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Are Qualified Opportunity Funds considered a security that is regulated by the SEC?

What does it mean for investors when a fund falls under SEC or when it doesn’t?


Answers
  • Debbie Klis
    August 09, 2019

    In most cases, yes, investments in Qualified Opportunity Funds (QOF) are considered a security that is regulated by the SEC. The line is fairly bright; if a taxpayer forms a QOF in which she will invest her capital gains and she manages the QOF herself (or with others), then it is not a security. If multiple taxpayers form a QOF and all taxpayers are significantly and actively involved with the management of the QOF (thus, it is member managed) then it is not a security. Regarding what is a security, the U.S. Supreme Court's famous decision of SEC v. W.J. Howey Co., 328 U.S. 293, 90 L.Ed. 1244, 66 S.Ct. 1100 (1946), determined that a land sales contracts for citrus groves in Florida, coupled with warranty deeds for the land and a contract to service the land, were “investment contracts” and thus securities. The court defined an investment contract as a contract, transaction or scheme whereby a person invests money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party. The Howey investment contract analysis has been the starting point in determining the status of transactions in the securities area. Courts look to the substance of the transaction to decide whether a security is involved and have made the determination regardless of the label placed on the interest by the parties.

  • John Wegmann
    August 10, 2019

    Your first question is, “Are Qualified Opportunity Funds considered a security that is regulated by the SEC?” I’m not a lawyer, so I’m speaking from personal experience and not providing legal advice. I have found that taxpayers who set up their own entity and invest their own money don’t have securities law issues. On the other hand, anyone planning an offering of shares or partnership interests to investors definitely needs to consult with a qualified attorney specializing in securities to avoid running afoul of any SEC or state securities laws. Your second question is, “What does it mean for investors when a fund falls under SEC or when it doesn’t?” From a tax point of view, the taxation of an investor in a QOF shouldn’t be affected by whether or not the shares or partnership interests are SEC registered. That said, an investor who own 100% of a fund can exert control over the management of the fund. This will not be the case for an investor who invests in a third-party managed fund. A publicly traded security will have greater liquidity; however, there are no publicly traded QOFs that I know of at the present time.

  • Guy Nicio
    August 12, 2019

    Hello, Qualified Opportunity Funds (QOFs) do not by virtue of the tax law from which these were created require any SEC regulation. However, SEC regulation continues to govern whatever investments it always has without regard to a QOF. Therefore, a QOF would only be regulated by the SEC if it were required to be so even if it were not a QOF. That said, my background is not in SEC regulation, so that question [in general] would be best suited for a relevant attorney.

  • Pat Cardwell
    August 12, 2019

    They normally consist of accredited investors. But I would insist upon a preferred placement memorandum.