The adoption of the Tax Cuts and Jobs Act[1] in December 2017 established the “opportunity zone” program to provide tax incentives for long-term investing in designated economically distressed communities. The program allows taxpayers to defer and reduce taxes on capital gains by reinvesting gains in “qualified opportunity funds” that are required to have at least 90 percent of their assets in designated low-income zones.
The staffs of the Securities and Exchange Commission (SEC) and the North American Securities Administrators Association (NASAA) are providing this summary of the opportunity zone program that briefly discusses the program and describes the compliance implications for opportunity funds under federal and state securities laws.[2]
Specifically, this summary discusses:
1. What are qualified opportunity zones (QOZs);
2. When interests in qualified opportunity funds (QOFs) would be “securities” under federal and state securities laws;
3. Registration of securities offerings with the SEC and/or state securities regulators and potential exemptions from securities registration for investments in a QOF (particularly through Rule 506 of federal Regulation D);
4. Broker-dealer registration requirements for persons selling interests in QOFs;
5. Registration and exemptions from registration for QOFs that are “investment companies” and considerations for advisers to a QOF.
This summary is intended to help participants in the opportunity zone program understand securities laws considerations. It is not intended to be a comprehensive description of all federal and state securities laws and rules that might apply to transactions conducted in connection with the opportunity zone program. Whether certain activities require registration of the offering of securities, broker-dealer registration, investment company registration, or investment adviser registration is a fact-specific analysis that must be conducted on a case-by-case basis. You may want to consult with an attorney with experience in federal and state securities laws when considering the matters discussed in this summary.
Federal and State Securities Regulators Welcome Your Questions
For questions about exemptions from registration under the federal securities laws, please contact the Office of Small Business Policy in the SEC’s Division of Corporation Finance. You may submit a request for interpretive advice using their online form.
For questions about state securities laws, please contact the state securities regulator in the state in which you intend to offer or sell securities. You may also obtain useful information on state securities laws registration requirements and exemptions to registration requirements by visiting the website of the North American Securities Administrators Association (NASAA) at www.nasaa.org.
[1] Pub. L. No. 115-97, 131 Stat. 2054 (2017).
[2] This summary represents the views of the SEC’s and NASAA’s staff and are not rules, regulations or statements of the SEC, NASAA or of any state securities regulator. The SEC has neither approved nor disapproved its content. Further, this summary does not alter or amend applicable law and has no legal force or effect. This summary creates no new or additional obligations for any person. Special thanks to the state and federal regulators who collaborated on this guidance, including Sebastian Arduengo (VT), Faith Anderson (WA), Lisa Hopkins (WV), Andrea Seidt (OH), Leslie Van Buskirk (WI) and the staff of the Office of Small Business Policy in the SEC’s Division of Corporation Finance.
[3] See 26 I.R.C. § 45D(e); IRS Rev. Proc. 2018-16. A current list of QOZs is maintained at https://www.cdfifund.gov/Documents/Designated%20QOZs.12.14.18.xlsx.
[4] See Internal Revenue Service, Opportunity Zones Frequently Asked Questions, at https://www.irs.gov/newsroom/opportunity-zones-frequently-asked-questions;.see also Economic Innovation Group, Unlocking Private Capital to Facilitate Economic Growth in Distressed Areas, April 2015, at https://eig.org/wp-content/uploads/2015/04/Unlocking-Private-Capital-to-Facilitate-Growth.pdf.
[5] Id. See also Press Release, Treasury, IRS Announce First Round Of Opportunity Zones Designations For 18 States, U.S. Department of the Treasury (April 9, 2018), available at https://home.treasury.gov/news/press-releases/sm0341, and Press Release, Treasury Issues Second Set of Highly Anticipated Opportunity Zones Guidance, U.S. Department of the Treasury (April 17, 2019), available at https://home.treasury.gov/news/press-releases/sm660.
[6] Joint Committee on Taxation, Estimated Revenue Effects of the “Tax Cuts and Jobs Act,” As Passed By the Senate On December 2, 2017, JCX-63-17, December 6, 2017, p. 6, at https://www.jct.gov/publications.html?func=startdown&id=5047.
[7] Whether seeking to register your QOF offering with the SEC or state securities regulators or seeking to qualify for an exemption under federal or state securities laws, you should consult experienced securities counsel before initiating any offering.
[8] The term “accredited investor” is defined in Rule 501 of Regulation D. For a natural person, it includes anyone who earned income that exceeded $200,000 (or $300,000 together with a spouse) in each of the prior two years, and reasonably expects the same for the current year, or has a net worth over $1 million, either alone or together with a spouse (excluding the value of the person’s primary residence).
[9] Sophisticated investors are investors who have sufficient knowledge and experience in financial and business matters to make them capable of evaluating the merits and risks of the prospective investment. See Rule 506(b)(2)(ii).
[10] See Section 3(a)(4)(A) of the Exchange Act .
[11] The Exchange Act separately defines a “dealer” as a person that is engaged in the business of buying or selling a security for its own account. See Exchange Act Section 3(a)(5). Businesses that act both as brokers and as dealers are commonly termed “broker-dealers.”
[12] See, e.g., Uniform Securities Act of 2002, §§ 401 and 402.
[13] See Exchange Act Rule 3a4-1(a)(4)(ii). Rule 3a4-1 also includes exceptions, subject to certain conditions, for associated persons of an issuer who offer and sell securities to various financial institutions and intermediaries, such as registered broker-dealers (Rule 3a4-1(a)(4)(i)), or who conduct only “passive” sales activities, such as preparing written sales materials (Rule 3a4-1(a)(4)(iii)).
[14] Private investment companies (also commonly referred to as “private funds”) may engage in a general solicitation pursuant to Rule 506(c) of Regulation D while continuing to rely on the exclusions available in Sections 3(c)(1) and 3(c)(7), notwithstanding the language on public offerings set forth in those exclusions. See Eliminating the Prohibition Against General Solicitation and General Advertising in Rule 506 and Rule 144A Offerings, Release No. 33-9415 (July 10, 2013) (“[P]rivate funds generally rely on one of two exclusions from the definition of ‘investment company’ under the Investment Company Act – Section 3(c)(1) and Section 3(c)(7) – which enables them to be excluded from substantially all of the regulatory provisions of that Act. . . . As we stated in the Proposing Release and reaffirm here, the effect of Section 201(b) is to permit private funds to engage in general solicitation in compliance with new Rule 506(c) without losing either of the exclusions under the Investment Company Act.” (footnotes omitted)).
[15] See, e.g., Real Estate Investment Trusts, Investment Company Act Release No. 3140 (Nov. 18, 1960); Companies Engaged in the Business of Acquiring Mortgages and Mortgage-Related Instruments, Investment Company Act Release No. 29778 (Aug, 11, 2011). Other exclusions or exemptions for such issuers may be available. For example, depending on the facts and circumstances, an issuer that holds securities issued by a QOF may not meet the definition of “investment company” under Section 3(a)(1) of the Investment Company Act, may be excluded under Rule 3a-1 thereunder, or may qualify for the exclusion under Section 3(c)(6) of the Investment Company Act.
[16] See Advisers Act Section 202(a)(11).
[17] See Commission Interpretation Regarding the Solely Incidental Prong of the Broker-Dealer Exclusion from the Definition of Investment Adviser, Investment Adviser Act Release No. 5249 (June 5, 2019).