RANDALL & ASSOCIATES - SECURITIES & INVESTMENT LAW

A. Bradley Randall is a securities & investment lawyer. He creates funds, takes companies public, protects fundraisers and litigates against fraud.

The Qualified Opportunity Zone (QOZ) program is a new investment opportunity that promotes new investment into distressed communities and allows investors to defer tax on capital gains. Almost 9,000 census tracts have been designated as QOZ’s, including areas ripe with investment opportunities and almost the entire island of Puerto Rico. 

QUALIFIED OPPORTUNITY ZONE BASICS

There is a ton of information already written on how QOZ investments work and the many nuances are outside the scope of this article. However, the basic idea of the QOZ is found in the treasury regulations published by the United States Treasury and the IRS. There you can find the exact rules on how to form a Qualified Opportunity Zone Fund (QOZF) and how that fund can invest in anything from land, real estate and other businesses or a QOZB. 

(By the way, our firm has set up more than a dozen of these types of investments and funds so if that interests you call us and we’ll guide you through the process)

The real benefit though is that an investment into a QOZ or QOZF can give investors incredible tax savings. Essentially, investors who hold their investment for five years or more will receive a step-up in their tax basis by 10% and investors who for seven years or more will receive a step-up by 15% instead. After 10 years, capital gains tax on any NEW net gain in the value of the QOZ investment will be forgiven. All this means that if an investor holds a QOZ investment for long enough, the initial capital gain invested (which would be taxed) could come out tax free, including the profit realized over the 10 years. 

DON’T SCREW IT UP — The SEC Is Watching

As amazing as this type of investment or fund structure can be, there is a huge potential for missteps that could cost investors their entire tax benefit. This is where securities law and the SEC comes in.

Under the QOZ program, investors can defer capital gains taxes on some or all of the proceeds of a sale of any type of asset to the extent that they invest such proceeds into a Qualified Opportunity Zone Fund of QOF. Those investments are made in exchange for ownership or equity in the fund, which in most cases are SECURITIES. This means that offerings or advertisements to invest in these types of funds must either be registered with the SEC or exempt from registration. 

Most QOF’s will offer their investments under an exemption and won’t go through the full registration process with the SEC. These exemptions are likley to be found under Rule 506 of Regulation D for “private placements.” These exemptions, and there are several under Rule 506, may require that the fund not ‘generally solicit” or that they may only sell the investment to ‘accredited investors”. These rules also determine what types of written disclosures, risk factors and other disclaimers should appear on the Private Placement Memorandums, pitch decks, or subscription agreements. 

The applicable laws that govern these types of investments are Regulation D, Investment Company Act of 1940, Advisers Act of 1940, Securities Act of 1933 and 1934. It’s critical that whatever structure the potential investment takes, the Securities Laws governing these types of structures are carefully considered. 

Visit me at raaslaw.com or email me at brad@raaslaw.com for more information on Qualified Opportunity Zones, fundraising or the SEC.

RANDALL & ASSOCTIATES 480 330-5003