that regulation by qualifying for one of two statutory exclusions: Section 3(c)(1), which is available to issuers with no more than 100 beneficial owners, and Section 3(c)(7), which is available to issuers whose outstanding securities are owned exclusively by qualified purchasers.
Section 3(c)(5)(C) provides a different path. It excludes from the definition of investment company any issuer that is not engaged in the business of issuing redeemable securities and is primarily engaged in purchasing or otherwise acquiring mortgages and other liens on and interests in real estate. This exclusion is not based on the number of investors or their sophistication. It is based on what the fund holds. A fund that is primarily engaged in acquiring direct interests in real property does not need to rely on 3(c)(1) or 3(c)(7) because it is not an investment company in the first instance.
The SEC staff has developed specific tests for what qualifies under 3(c)(5)(C). Based on no-action letters and interpretive guidance, at least 55% of the fund’s total assets must consist of qualifying assets, meaning whole mortgage loans, certain mezzanine loans satisfying specific conditions, fee interests in real property, and other direct real estate interests as recognized by staff guidance. At least 80% of total assets must consist of qualifying assets and real estate-related assets combined. No more than 20% may consist of assets that have no direct relationship to real estate. These requirements must be monitored on an ongoing basis, not just at fund formation.
Why the 3(c)(5)(C) Exclusion Matters for Adviser Registration
Here is the critical connection that most real estate practitioners do not immediately see: because a fund qualifying under 3(c)(5)(C) holds real property rather than securities, the manager who directs acquisitions, dispositions, and operations of those properties may not be advising about securities at all. The Investment Advisers Act of 1940 defines an investment adviser as any person who, for compensation, engages in the business of advising others as to the value of securities or as to the advisability of investing in, purchasing, or selling securities. Advice about non-securities, including the purchase, management, and disposition of direct real estate, is generally not subject to the Advisers Act.
The practical implication is significant. A management company that advises solely a fund qualifying under 3(c)(5)(C), and whose advice concerns the acquisition, management, and disposition of direct real estate interests that the fund holds, may not be an investment adviser under the Advisers Act. If it is not an investment adviser, no registration or exemption analysis is necessary. It is simply not within the regulatory perimeter that the Advisers Act draws.
This is not merely a theoretical observation. The SEC’s own private fund adviser rules, adopted in August 2023 and subsequently vacated by the Fifth Circuit in June 2024, explicitly excluded funds that rely solely on Section 3(c)(5)(C) from the definition of private fund that those rules governed. Shartsis Friese has noted that the 2023 rules did not apply with respect to funds that do not rely on Section 3(c)(1) or 3(c)(7), such as real estate funds that rely on Section 3(c)(5). The legislative and regulatory structure consistently treats the 3(c)(5)(C) fund as a different kind of vehicle, not a private fund in the regulatory sense, because it holds real property rather than securities.
| 📌 The Form PF Consequence: Another Reason Structure Matters Form PF is the confidential reporting form that registered investment advisers to private funds must file with the SEC. Private fund is defined in Form PF as an issuer that would be an investment company but for Section 3(c)(1) or 3(c)(7) of the Investment Company Act. A fund that relies solely on Section 3(c)(5)(C) does not qualify as a private fund under that definition, because its Investment Company Act exclusion comes from 3(c)(5)(C), not from 3(c)(1) or 3(c)(7). An adviser to solely a 3(c)(5)(C) fund is therefore not required to file Form PF, because the fund it advises is not a private fund within Form PF’s meaning. This has several practical consequences. The adviser does not report portfolio details, leverage, liquidity information, or investment concentration data through Form PF. It does not trigger the enhanced Form PF reporting requirements that apply to large hedge fund advisers or large private equity advisers. And it is not subject to the event reporting requirements that apply to advisers to 3(c)(1) and 3(c)(7) funds under the amended Form PF rules. These are meaningful regulatory differences that flow directly from the choice of Investment Company Act exclusion. |
What Disqualifies a Fund From Section 3(c)(5)(C): Where the Analysis Gets Complicated
The 3(c)(5)(C) exclusion is not available to every fund with real estate in its name or real estate in its pitch deck. It is available only to funds that hold the right kind of assets at the right proportion. Understanding what disqualifies a fund from 3(c)(5)(C) is as important as understanding what qualifies it, because disqualification forces a different regulatory analysis and typically changes the adviser registration picture.
Fund-of-Funds Structures Do Not Qualify
This is the most important line to understand clearly. A real estate fund-of-funds, meaning a fund whose strategy involves investing in other real estate funds, does not qualify for the Section 3(c)(5)(C) exclusion. The reason is straightforward: the interests in other investment funds are securities, not direct interests in real property. The SEC confirmed this in a 1984 no-action letter to Realex Capital Corporation, where the staff took the position that limited partnership interests in a fund would be investment contracts and therefore securities, not real estate interests for purposes of Section 3(c)(5)(C). Relying on the efforts of managing partners for success of the enterprise is the structure that precludes 3(c)(5)(C) treatment.
A fund-of-funds that invests in other real estate funds holds securities, not real property. Because the assets are securities, the fund is an investment company unless it qualifies under 3(c)(1) or 3(c)(7). Because it relies on 3(c)(1) or 3(c)(7), it is a private fund in the regulatory sense. And because the manager is directing the investment of pooled capital into securities, the manager is advising about securities and is an investment adviser subject to the full Advisers Act framework.
The regulatory consequences of the fund-of-funds structure are therefore fundamentally different from those of a direct real estate fund. The fund-of-funds manager is an investment adviser. It must either register or qualify for an exemption. Its fund is a private fund subject to the Form PF regime if the manager is a registered investment adviser with at least $150 million in private fund assets. And the vacated 2023 private fund adviser rules, which the Fifth Circuit struck down but which could be revived in some form, would have applied to the fund-of-funds manager where they explicitly did not apply to the 3(c)(5)(C) direct real estate fund manager.
Passive Joint Venture Interests May Not Qualify
A direct real estate fund that holds fee interests in properties it controls, or manages through wholly owned or majority-controlled operating entities, is on strong ground for the 3(c)(5)(C) exclusion. A fund that instead acquires passive minority interests in joint ventures, where it relies on the managing partner of the joint venture for returns, is in more complicated territory. As the Realex no-action letter illustrates, the SEC staff has taken the view that passive reliance on the efforts of a managing partner converts what looks like a real estate investment into a security, specifically an investment contract under the Howey test.
That analysis has significant consequences for managers who structure their real estate funds around passive joint venture participations, preferred equity positions with minimal control rights, or minority stakes in operating ventures they do not control. Each of those structures should be analyzed for whether the assets qualify under 3(c)(5)(C) before any assumption is made that the fund is not an investment company or that the manager is not an investment adviser.
Preferred Equity, Mezzanine Debt, and the Asset Test Complexity
Even funds that intend to qualify under 3(c)(5)(C) can encounter asset classification problems when their portfolios include preferred equity positions, mezzanine loans, B-notes, or other structured real estate instruments. The SEC staff has provided guidance through no-action letters on which instruments qualify as mortgage loans or interests in real estate for purposes of the 55% qualifying asset test, and which are classified only as real estate-related assets counting toward the 80% threshold rather than the 55% threshold.
Getting those classifications wrong causes the fund to fail the 3(c)(5)(C) exclusion, even if the intention was to hold real estate. A fund that fails 3(c)(5)(C) becomes an investment company unless it qualifies under 3(c)(1) or 3(c)(7). That transition changes the fund’s Investment Company Act analysis, the manager’s Advisers Act status, and potentially the applicable regulatory regime in ways that are very difficult to correct after investors have already been admitted.
When the Real Estate Fund Manager Is an Investment Adviser
The analysis changes when the fund’s structure, assets, or operations take it outside the 3(c)(5)(C) exclusion. At that point, the manager’s Advisers Act status must be analyzed from the beginning. The manager is likely an investment adviser if it is selecting securities, directing allocation among fund investments that are securities, managing a portfolio of securities positions on an ongoing basis, or exercising discretionary authority over investments in securities. That includes managing a fund-of-funds, advising about REIT shares, directing investment in preferred equity structures that are securities, or managing a portfolio that includes a material portion of assets that are securities rather than direct real property interests.
The Three-Part Test for Investment Adviser Status
The Advisers Act imposes registration obligations on any person who meets three criteria simultaneously. First, the person must engage in the business of advising others as to the value of securities or as to the advisability of investing in, purchasing, or selling securities. Second, the person must receive compensation for that advice. Third, the person must be in the business of providing that advice, as distinguished from giving occasional or incidental securities advice in the context of a different primary business.
Compensation is interpreted broadly. Any economic benefit, including advisory fees, management fees, performance allocations, or carried interest, can satisfy the compensation element. The fact that the compensation is structured as a management fee or a promoted interest rather than a line item labeled advisory fee does not change the analysis. The SEC has consistently said that substance governs.
Being in the business of providing advice is evaluated based on whether the person holds themselves out to the public as providing investment advice, whether they provide advice with some regularity, and whether securities advice is a significant part of the services they provide. A management company that manages a real estate portfolio does not provide securities advice simply because it is compensated through a management fee. A management company that manages a fund investing in other funds, or in securities alongside real property, may be doing both simultaneously.
Regulatory AUM and the Form ADV Geography: Who Registers Where
If the management company is an investment adviser, the next question is whether it must register and, if so, whether registration belongs with the SEC or with one or more state regulators. An adviser with at least $100 million in regulatory assets under management may register with the SEC and must do so when regulatory AUM reaches $110 million. Advisers with regulatory AUM between $25 million and $100 million are generally state-registered, with a buffer allowing SEC-registered advisers to remain so if AUM does not fall below $90 million. Advisers with less than $25 million in regulatory AUM typically register with their home state if the state requires registration.
Regulatory AUM for this purpose includes securities portfolios for which the adviser provides continuous and regular supervisory or management services. An account counts as a securities portfolio if at least 50% of its total value consists of securities, with cash and cash equivalents treated as securities for that test. A manager of a pure direct real estate fund relying solely on 3(c)(5)(C) may have no regulatory AUM at all, because the portfolio does not consist of securities. A manager of a fund-of-funds or a mixed fund holding both securities and real property must count the securities portion toward regulatory AUM.
Available Exemptions When Registration Is Triggered
The Private Fund Adviser Exemption
A management company that is an investment adviser may avoid full registration by relying on the private fund adviser exemption if it acts solely as an adviser to one or more qualifying private funds and has less than $150 million in private fund assets under management in the United States. Advisers relying on this exemption become exempt reporting advisers rather than fully registered advisers. They file limited information through Form ADV Part 1A using the IARD electronic filing system but do not file Form ADV Part 2A, do not prepare and deliver a brochure, and are not subject to the full examination regime that applies to registered advisers.
The critical qualifier is solely. The private fund adviser exemption applies only if the adviser advises solely qualifying private funds. The moment the management company begins advising separate accounts, personalized co-investment vehicles that are not structured as private funds, or any non-fund client on securities matters, the solely condition fails and the exemption is lost. At that point, the management company must either register or find another basis for exemption, and the practical cost of transitioning from exempt reporting adviser status to full registration is significant.
It is also worth noting that private funds for purposes of the private fund adviser exemption means funds that rely on 3(c)(1) or 3(c)(7) of the Investment Company Act. A fund relying solely on 3(c)(5)(C) is not a qualifying private fund for this exemption, which creates a conceptual puzzle: if the manager of a 3(c)(5)(C) fund is not an investment adviser because it is advising about real estate rather than securities, the exemption analysis is unnecessary. If, however, the manager has some advisory functions that do involve securities alongside its 3(c)(5)(C) real estate activities, the exemption analysis must account for which fund structures are qualifying and which are not.
State Exemptions and the Multi-State Adviser Framework
Below the SEC registration threshold, state law governs. Many states have adopted the NASAA Registration Exemption for Investment Advisers to Private Funds model rule or a variation of it, which provides a state-level exemption from registration for advisers that provide advice solely to private funds and whose assets under management attributable to clients in that state fall below specified thresholds. The specific conditions vary by state, and a management company operating in multiple states must analyze each state’s requirements independently.
A management company that qualifies for an exemption in its home state may still need to make notice filings in other states where it has clients or investors. State notice filing requirements for exempt or exempt reporting advisers are not uniform and require state-by-state analysis. A management company that operates nationally and assumes that a federal exemption or a home-state exemption solves all state compliance questions is making an assumption that state securities regulators will not share.
The Fund-of-Funds Contrast: Why the Same Sponsor May Have Two Different Regulatory Profiles
A real estate sponsor that manages multiple vehicles may find that its regulatory profile differs significantly across those vehicles depending on how each one is structured. A direct real estate fund acquiring fee interests in commercial properties and relying on 3(c)(5)(C) may have no regulatory AUM and no adviser registration requirement. A fund-of-funds vehicle that the same sponsor manages, investing in other sponsors’ real estate funds, holds securities and is a private fund under 3(c)(1) or 3(c)(7). The manager of the fund-of-funds is an investment adviser to a private fund, subject to the Advisers Act, potentially subject to registration, and subject to the full suite of obligations that come with that status.
The Ropes and Gray analysis of the SEC’s 2023 private fund adviser rules, which were vacated but which inform how the SEC thinks about these structures, noted that the vacated rules did not apply to real estate funds relying on Section 3(c)(5)(C) but did apply to funds relying on 3(c)(1) or 3(c)(7). The same sponsor could be operating both categories of vehicle simultaneously, with fundamentally different regulatory obligations attaching to each.
This dual structure creates operational complexity. The same investment team may be making decisions for both a 3(c)(5)(C) direct real estate fund and a 3(c)(7) fund-of-funds. To the extent the team is providing securities advice in connection with the fund-of-funds, the management company is an investment adviser for that activity even if it is not an investment adviser for the direct real estate fund activity. The regulatory status of the management company depends on what the company is advising about, and a company that advises about both real property and securities has a more complex analysis than one that advises exclusively about real property.
| ⚠️ Situations That Trigger Full Registration Most Quickly Several operational decisions that appear to be purely business choices can trigger investment adviser registration obligations with significant compliance consequences. Sponsors should assess these before they are implemented, not after. Launching a fund-of-funds vehicle. Any vehicle that invests in other investment funds holds securities and is a private fund under 3(c)(1) or 3(c)(7). Its manager is an investment adviser. The transition from managing a direct real estate fund to also managing a fund-of-funds changes the management company’s regulatory status immediately. Offering separately managed accounts. The private fund adviser exemption requires that the adviser act solely as an adviser to qualifying private funds. Adding separate account management, even for existing investors in the fund, destroys the solely condition and eliminates the exemption. Advising individual investors outside the fund structure. If the management company begins giving investment advice to fund investors about their personal portfolios, their allocation decisions outside the fund, or their other securities holdings, those advisory relationships may constitute separate investment advisory relationships that count toward both the investor threshold and the regulatory AUM calculation. Exceeding $150 million in private fund assets. An exempt reporting adviser relying on the private fund adviser exemption that grows past $150 million in private fund assets loses the exemption and must register as a full investment adviser, with all the compliance obligations registration entails. |
The Fifth Circuit Vacatur and What It Changes for Real Estate Fund Managers
In June 2024, the United States Court of Appeals for the Fifth Circuit vacated the entire package of private fund adviser rules that the SEC had adopted in August 2023. Those rules would have imposed mandatory quarterly statement requirements, annual audit requirements, restricted activities rules, and preferential treatment rules on investment advisers to private funds. With the vacatur, those rules are not in effect and the SEC has not announced that it will seek Supreme Court review or immediately propose revised rules.
For managers of funds relying solely on Section 3(c)(5)(C), the vacatur changes nothing, because those rules never applied to them. The 2023 rules explicitly excluded funds that did not rely on 3(c)(1) or 3(c)(7) from their scope. A manager who was not affected when the rules were adopted is not affected by their vacatur.
For managers of funds that do rely on 3(c)(1) or 3(c)(7), including real estate fund-of-funds managers and managers of direct real estate funds that have opted to use 3(c)(1) or 3(c)(7) rather than 3(c)(5)(C), the vacatur does matter. It eliminates the compliance obligations the 2023 rules would have imposed and returns those managers to the pre-2023 regulatory baseline. It does not, however, eliminate the existing Advisers Act obligations that applied before the 2023 rules were adopted, including the fiduciary duty requirements, the custody rule, the marketing rule for advisers who are registered, and the examination authority of the SEC and state regulators.
The ILPA January 2025 Reporting Template was released specifically in response to the vacatur, designed to fill the transparency gap that the 2023 rules would have addressed through a purely industry-driven framework rather than a regulatory mandate. For fund-of-funds managers and other managers of 3(c)(1) and 3(c)(7) private funds, ILPA-aligned reporting has become the de facto institutional standard even in the absence of the vacated SEC rules.
Structure Determines Regulatory Status: The Analysis Must Come Before the Launch
The investment adviser registration analysis for a real estate fund manager begins with two foundational questions that must be answered in sequence. The first question is whether the fund qualifies for the Section 3(c)(5)(C) exclusion from the Investment Company Act. If yes, and if the manager’s advisory activities relate exclusively to direct real estate interests rather than securities, the manager may not be an investment adviser under the Advisers Act, and the registration analysis ends there. The second question, which becomes necessary only when the first question’s answer is no or is uncertain, is whether the manager meets the three-part test for investment adviser status and, if so, whether an exemption is available and which regulatory filing obligations apply.
The fund-of-funds structure illustrates why these questions must be answered based on the actual assets and actual advisory activities rather than on what the fund’s name or marketing materials say. A fund described as a real estate fund that invests in other real estate funds holds securities, is likely a private fund under 3(c)(1) or 3(c)(7), and has a manager who is an investment adviser. A fund that acquires fee interests in commercial properties directly, qualifies under 3(c)(5)(C), and is managed by a company that directs real estate acquisitions and operations may have no investment adviser registration requirement at all.
The gap between those two structures is the gap between two fundamentally different regulatory frameworks. Getting the analysis right before the fund is formed, before investors are admitted, and before advisory activities begin is the difference between building a platform on a sound regulatory foundation and discovering the registration requirement after the platform has been operating in ways that assumed it did not apply.