..'.f. .
 

JUN 2./ 1996
 

....p ..	 Our Ref No. 96-105-CC 

Cornish & Carey

RESPONSE OF THE OFFICE OF CHIEF COUNSEL	 Commercial, Inc.

DIVISION OF INVESTMNT MAAGEMENT	 File No. 132-3
 

Your letter of February 26, 1996 requests the staff's
 

concurrence that each employee investment limited partnership or
 

limited liability company ("Fund") established by Cornish & Carey
 

Commercial, Inc. ("Cornish & Careyll) may be considered a single
 

beneficial owner of the securities of an issuer relying on
 

Section 3(c) (1) (1I3(c) (1) Entity") of the Investment Company Act
 

of 1940 ("the Act"), under the circumstances described below.
 

You state that Cornish & Carey, a commercial real estate
 

broker, periodically is presented with opportunities to invest in
 3 (c) (1) Entities, primarily venture capital funds operated in the 

Northern California area. You state that Cornish & Carey wants
 

to share these investment opportunities with management employees


as a way to encourage and reward long- term employment. To that 

end, Cornish & Carey proposes to establish a Fund each year for


the participation of its then-eligible employees. 
 1 The
 

Investment Committee of Cornish & Carey's Board of Directors will
 

make all investment decisions for each Fund. Employee
 

participants will have no discretion over the selection or
 

disposition of investments by the Funds. Each participant in a
 

Fund will share, pro rata, in proportion to the participant's
 

capital contribution', in all investments made by the Fund. You
 

state that each Fund will limit its investment to less than 10%
 of the outstanding voting securities of each 3 (c) (1) Entity. 

Depending on the level of capitalization, a Fund may invest in


one or more 3(c) (1) Entities.2 

Section 3 (c) (1) excludes from the definition of investment 

company any issuer whose outstanding securities (other than
 

short-term paper) are beneficially owned by not more than 100
 

persons and which is not making and does not presently propose to
 make a public offering of securities. Under Section 3 (c) (1) (A) , 

ownership by a compan~ is deemed to be beneficial ownership by
 

one person, unless the company owns 10% or more of the
 

outstanding voting securities of the issuer, and the value of the
 

company's investments in all 3 (c) (1) Entities exceeds 10% of its
 

1/ You state that all offers and sales of interests in each
 

Fund will be made pursuant to Rule 596 of Regulation D or
 

otherwise pursuant to Section 4 (2) of the Securities Act of 1933.
 

2/ It is anticipated that these Funds also will rely on Section


3(c)(1). 

3/ The term "company" includes, in pertinent part, a
 

partnership and any organized group of persons whether
 incorporated or not. See Section 2 (a) (8) of the Act. 
- 2 ­

assets (the "attribution rule") . 4
 

Despite compliance with the express provisions of Section
 

3 (c) (1), however, Section 48 (a) of the Act gives the Commission
 

the authority to "look through" a transaction or a multi-tiered
 

structure if it is a sham or conduit formed or operated for no
 

purpose other than circumventing the requirements of' 
 Section 

3(c) (1) or any other provision of the Act.s For example, for
 

purposes of counting beneficial owners, the staff will require
 

"integration" of ostensibly separate 3 (c) (1) Entities if it
 

appears that the separate offerings do not present investors with
 

materially different investment opportunities. 6 Similarly, when
 

an entity is managed as a device for facilitating individual
 

investment decisions instead of as a collective investment
 

vehicle, the staff will "look through" the entity and attribute
 

ownership directly to the underlying securityholders. 7
 

Al though you state that the Funds will be collective
 

investment vehicles formed for the purpose of rewarding long- term
 

employees and not for the purpose of circumventing any provision
 

of the Act, you seek the views of the staff because of a
 

representation recited in a numer of the prior staff no-action
 

letters addressing t~e application of the attribution rule to a
 

company investing in a 3 (c) (i) Entity. In several of these
 

4/ Specifically, the second 10% test of Section 3 (c) (1) (A)
 

provides that a company shall be considered a single beneficial
 

owner unless more than 10 percent of its assets are invested in
 

issuers that are, or, but for Section 3 (c) (1) (A) would be,


excluded under Section 3 (c) (1) . 

5/ The staff has taken the position that Section 3.(c) (1) must
 

be read in conjunction with Section 48 (a). See generally Tyler
 

Capital Fund, L.P./South Market Capital ("Tyler Capital") (pub.
 

avail. Sept. 28, 1987); see also Railbox Company (pub. avail.
 

Oct. 29, 1984). Section 48 (a) generally makes it unlawful for
 

any person to do indirectly through another person or entity what
 

would be unlawful for the person to do directly.
 

6/ See,~, Shoreline Fund, L.P. (pub. avail. Apr. 11, 1994) ¡
 

Monument Capital Management, Inc. (pub. avail. July 12, 1990) ¡
 

PBT Covered Option Fund (pub. avail. Feb. 17, 1979); see also In
 

the Matter of Kenneth von Kohorn & VK Partnership Management,
 

Inc., Investment Company Act Release No. 20907 (Admin. Proc. File
 

No. 3-8624) (Feb. 22, 1995).
 

7/ See PanAgora Group Trust (pub. avail. Apr. 29, 1994); WR
 

Investment Partners Diversified Strategies Fund, L.P. (Apr. 15,
 

1992) ¡ Tyler Capital, supra n.2¡ Six Pack (pub. avail. Nov. 13,


1989) . 
- 3 ­

letters, the requesting party represented, and in some cases the
 

staff conditioned relief on the representation, that the company
 

would not invest more than 40% of its committed capital in any


one 3 (c) (1) Entity. 8 You are unable to make this representation 

because the Funds may not have sufficient capital to diversify
 

their investments to this extent.
 

You maintain that this 40% of capital limit is not a
 

statutory requirement and should not be determinative of when to
 

"look through" a collective investment vehicle to which the
 

attribution rules of Section 3 (c) (1) (A) otherwise would not
 

apply, and that is neither structured nor operated for the
 

purpose of circumventing the 100-securityholder limit of Section
 

3 (c) (1). The staff agrees. When an issuer can make the 40%
 

representation, the staff generally has been able to conclude
 

with a degree of certainty that the structure was not created to


evade the Act and the staff thus has granted no-action relief. 9 

Because the 40% test is not a statutory requirement, however,
 

failure to comply with it would not automatically place a private
 

investment company in violation of the Act. Rather, whether a


company that meets the express conditions of Section 3 (c) (1) will 

be considered to have violated Section 48 (a) will depend on an
 

analysis of all of the surrounding facts and circumstances.
 

While the percentage of an issuer's assets invested in another
 

3 (c) (1) company is relevant to. this analysis, exceeding a
 

specified percentage level, by itself, is not determinative.10
 

We concur, therefore, that each Fund may be considered a
 single beneficial owner of a 3 (c) (1) Entity, provided that: 1) no Fund will invest in any 3 (c) (1) Entity to the extent that the attribution provisions of Section 3 (c) (1) (A) are triggered; and 

8/ See Handy Place Investment Partnership (pub. avail. July
 1989); see also Merrill Lynch & Co., Inc. (pub. avail. Apr. 23,19 , 

1992); Knightsbridge Integrated Fund (pub. avail. May 20, 1988);
 

CM Communications Fund (pub. avail. Apr. 17, 1987).
 

9/ The staff continues to adhere to the positions taken in the
 

prior no-action letters, and issuers may continue to rely on


them. 

10/ Compare Six Pack, supra n. 5; WR Investment Partners, supra
 

n.3 (staff looked through collective entities even though the
 

entities represented that they would abide by 40% capital limit,
 

when the collective entities facilitated individual investment
 

decisions); with MCKinsey & Co. (pub. 'avail. Feb. 23, 1989)
 

(staff granted no-action relief assuring that it would consider a
 

limited partnership established for employees as one beneficial


owner of 3 (c) (1) Entities even though the limited partnership did 

not represent that it would abide by the 40% capital limit).
 
- 4 ­

2) no Fund or 3 (c) (1) Entity will be structured or operated for
 

the purpose of circumventing the provisions of the Act.
 

£L rr 

Eileen M. Smiley
 

Senior Counsel
 
_.... __ ____._.._.-"~..~_.......~__~
 

. , 

WILSON SONSINI GOODRICH & ROSATI
 

PROFESSIONAL CORPORATION 

650 PAGE MILL ROAD 

PALO ALTO. CAIFORNIA 94304-1050 JOHN AROT WILSON
 

OF COUNSEL TELEPHONE .615-493-9300 FACSIMILE (15-493-6811 

Februar 26, 1996
 

AfJ rt A- - l.O . .~ 

Offce of Chief Counsel . SETION '3 (C) cO . 

Division of Investment Management RULE 

Securities and Exchange Commssion PWLID G/J-I!rb 450 Fifth Street, N.W. AVAILABIIT 

Washington, D.C. 20549 

Re: Cornish & Carey Commercial, Inc.
 

Investment Company Actor 1940. as amended - Section 3( c)(I) 

Ladies and Gentlemen: 

On behalf of our client, Cornsh & Carey Commercial Inc. ("Cornsh & Carey"), we seek 

assurance that the staf 
 the Division of Investment Management of the Securities
 (the "Sta') of 


and Exchange Commssion (the "Commssion") wi not recommend enforcement under the 

Cornsh & Gaey causes one or
 

more employee investment vehicles (the "Employee Funds") to purchase securities in investment
 

Investment Company Act of 1940, as amended (the "Act"), if 


funds which rely on the exemption from the defition of 
 "investment company" set forth in

the Act ("3(c)(1) Entities"), as described below. In paricular, we request that
 

the Staf concur in our view that each Employee Fund should be considered a single beneficial
 

owner of the securities of any 3 (c)(1) Entity in which it invests, provided that it beneficially owns
 

Section 3(c)(1) of 


less than ten percent (10%) of the outstading votig securities of 
 such 3(c)(1) Entity.

FACTS 

Cornsh & Carey is.the largest commercial rea estate broker operatig iI Nortern
 

mion. Cornsh & Carey currently has 

over 150 employees operating out offive offces in the area. From tie to tie, Cornh & Carey 

is presented with the opportnity to subscribe for interests in 3(c)(1) Entities, priy venture 

capita funds operating in the region. Cornsh & Carey desires to share such investment 

Calforna and has gross anual revenues in excess of $25 


opportnities with members of its manag~ment team as a way to encourage and reward long-term
 

service to Cornsh & Carey. Therefore, Cornsh & Carey proposes to establish Employee Funds 

for the paricipation of its management personneL as described below. 

Only individuals who are "accredited investors" within the meaning of Rule 501(a) of
 

Regulation D of 
 the Securities Act of 1933, as amended (the "Securities Act"), wil be allowed to 

1:\PUBLIaGCH\O I 73734.04 
WILSÇlN SONSINI GOODRICH & ROSATI
 

Offce of Chief Counsel 

Division of Investment Management 

Securities and Exchange Commssion 

Februar 26, 1996
 

Page 2 

paricipate in the Employee Funds. The opportnity to paricipate in an Employee Fund wil be 

further restricted to management employees of Cornsh & Carey, whom Cornish & Carey believes 

are sophisticated in business and financial matters and capable of protecting their own interests 1 Almost all of the Cornsh & Carey with respect to investments in the Employee Funds. 


management employees hold college degrees, and many hold graduate degrees as well. Such 

management employees typically have i 0 to 30 years of experience in the commercial real estate 

business or related real estate and finance activities. Such management employees typicaly are 

experienced in makg investment decisions, including decisions with respect to stock in public 

and private corporations, limited parnership interests, real estate, and other investments. 

It is expected that approximately 20 to 30 employees wil initially be eligible to participate 

in the Employee Funds, although such number may increase as the Cornsh & Carey organzation 

grows. Capital contributions from paricipants in an Employee Fund are expected to be in the 

range of$50,000 to $100,000, although larger or smaller contributions may be allowed in the 

discretion of the Executive Investment Commttee of Cornish & Carey's Board of 
 Directors (the 

"Investment Commttee"), which wil manage the Employee Funds.
 

The Employee Funds will be structured as a series of limited parnerships or limited 

liability companes, with a new fund formed annually for the paricipation of Cornsh & Carey's 

then-current eligible employees. Alternatively, to minimize admistrative inconvenience and 

costs, the Employee Funds may be structured as a series of sub-accounts within a single lited
 

parnership or limted liabilty company. For purposes of 
 this letter, any such sub-account is 

considered to be a separate Employee Fund. 

The Investment Commttee wil make al investment decisions for the Employee Funds. 

Employee paricipants in the Employee Funds, in their capacities as such, wil have no discretion 

over the selection or disposition of investments by the Employee Funds. Each paricipant in an 

Employee Fund will share pro rata, in proportion to such paricipant's capital contribution to the 

fund, in all investments made by that fund. Transfers of interests in the Employee Funds may be 

permitted under limited circumstances in the sole discretion of the Investment Commttee, and 

References in this letter to management employees are intended to include senior 

consultants who may be deemed independent contractors rather than employees for tax purposes 

(i.e., their income is reported on Form 1099 rather than Form W-2), but who meet the same 

eligibility criteria for participating in Employee Funds as the other management employees 

referred to herein.
 

I:\PUBLIC\GCH\O 173734.04
 
WILS.oN SONSINI GOODRICH & ROSATI
 

Offce of Chief Counsel
 

Division of Investment Management
 

Securities and Exchange Commssion
 

Februar 26, 1996
 

Page 3
 

wil be prohibited if not in compliance with the requirements of the Securities Act. Employee 

paricipants wil have no right to demand early withdrawal or distribution of their interests in the 

Employee Funds. 

Depending on the amount of capital contributed to a paricular Employee Fund and the 

size and number of investment opportunities that become available to that Employee Fund, such 

Employee Fund may be limited in its abilty to diversify and may invest in many, or as few as one, 

3(c)(1) Entities. However, the Employee Funds are not designed to facilitate individual 

investment decisions of their paricipants with respect to the underlying investments in 3 ( c)( 1) 

Entities. With the exception of the first Employee Fund's initial investment, which Cornish & 

Carey has already identified, eligible paricipants generally wil not have knowledge, prior to 

makng their commtments to an Employee Fund, of the identity of the paricular 3(c)(1) Entities
 

in which such Employee Fund intends to invest. In fact, in most cases, not all investments for an 

Employee Fund wil have been identified by the Investment Commttee at the time of the fund's 

formation. In no event wil an Employee Fund's investment in a 3 ( c)( 1) Entity represent ten 

percent (10%) or more of the outstanding voting securities of 
 such 3(c)(1) Entity. 

In order to assure parnership tax classification of the Employee Funds, Cornsh & Carey 

wil contribute at least 1% of 
 the total capitalization of each Employee Fund. To increase the 

likelihood that each Employee Fund wil be capitalized suffciently to meet the minimum 

investment requirements of the 3 ( c)( 1) Entities in which it may be invited to paricipate, Cornsh 

& Carey may contribute up to 5% of the total capitalization of each Employee Fund. For 

purposes of 
 this letter, it should be assumed that the value of all securities owned by Cornsh & 

Carey in the Employee Funds and other issuers described in Section 3(c)(1)(A) of the Act will be 

less than ten percent (10%) of the value of 
 Cornsh & Carey's total assets. 

Like all other paricipants in an Employee Fund, Cornsh & Carey wil share pro rata in the 

. investments of the fund in proportion to its capital contribution. Cornish & Carey wil not receive 

a "caried interest" for managing an Employee Fund, nor wil it be paid a management fee. 

Cornish & Carey may be reimbursed for direct expenses incurred on behalf of an Employee Fund, 

such as accounting and legal expenses. 

Offers and sales of interests in the Employee Funds wil be made pursuant to Rule 506 of 

Regulation D or otherwise pursuant to Section 4(2) of 
 the Securities Act. Prospective 

participants in the Employee Funds wil be advised by means of a detailed written offering 

memorandum of the ownership and management structure of the Employee Funds, the expected 

I:\PUBLIC\GCH\O i 73734.04 
WILSON SONSINI GOODRICH & ROSATI 

Offce of Chief Counsel 

Division of Investment Management 

Securities and Exchange Commssion 

February 26, 1996 

Page 4 

costs to be incurred by the Employee Funds, the fact that the investments made by the Employee 

Funds in the 3(c)(1) Entities, as well as the underlying investments made by the 3(c)(1) Entities, 

are expected to be risky and highly speculative, and other relevant information necessar for an 

eligible paricipant to make an informed investment decision. Because the Employee Funds wil 

have 100 or fewer beneficial owners of their respective outstanding securities within the meanng 

of Section 3( c )(1) of the Act, it is expected that the Employee Funds wil operate without 

registration under the Act. 

Cornsh & Carey believes that the Einployee Funds wil be a valuable benefit to the 

members of its management team. Whle all of the eligible participants wil be accredited, most of 

such individuals ordinarily would not have access to investment opportunities in the 3 ( c)( I) 

Entities in which the Employee Funds plan to invest due to the large minimum commtments 

typically required to paricipate in such 3(c)(1) Entities, often in the range of $250,000 to 

$1,000,000. By allowing eligible employees to pool their resources, the Employee Funds wil 

provide eligible employees access to these investment opportunities while minimizing the amount 

that any individual must put at risk in order to paricipate. 

The 3(c)(1) Entities in which the Employee Funds are expected to invest, including 

venture capital funds, carefully monitor the number of beneficial owners of their securities in order 

to come within the exemption from the registration requirements of 
 the Act provided by Section 

3 ( c)( 1). Therefore, an Employee Fund generally wil not be permtted to invest in a 3 (c)( 1) Entity 

unless it can assure the 3(c)(1) Entity that it wil be deemed to be a single beneficial owner of 
 the 

3(c)(1) Entity's securities. As a result, the value of 
 the Employee Funds as a means to reward and 

retain key personnel is dependent upon a positive response to this no-action request. 

ANALYSIS 

Section 3(c)(1) of the Act excludes from the definition of 
 investment company "(a)ny 

issuer whose outstanding securties (other than short-term paper) are beneficially owned by not 

more than one hundred persons and which is not makng and does not presently propose to make 

a public offering of its securities." Section 3 
 (c)(l)(A) provides that beneficial ownership by a 

"company" generally is deemed to be beneficial ownership by one person. However, where the 

company owns ten percent (10%) or more of the outstanding voting securities of an issuer and the 

value of all securities owned by such company of all issuers which are or would, but for the 

exception set forth in Section 3(c)(1)(A), be excluded from the definition ofinvestrIent company 

solely by reason of Section 3 the value of 
 the company's total (c)(1) exceeds ten percent (10%) of 


I:\PUBLIC\GCH\O 173734.04
 
WILSON SONSINI GOODRICH & ROSATI 

Offce of Chief Counsel 

Division of Investment Management 

Securities and Exchange Commssion 

Februar 26, 1996
 

Page 5
 

assets at the time of its most recent acquisition of securities of the issuer, the company is deemed 

to be a "look through" entity and beneficial ownership of the issuer's securities is attributed to the 

holders of such company's outstanding securities (other than short-term paper). 

The purpose of Section 3 ( c)( 1) is to exempt from investment company regulation those 

entities in which there is no significant public interest makng such regulation appropriate. The 

100-person limit is the bright line that has been established to demarcate public investment 

companes within the purview of the Act from private investment companes not within the 

purview of 
 the Act. See "Protecting Investors: A Half-Century oflnvestment Company 

Regulation," SEC Staf 
 Report 1504, Chapter 2, Section II (1992). The attribution rule of Section 

3(c)(1)(A) is designed to ensure "that an investment company issuer cannot evade the 

requirements of the Act simply by using one or more other companes to purchase blocks of its 

securities and, in turn, sell those companes' securities to investors, i.e., to act a conduits for the 

distribution ofthe investment company's securities." H.R. Rep. No. 1341, 96th Cong., 2d Sess. 

35 (1980). 

Because an Employee Fund is a "company" as such term is used in Section 3 
 (c)(l)(A) óf

the Ace and because no Employee Fund wil be permtted to acquire ten percent (10%) or more 

of the outstanding voting securities of any 3(c)(1) Entity, the language of Section 3 (c)(l)(A) of 

the Act would require that beneficial ownership by an Employee Fund of securities of a 3 ( c)( 1 ) 

Entity be deemed to be beneficial ownership by one person, and not by each of the paricipants in 

the Employee Fund. However, we are aware of several instances in which the Staf has examned 

the paricular structure and operation of an investment vehicle to determne whether a "look 

through" to its beneficial owners should be required, notwithstanding literal satisfaction of the 

conditions of Section 3(c)(1)(A) for treating the investment vehicle as a single beneficial owner. 

Section 48(a) of 
 the Act provides that "(i)t shal be unlawfl for any person, directly or indirectly, 

to cause to be done any act or thing through or by means of any other person which it would be 

unlawfl for such person to do under the provisions of this title or any rule, regulation, or order 

thereunder." The concern of 
 the Staf ariculated in those cases where a "look through" was 

required, despite literal compliance with Section 3( c )(1 )(A), was whether or not the use of a 

multi-tier structure was simply a sham or conduit being used in violation of Section 48(a) to 

facilitate the individual investment decisions of a number of investors exceeding the 100-person 

2 Section 2(a)(8) of 
 the Act defies "company" as "a corporation, a parership, an association, a 

joint-stock company, a trst, a fud, or any organzed group of persons whether incorporated or not; or any
 

receiver, trstee in a case under Title 11 of 
 the United States Code or simlar official or any liquidating agent 

for any of the foregoing, in 
 his capacity as such."

I:\PUBLIaGCH\O 173734.04 
WILSON SONSINI GOODRICH & ROSATI
 

Offce of Chief Counsel 

Division of Investment Management 

Securities and Exchange Commssion 

February 26, 1996 

Page 6
 

limit. 

For example, in Six Pack (pub. avaiL. Nov. 13, 1989), each parner of an investment 

parnership had the ability to var his percentage paricipation on an investment-by-investment 

basis, subject to the unanmous approval of the other parners. The Staf 
 took the position that 

under these circumstances, the investment parnership was not a common investment vehicle, but 

rather was a device for facilitating individual investment decisions. Therefore, notwithstanding 

the fact that the Six Pack parnership at all times owned less than ten percent (10%) of the 

outstanding interests of any 3( c )(1) Entity, the Staf concluded that each parner should be 

counted as a separate beneficial owner under Section 3 
 (c)(1). Similarly, in Tyler Capital Fund, L.P./South Market Capital (pub. avaiL. Sept. 28, 1987), a separate sub-account was established 

for each new investment to be made by an investment parnership, and each paricipant in the
 

investment parnership was alowed to determne his level of paricipation in the sub-account afer 

being informed of the new investment opportunity. Again, the Staf 
 took the position that, 

notwithstanding literal compliance with the requirements of Section 3(c)(1)(A), each paricipant 

in a sub-account should be treated as a separate beneficial owner of 
 the 3(c)(1) Entity in which 

the sub-account invested. See also WR Investment Partners Diversified Strategies Fund, L.P. 

(pub. avaiL. Apr. 15, 1992), where it was proposed that the general parner of an investment 

parnership vary each limited parner1s percentage paricipation in investments made by the 

parnership after consulting with the limited parners regarding their individual investment 

objectives. Again, the staf declined to take a no-action position. In each of 
 these cases, the 

investment vehicle in question was used to facilitate the individual investment decisions of its 

paricipants. Such abuse is not present in the case of the Cornish & Carey Employee Funds. 

Each paricipant in an Employee Fund wil share in al investments' 
 made by the Employee Fund 

pro rata in proportion to the paricipant's total capital contribution, and no employee paricipant, 

in his capacity as such, will have discretion over the investment decisions made by the Cornsh & 

Carey Board of Directors. 

In contrast to the no-action letters cited above, the Staf has consistently taken the 

position that a "look through" to the beneficial owners of an investment vehicle is not necessar 

or appropriate where the investment vehicle in question meets the requirements of Section 

3(c)(1)(A) for being treated as a single beneficial owner and is operated strictly as a common 

investment vehicle. For example, in Handy Place Investment Parnership (pub. avaiL. July 19, 

1989), the Staf agreed that a parnership organzed to allow members of a law firm to pool their 

investment resources should not be treated as a "look through" entity under Section 3(c)(1) where 

the single-owner . 
 attribution test of Section 3( c )(1 )(A) was satisfied, where each participant's 

contribution with respect to each underlying investment of the parnership was simply 

I:\PUBLIC\GCH\O 173734.04
 
WILSON SONSINI GOODRICH & ROSATI 

Offce of Chief Counsel
 

Division of Investment Management
 

Securities and Exchange Commssion
 

Februar 26, 1996
 

Page 7
 

proportionate to the paricipant's relative capital commtment to the partnership, where 

investment decisions were made by the managing parners of the partnership, and where the 

partnership's investment in anyone 3(c)(1) Entity did not constitute more than forty percent 

the commtted capital of 
 the parnership. See also Merril Lynch & Co., Inc. (pub. avaiL. 

Apr. 23, 1992); Knghtsbridge Integrated Fund (pub. avaiL. May 20, 1988); and CMS 

Communications Fund, L.P. (pub. avaiL. Apr. 17, 1987). 

(40%) of 


Depending on the amount of capital contributed to a paricular Employee Fund and the 

size and number of investment opportunities that become available to that Employee Fund, such 

Employee Fund may invest in several, or as few as one, 3(c)(1) Entities. Therefore, we canot 

assure the Staf 
 that each Employee Fund wil limit its investment in any 3(c)(1) Entity to forty 

percent (40%) of the Employee Fund's total capital commtments, as was the case in certain of 

the no-action letters cited above. However, the forty percent (40%) limit, which has evolved out 

of the fact patterns of prior no-action requests, is simply one factor that the Staf has used to 

determne whether an investment vehicle has been formed solely for the purpose of investing in a 

particular 3(c)(1) Entity. It is not a statutory requirement, nor should it be determnative of 

whether a "look through" of an investment vehicle is required where there are other strong indicia 

that the investment vehicle is not being used to facilitate individual investment decisions. The fact 

that a bona fide common investment vehicle for employees was non-diversified did not prevent the 

Staffrom granting no-action relief 
 in McKinsey and Company Incorporated (pub. avaiL. Feb. 23, 

1989). Like Cornsh & Carey, McKinsey created a series of investment parnerships designed to
 

allow key, accredited employees to pool their resources to gain access to 
 investments in 3(c)(1) 

Entities which usually would not be offered to them as individual investors and which might be 

beyond their individual means. Although the McKinsey-no-action request disclosed that one or 

more of the McKinsey partnerships might invest exclusively in one 3(c)(1) Entity, the Staf 
 agreed 

that each such parnership should be treated as a single beneficial owner for purposes of Section 

3(c)(1) ofthe Act. We note that the McKisey parnerships, which had approximately 300 

eligible paricipants, were the subject of an exemptive order as employees' securities companes, 

while the Cornish & Carey Employee Funds, which are expected to have 100 or fewer 

participants, wil rely on the exemption from registration under the Act provided by Section 

3(c)(1). So long as a fund is not designed to circumvent the Act's provisions, whether the fund is
 

deemed to be a single beneficial owner of the securities of an entity in which it invests is a 

separate issue from the method by which the fund itself is exempt from registration under the Act. 

Therefore, based on the maner in which the Cornish & Carey Employee Funds wil be operated 

as collective investment vehicles, and notwithstanding the distinction between the McKinsey and 

Cornish & Carey methods of avoiding registration under the Act, we believe that the Cornish & 

Carey Employee Funds, like the McKinsey partnerships, should be treated as single beneficial 

I:\PUBLIaGCH\O 173 734.0
 
WILSON SONSINI GOODRICH & ROSATI 

Offce of Chief Counsel 

Division of Investment Management 

Securities and Exchange Commssion 

Februar 26, 1996
 

Page 8
 

owners of the securities of3(c)(1) Entities in which they invest.
 

CONCLUSION 

Because each Employee Fund wil be operated as a collective investment vehicle for 

eligible Cornsh & Carey employees as described above, and wil not be operated to facilitate 

individual investment decisions, we believe that the treatment of an Employee Fund as a single 

beneficial owner of the securities of any 3 ( c)( i) Entity in which it acquires less than ten percent 

(10%) of 
 the outstanding voting securities is not only alowed by the language of Section

3(c)(1)(A) of 
 the Act, but is also consistent with the no-action positions previously taken by the 

Staf Many of 
 the 3(c)(1) Entities in which the Employee Funds may be invited to invest wil be 

unwiling to admit an Employee Fund as an investor unless the Employee Fund can assure the 

3(c)(1) Entity that the Employee Fund is appropri~tely deemed to be a single beneficial owner of 

the 3 ( c)(1) Entity's securities for purposes of Section 3 ( c)(1) of the Act. We therefore 

respectfully request that the Staf concur in our view that, under the circumstances described in 

this letter, an Employee Fund wil be deemed to be the beneficial owner of the securities of any 

3(c)(1) Entity in which it acquires less than ten percent (10%) of 
 the outstanding voting securities, 

and that a "look through" to the Employee Fund's paricipants will not be required. 

Than you for your consideration of this request. Please direct any comments or 

questions on this matter to Lar Sonsini, Gai Husick or Brett Byers of 
 this offce at (415) 493­

9300. 

Sincerely, 

WISON SONSIN GOODRICH & ROSATI 

Professional Corporation 

I:\PUBLIC\GCH\O 173734.04
 
WILSON SONSINI GOODRICH & ROSATI
 

PROFESSIONAL CORPORATION 

650 PAGE MILL ROAD 

PALO ALTO. CALIFORNIA 94304-1050 JOHN ARNOT WILSON 

TELEPHONE 415-493-9300 FACSIMILE 415-493-6811 OF COUNSEL 

February 2 fl 1996 

Offce of Chief Counsel 

Division of Investment Management 

U.S. Securities and Exchange Commssion 

450 Fifth Street, N.W. 

Washington, D.C. 20549 

Re: Cornish & Carey Commercial, Inc.
 

Investment Company Act or 1940. as amended - Section 3(c)(1) 

Ladies and Gentlemen: 

Enclosed please fid one original and seven copies of a no-action request on behalf of 

Cornsh & Carey Commercial, Inc. If 
 you have any questions concernng this matter, please 

contact the undersigned, Lar Sonsin or Brett Byers of 
 this offce at (415) 493-9300. In the 

event you are unable to grant a positive response to this request, we would be most appreciative if 

you would contact one of 
 us to discuss such matter before issuing your response. 

Please date stamp and return the enclosed copy of this cover letter in the self-addressed 

stamped envelope provided. 

Sincerely, 

WISON SONSIN GOODRICH & ROSATI 

Professional Corporation 

~~ Ga~usick 

:I:\PUBLIaGCO 174358.02 
..'.f. .
 

JUN 2./ 1996
 

....p ..	 Our Ref No. 96-105-CC 

Cornish & Carey

RESPONSE OF THE OFFICE OF CHIEF COUNSEL	 Commercial, Inc.

DIVISION OF INVESTMNT MAAGEMENT	 File No. 132-3
 

Your letter of February 26, 1996 requests the staff's
 

concurrence that each employee investment limited partnership or
 

limited liability company ("Fund") established by Cornish & Carey
 

Commercial, Inc. ("Cornish & Careyll) may be considered a single
 

beneficial owner of the securities of an issuer relying on
 

Section 3(c) (1) (1I3(c) (1) Entity") of the Investment Company Act
 

of 1940 ("the Act"), under the circumstances described below.
 

You state that Cornish & Carey, a commercial real estate
 

broker, periodically is presented with opportunities to invest in
 3 (c) (1) Entities, primarily venture capital funds operated in the 

Northern California area. You state that Cornish & Carey wants
 

to share these investment opportunities with management employees


as a way to encourage and reward long- term employment. To that 

end, Cornish & Carey proposes to establish a Fund each year for


the participation of its then-eligible employees. 
 1 The
 

Investment Committee of Cornish & Carey's Board of Directors will
 

make all investment decisions for each Fund. Employee
 

participants will have no discretion over the selection or
 

disposition of investments by the Funds. Each participant in a
 

Fund will share, pro rata, in proportion to the participant's
 

capital contribution', in all investments made by the Fund. You
 

state that each Fund will limit its investment to less than 10%
 of the outstanding voting securities of each 3 (c) (1) Entity. 

Depending on the level of capitalization, a Fund may invest in


one or more 3(c) (1) Entities.2 

Section 3 (c) (1) excludes from the definition of investment 

company any issuer whose outstanding securities (other than
 

short-term paper) are beneficially owned by not more than 100
 

persons and which is not making and does not presently propose to
 make a public offering of securities. Under Section 3 (c) (1) (A) , 

ownership by a compan~ is deemed to be beneficial ownership by
 

one person, unless the company owns 10% or more of the
 

outstanding voting securities of the issuer, and the value of the
 

company's investments in all 3 (c) (1) Entities exceeds 10% of its
 

1/ You state that all offers and sales of interests in each
 

Fund will be made pursuant to Rule 596 of Regulation D or
 

otherwise pursuant to Section 4 (2) of the Securities Act of 1933.
 

2/ It is anticipated that these Funds also will rely on Section


3(c)(1). 

3/ The term "company" includes, in pertinent part, a
 

partnership and any organized group of persons whether
 incorporated or not. See Section 2 (a) (8) of the Act. 
- 2 ­

assets (the "attribution rule") . 4
 

Despite compliance with the express provisions of Section
 

3 (c) (1), however, Section 48 (a) of the Act gives the Commission
 

the authority to "look through" a transaction or a multi-tiered
 

structure if it is a sham or conduit formed or operated for no
 

purpose other than circumventing the requirements of' 
 Section 

3(c) (1) or any other provision of the Act.s For example, for
 

purposes of counting beneficial owners, the staff will require
 

"integration" of ostensibly separate 3 (c) (1) Entities if it
 

appears that the separate offerings do not present investors with
 

materially different investment opportunities. 6 Similarly, when
 

an entity is managed as a device for facilitating individual
 

investment decisions instead of as a collective investment
 

vehicle, the staff will "look through" the entity and attribute
 

ownership directly to the underlying securityholders. 7
 

Al though you state that the Funds will be collective
 

investment vehicles formed for the purpose of rewarding long- term
 

employees and not for the purpose of circumventing any provision
 

of the Act, you seek the views of the staff because of a
 

representation recited in a numer of the prior staff no-action
 

letters addressing t~e application of the attribution rule to a
 

company investing in a 3 (c) (i) Entity. In several of these
 

4/ Specifically, the second 10% test of Section 3 (c) (1) (A)
 

provides that a company shall be considered a single beneficial
 

owner unless more than 10 percent of its assets are invested in
 

issuers that are, or, but for Section 3 (c) (1) (A) would be,


excluded under Section 3 (c) (1) . 

5/ The staff has taken the position that Section 3.(c) (1) must
 

be read in conjunction with Section 48 (a). See generally Tyler
 

Capital Fund, L.P./South Market Capital ("Tyler Capital") (pub.
 

avail. Sept. 28, 1987); see also Railbox Company (pub. avail.
 

Oct. 29, 1984). Section 48 (a) generally makes it unlawful for
 

any person to do indirectly through another person or entity what
 

would be unlawful for the person to do directly.
 

6/ See,~, Shoreline Fund, L.P. (pub. avail. Apr. 11, 1994) ¡
 

Monument Capital Management, Inc. (pub. avail. July 12, 1990) ¡
 

PBT Covered Option Fund (pub. avail. Feb. 17, 1979); see also In
 

the Matter of Kenneth von Kohorn & VK Partnership Management,
 

Inc., Investment Company Act Release No. 20907 (Admin. Proc. File
 

No. 3-8624) (Feb. 22, 1995).
 

7/ See PanAgora Group Trust (pub. avail. Apr. 29, 1994); WR
 

Investment Partners Diversified Strategies Fund, L.P. (Apr. 15,
 

1992) ¡ Tyler Capital, supra n.2¡ Six Pack (pub. avail. Nov. 13,


1989) . 
- 3 ­

letters, the requesting party represented, and in some cases the
 

staff conditioned relief on the representation, that the company
 

would not invest more than 40% of its committed capital in any


one 3 (c) (1) Entity. 8 You are unable to make this representation 

because the Funds may not have sufficient capital to diversify
 

their investments to this extent.
 

You maintain that this 40% of capital limit is not a
 

statutory requirement and should not be determinative of when to
 

"look through" a collective investment vehicle to which the
 

attribution rules of Section 3 (c) (1) (A) otherwise would not
 

apply, and that is neither structured nor operated for the
 

purpose of circumventing the 100-securityholder limit of Section
 

3 (c) (1). The staff agrees. When an issuer can make the 40%
 

representation, the staff generally has been able to conclude
 

with a degree of certainty that the structure was not created to


evade the Act and the staff thus has granted no-action relief. 9 

Because the 40% test is not a statutory requirement, however,
 

failure to comply with it would not automatically place a private
 

investment company in violation of the Act. Rather, whether a


company that meets the express conditions of Section 3 (c) (1) will 

be considered to have violated Section 48 (a) will depend on an
 

analysis of all of the surrounding facts and circumstances.
 

While the percentage of an issuer's assets invested in another
 

3 (c) (1) company is relevant to. this analysis, exceeding a
 

specified percentage level, by itself, is not determinative.10
 

We concur, therefore, that each Fund may be considered a
 single beneficial owner of a 3 (c) (1) Entity, provided that: 1) no Fund will invest in any 3 (c) (1) Entity to the extent that the attribution provisions of Section 3 (c) (1) (A) are triggered; and 

8/ See Handy Place Investment Partnership (pub. avail. July
 1989); see also Merrill Lynch & Co., Inc. (pub. avail. Apr. 23,19 , 

1992); Knightsbridge Integrated Fund (pub. avail. May 20, 1988);
 

CM Communications Fund (pub. avail. Apr. 17, 1987).
 

9/ The staff continues to adhere to the positions taken in the
 

prior no-action letters, and issuers may continue to rely on


them. 

10/ Compare Six Pack, supra n. 5; WR Investment Partners, supra
 

n.3 (staff looked through collective entities even though the
 

entities represented that they would abide by 40% capital limit,
 

when the collective entities facilitated individual investment
 

decisions); with MCKinsey & Co. (pub. 'avail. Feb. 23, 1989)
 

(staff granted no-action relief assuring that it would consider a
 

limited partnership established for employees as one beneficial


owner of 3 (c) (1) Entities even though the limited partnership did 

not represent that it would abide by the 40% capital limit).
 
- 4 ­

2) no Fund or 3 (c) (1) Entity will be structured or operated for
 

the purpose of circumventing the provisions of the Act.
 

£L rr 

Eileen M. Smiley
 

Senior Counsel