What are Parallel Funds?

"Parallel funds" refer to fund entities that are set up to invest side-by-side based on the same fund thesis. 

Parallel funds are usually set up in order to comply with limits on the number of investors a fund can accept under Section 3(c)(1) of the Investment Company Act of 1940.


Investor Structuring in Parallel Funds

Parallel funds are typically set up as two separate limited partnerships (or two separate series of a master series limited partnership) that invest pro-rata based on their capital commitments. Per the terms of the partnership agreements, the two parallel funds are contractually obligated to have substantially similar terms (including economic terms). 

One limited partnership usually relies on the 3(c)(1) exemption of the Investment Company Act, and the other limited partnership usually relies on the 3(c)(7) exemption of the Investment Company Act (but this partnership limits participation to “Qualified Purchasers”).

An investor who is a Qualified Purchaser will generally invest in a "3(c)(7)" limited partnership. A 3(c)(7) limited partnership can accept up to 1,999 investors, but every investor must be a Qualified Purchaser. 

Accredited Investors who are not qualified purchasers generally invest in the "3(c)(1)" limited partnership. A 3(c)(1) fund can generally accept 99 investors or up to 249 if it satisfies the requirements of a qualifying venture capital fund.


Nominee Structure

The parallel fund structure is intended to ensure that investors receive the same economic exposure no matter which limited partnership they invest in.

On the AngelList Platform, parallel funds are set up using a “Nominee Structure.” This means that only one of the parallel funds (the “Main Fund”) will wire capital to the portfolio company, and the Main Fund will hold all of the assets belonging to both the Main Fund and the other parallel fund (the “Parallel Fund”). However, the total assets and proceeds will be split between the two funds based on the committed capital to each fund. This means that the Main Fund is acting as a nominee for the benefit of the Parallel Fund; the Main Fund is simply holding the Parallel Fund’s assets, but it will have no contractual claim or beneficial ownership in the Parallel Fund assets. This structure comes with the following benefits:

  • Only one wire to the portfolio company;
  • Only one fund name on the portfolio company’s cap table; and
  • No need to rebalance interests in portfolio company investments as between the parallel funds if the ratio of investor capital in each fund changes, which would require working with the portfolio company to transfer securities as between the two funds.

There is no impact on the economics or control rights based on whether an investor invests through the Main Fund or the Parallel Fund. 


Example | Parallel Funds on the Nominee Structure

Fund Manager raises $10M total from 275 LP's.

  • 75 LP's who account for $2.5M of the capital are accredited investors but are not Qualified Purchasers
  • 200 LP's account for $7.5M of the capital and are Qualified Purchasers

In order to accommodate all 275 investors:

  • The 75 accredited, Non-QP LP's are placed in FM Fund I, LP (a 3c1 limited partnership); let’s call this the “Main Fund.”
  • The 200 Qualified Purchaser LP's are placed in FM Fund I QP, LP (a 3c7 limited partnership); let’s call this the “Parallel Fund.” 

The Main Fund will then make a single wire on behalf of both funds when completing an investment. The outcome is as follows:

  • For any distributable proceeds:
    • 25% of the total proceeds will be distributed to the Main Fund.
    • The remaining 75% of the proceeds will be distributed to the Parallel Fund. The Parallel Fund is the beneficial owner of 75% of the assets (and the proceeds distributable from such assets), and the Main Fund was holding those assets as a nominee for the benefit of the Parallel Fund.
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