Opportunity Zone Magazine Volume 1, Issue 3 | Page 81

THE SECURITIES LAWS LANDSCAPE FOR OZ FUNDS AND THEIR MANAGERS 81 in a common enterprise; (3) with the expectation of profits; (4) derived primarily from the efforts of people other than the investor. 2 That last element is usually where the action is – is the interest owner passive or meaningfully active in the underlying business? Since a limited partner of a limited partnership is, by definition, not active in its management or operations, a limited partnership interest is always a security. Similarly, the interest of a limited liability company non-managing member is also generally a security. In the OZ context, the QOF interest offered to a passive investor is a security. In turn, the interest of the QOF in any lower-tier entity or portfolio assets is a security if (a) it is stock (e.g., OZ Stock), or (b) the QOF itself is not a substantially active partner. For example, a money-only joint venture partner’s interest in the joint venture entity is probably a security. THE SECURITIES FRAMEWORK The Securities Act: The Securities Act generally requires that all offers of a security be registered with the SEC, unless an exemption applies. Among other exemptions, Regulation D under the Securities Act permits an issuer (e.g., a QOF) to offer and sell a security (e.g., an interest in a QOF) to any number of “accredited investors” without registration, subject to certain solicitation limitations and notice filings. There is a laundry list of who qualifies as an accredited investor. It includes a natural person who has a net worth exceeding $1 million, exclusive of the value of his or her home (calculated with a little nuance) and entities owned exclusively by accredited investors. Most QOF offerings are structured to comply with this exemption. Notably, the Securities Act also imposes prohibitions on the making of misstatements of material facts or the making of material omissions necessary to make any statements of fact that are made not misleading. These restrictions apply regardless of whether or not the offering is exempt from registration (e.g., offered in compliance with Regulation D). Most importantly for fund sponsors, any person engaged in the offer or sale of a security is jointly and severally liable for those material misstatements or omissions. Thus, it is crucial to prepare appropriate offering materials and use care in verbal statements during that process. Company Act: Like the Securities Act, the Company Act requires all “investment companies” to register with the SEC, absent an exemption or exclusion. The definition of “investment company” includes any company that “is or holds itself out as being engaged primarily, or proposes to engage primarily, in the business of investing . . . in securities.” The Company Act excludes “private funds” from the definition of “investment company.” Private funds are companies with fewer than 100 beneficial owners (so-called “§3(c)(1)” funds, after the exemption section of the Company Act) Tailored. Client-driven. Solution-based. Navigating deals at the speed of opportunity requires depth and experience. Leveraging a coordinated, multidisciplinary approach, we help sponsors, investors, developers, and businesses bisect the details of sponsoring and investing in Qualified Opportunity Funds and take advantage of the unique tax benefits of the Qualified Opportunity Zone Program. ©2020 Seyfarth Shaw LLP #20-7406 R1 www.seyfarth.com OPPORTUNITYZONE.COM