The joint staff summary seeks to help participants understand the application of the securities laws to qualified opportunity funds established under the Tax Cuts and Jobs Act.
The SEC and NASAA have issued a joint staff statement that explains the application of the federal and state securities laws to "opportunity zone" investments. The summary explains when interests in qualified opportunity funds would be securities under federal and state law, while also providing an overview of the requirements relating to offerings, broker-dealer registration, and considerations for advisers. Separately, a new Compliance and Disclosure Interpretation issued by Division of Corporation Finance staff discusses the application of Regulation Crowdfunding and other federal exemptions that may permit non-accredited investors to participate in these offerings.
Adopted as part of the Tax Cuts and Jobs Act in December 2017, the opportunity zone program provides tax incentives for long-term investing in designated economically distressed communities. Under the program, taxpayers may 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.
Staff summary. The summary notes that offerings of interests in a qualified opportunity fund will typically involve offers and sales of securities under federal and state laws except in limited circumstances, such as a fund established and operated as a general partnership where each partner has a substantial management role. As result, qualified opportunity funds must comply with the registration and anti-fraud provisions of federal and state securities laws, in addition to other applicable regulations, such as those of the Internal Revenue Service and Treasury Department. Among other things, the staff summary covers some frequently used exemptions from registration that may be available to issuers of qualified opportunity funds, including Rule 506(c) of Regulation D, which exempts a public offering from registration so long as the issuer takes reasonable steps to verify the accredited investor status of each purchaser.
New C&DI. Separately, staff of the Division of Corporation Finance issued new Compliance and Disclosure Interpretation 204.05 to address possible capital-raising options for opportunity zone issuers seeking to allow non-accredited investors to participate in their projects. Staff expressed the view that, properly structured, Regulation A, Regulation Crowdfunding, and the intrastate offering exemptions in Rules 147 and 147A can be effective tools for the financing of an opportunity zone project, either alone or in conjunction with another exemption.
For example, the C&DI notes that a qualified opportunity fund could rely on Rule 506(c) to offer and sell securities to accredited investors and use the proceeds to finance a portion of a project, while making a Regulation Crowdfunding offering to non-accredited investors at the same time to fund the remainder of the project. The offering under Rule 506(c) would not be integrated with a Regulation Crowdfunding offering as long as any general solicitation and advertisement for the Rule 506(c) offering either: (1) did not include the terms of the Regulation Crowdfunding offering; or (2) also complied with the requirements of a Regulation Crowdfunding offering, such as necessary legends and additional restrictions on general solicitation.
Opportunities for Main Street investors. In a public statement, SEC Chairman Jay Clayton stated that the Opportunity Zone staff statement and guidance demonstrate that Main Street investors can invest in their local communities in a manner that is in compliance with the securities laws. Unlike the opportunities available to institutional and high net worth individuals, however, the chairman acknowledged that the path for Main Street investors is often more complex, especially for those investors living within the opportunity zone.
Referencing the SEC's recent concept release regarding the regulation of private securities offerings, Clayton wondered whether changes to SEC rules could provide a simplified path to allow individuals who live in or near an opportunity zone to invest in a project on a basis that still affords appropriate investor protection. For example, he posited an exemption where the investment opportunity would be limited to residents of the opportunity zone or adjacent zip codes within the same state, similar to the intrastate exemption under Rule 147A, with a maximum investment size scaled to reflect individual circumstances in a manner similar to the Regulation Crowdfunding rules.
NASAA statement. In a news release, NASAA President Michael Pieciak praised the joint efforts of state and federal securities regulators to respond effectively to innovation. "This joint summary is a good example of state and federal regulators working collaboratively to address new compliance issues raised by an innovative program and thereby promoting our dual mission of protecting investors and helping facilitate capital formation," Pieciak said.
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