Monday, May 13, 2019
Today, I have been attending and presenting at the Midwest Symposium on Social Entrepreneurship in Kansas City, Missouri. This is the Seventh Annual installment of this event, which engages entrepreneurs, lawyers, government actors, and others in education, networking, and discussions around various issues (which differ from year to year) relating to social enterprise structure, governance, finance, and operations. I love attending this symposium. The people are socially and intellectually stimulating. I appreciate Tony Luppino inviting me to participate.
There is much I could write about the programs today. However, I will focus in one one small thing for now: Opportunity Zones and more particularly the funds that invest in them. A quick description of Opportunity Zones and a cautionary message on related investment funds follow.
The U.S. Internal Revenue Service has defined Opportunity Zones as follows in a Q&A posted on its website:
An Opportunity Zone is an economically-distressed community where new investments, under certain conditions, may be eligible for preferential tax treatment. Localities qualify as Opportunity Zones if they have been nominated for that designation by the state and that nomination has been certified by the Secretary of the U.S. Treasury via his delegation of authority to the Internal Revenue Service.
The main point is to encourage investment in businesses or real estate in distressed areas of the United States through federal tax incentives.
Unsurprisingly, investment funds have been established to make these tax-advantaged financings. From that state of affairs stems my public service announcement. As I listened to folks talking about this form of funding real estate and businesses, the securities lawyer in me became uncomfortable. The presenters appeared to be ignoring the seemingly obvious conclusion that the process of seeking investors to participate in these investment funds is a securities offering that must be registered under federal or state securities laws, unless an exemption is available. So, I raised that point from the audience . . . .
Sure enough, if one looks or resources on the Internet, one learns that promoters of these funds seem to have reached the same legal conclusion about the potential application of securities offering registration/exemptions. (See, e.g., here and here.) Federal registration exemptions in or under the Securities Act of 1933, as amended, that might work in this context include those for private placements (Section 4(a)(2) or Rule 506(b)) and intrastate offerings (Section 3(a)(11) and Rules 147 and 147A).
Bottom line word to the wise? Find an exemption for the offer or sale of investment interests in a Qualified Opportunity Fund or register the offering with the Securities and Exchange Commission and any applicable state securities commission. Otherwise, proceed at your regulatory peril . . . .