Opportunity Zone Magazine Volume 1, Issue 3 | Page 82

82 OPPORTUNITY ZONE MAGAZINE | VOLUME 1 • ISSUE 3 THE SECURITIES LAWS LANDSCAPE FOR OZ FUNDS AND THEIR MANAGERS and companies owned exclusively by those with $5 million in investments and/or other “qualified purchasers” (“§3(c) (7)” funds). Therefore, if a QOF is structured to be a private fund, ideally by design but often by lucky happenstance, it usually need not be overly concerned with the registration requirements of the Company Act. But any QOF nearing the 100 beneficial owner mark, and has any owners who are not “qualified purchasers” as defined in the Act, needs to pay careful attention to whether or not the fund invests in securities and to its obligations under the Company Act. Funds may impose internal restrictions on transfer to help comply with these exceptions. Advisers Act: Keeping with the theme of the other securities laws, the Advisers Act requires all investment advisers to register with the SEC, unless exempt or prohibited because of the adviser’s home state regulation. An “investment adviser” includes “any person who, for compensation, engages in the business of advising others . . . as to the value of securities or as to the advisability of investing in, purchasing, or selling securities . . ..” 3 Most states have similar definitions of investment adviser and often requires state registration without any exemption for limited assets under management. Investment advisers are subject to strict limitations on charging fees and performance compensation to the accounts of persons (in this context, the investors) who are not “qualified clients,” a threshold far higher than the traditional “accredited investor” bar. Reduced to its main elements, an investment adviser is one who for compensation, engages in the business of advising others regarding securities. The compensation element is generally satisfied by the receipt of any economic benefit related to the services provided. 4 For example, a management fee, administrative services fee, or carried interest paid to a QOF manager are each likely “compensation.” A person is “in the business” if her activities occur on such a basis that it constitutes a business activity occurring with some regularity.” Unless the manager is neglecting her responsibilities to manage the affairs and investments of the QOF, she probably meets the business element as well. Again, the analysis often will turn on whether or not the QOF invests in “securities.” Among others, QOFs that seek to benefit from the working capital safe harbor of the OZ Incentive probably have a dual-tier structure in which the QOF owns OZ Stock or OZ Partnership Interests, among other potential assets. If any of the QOF’s assets consist of securities (such as OZ Stock or passive OZ Partnership Interests), the third element is likely satisfied. Accordingly, a QOF manager is probably an investment adviser if the manager receives any fees, carried interest, or other compensation for its services and the QOF owns securities. SO WHAT IF THE QOF MANAGER IS AN INVESTMENT ADVISER? Advisers regulatory treatment under the Advisers Act depends, in part, on the extent of its RAUM, including Congratulations to Kenneth Weissenberg National Co-Leader, Real Estate Services Group for being recognized as one of the Top Tax Attorneys in the Opportunity Zone Industry Eisneramper.com/QOF the gross assets of any private fund for which it provides it supervises or manages, including uncalled commitments. 5 In this context, not just one QOF, but all that she manages count toward the RAUM calculation. Small advisers with less than $25 million RAUM generally look to the requirements of the regulatory authority in their home states. Mid-sized advisers with RAUM of $25 -$110 million must register with the SEC (or be eligible for an exemption) unless required to be registered as an investment adviser in its home state (e.g., because it qualifies for a state exemption). Advisors with RAUM exceeding $110 million must register with the SEC regardless of any state-registration, unless the advisor advises solely private funds (such as 3(c)(1) and 3(c)(7) funds). Private fund advisers, however, must register with the SEC upon having $150 million RAUM. Importantly, despite the above thresholds, advisors with at least $25 million in RAUM, and not state-registered are “exempt reporting advisers” and must file reports with the SEC under Rule 204-4. 6 In addition to the registration requirements under the Advisers Act (and corollary state laws), investment advisers must comply with the Advisers Act’s compensation rules, disclosure obligations, record keeping, and funds custody requirements. Even more, to become registered as an investment adviser, an adviser or investment adviser representative may be required to pass the Series 65 exam. All of which is important to know before it’s too late. If a QOF manager or potential manager is concerned about OPPORTUNITYZONE.COM