When a hedge fund begins to approach the limitation on the number of investors (e.g. 100 persons), the manager cannot avoid the limitation by forming another hedge fund identical to the prior fund.
To prevent managers from creating identical hedge funds each time they approach the 100-person limitation, the SEC applies the “integration” doctrine. In the event that two or more hedge funds, which are managed by the same sponsor, are substantially similar, the SEC will “integrate” such funds so that they will be deemed to constitute one issuer. If the SEC integrates two or more hedge funds, it combines the number of each fund’s investors to determine whether the funds, in the aggregate, are owned by more than 100 persons.
The staff of the SEC will not integrate two hedge funds if one was formed pursuant to an exemption under Section 3(c)(1) of the Investment Company Act of 1940 and the other fund was formed under Section 3(c)(7) of the Act. Additionally, the SEC staff normally does not integrate domestic hedge funds and their offshore counterparts.