Opportunity Zone Magazine Volume 1, Issue 3 | Page 56

56 OPPORTUNITY ZONE MAGAZINE | VOLUME 1 • ISSUE 3 But there is a way to make sure this community resource doesn’t go untapped. QOFs can bring in main-street investors into OZ investments by “mixing” funds. Specially, it is the union of all accredited investors inside the QOF, or nonaccredited investors outside the QOF, that can be used to finance an OZ business or property. Of course the investors outside the QOF will not receive the capital gains tax benefits, but they may still investor in a OZ business or property. First, the investors in the QOF itself can use a mixture of qualifying investors (i.e. funds from qualified capital gains realizations) and non-qualifying investors (i.e. funds that are not from capital gains realizations.) These are termed “mixed-use” funds in Section 1400Z-2 and are permissible if the two sources of funds are tracked and reported separately. While this source of QOF funding is still limited to accredited investors only, QOFs are not bound only to investors with large, accumulated capital gains. Taxable accounts and, importantly, accounts that are already taxed advantaged (e.g. IRA accounts) are also valuable funding sources for QOFs investors. 16 Neither the qualified capital gains investor, nor the already tax-advantaged IRA investor, pays any capital gains tax on their QOF investment. 17 Accredited investors in IRAs are far more numerous and more main street than the accredited investors with very large unrealized capital gains. Of course, IRA investors and taxable account investors must evaluate the risks and other characteristics of the QOF, but they can certainly participate in a mixed-use QOF if they are comfortable with the investment and look to contribute to the economic impact in OZ communities. Secondly, the SEC has noted that a different offering exemption enables a mixture of funds to finance an OZ business or property: “a pooled investment vehicle (a “fund”) could rely on Rule 506(c) to offer and sell securities of the fund to accredited investors and use the proceeds to finance a portion of a [OZ] project, while a Regulation Crowdfunding offering to non-accredited investors is made at the same time to fund the remainder of the [OZ] project.” 18 Under crowdfunding, non-accredited investors outside the QOF can participate alongside the accredited investors inside the QOF. Crowdfunding is a practical, widely accepted, and innovative way for individuals and businesses to access capital through small investments made by multiple individuals. The crowdfunding strategy utilizes technology, social media, and targeted sites to collect data, elevate experience and involvement, and facilitate funding. There are a multitude of benefits outside of additional capital that stem from crowdfunding, of which include expanded audience, community engagement, and a shared interest for success. There are several channels that a QOF can assist the crowdfunding portion of an OZ investment that is outside the QOF. The engagement of local agents on deal sourcing and economic impact objectives is a common need for both the QOF and the crowdfund. Similarly, the ongoing tracking and shareholder voting on the OZ investment is shared across both OPPORTUNITYZONE.COM