Opportunity Zone Magazine Volume 1, Issue 3 | Page 81

THE SECURITIES LAWS LANDSCAPE FOR OZ FUNDS AND THEIR MANAGERS
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in a common enterprise; (3) with the expectation of profits;
(4) derived primarily from the efforts of people other than
the investor. 2 That last element is usually where the action is
– is the interest owner passive or meaningfully active in the
underlying business?
Since a limited partner of a limited partnership is, by
definition, not active in its management or operations, a
limited partnership interest is always a security. Similarly, the
interest of a limited liability company non-managing member
is also generally a security. In the OZ context, the QOF
interest offered to a passive investor is a security. In turn,
the interest of the QOF in any lower-tier entity or portfolio
assets is a security if (a) it is stock (e.g., OZ Stock), or (b) the
QOF itself is not a substantially active partner. For example,
a money-only joint venture partner’s interest in the joint
venture entity is probably a security.
THE SECURITIES FRAMEWORK
The Securities Act: The Securities Act generally requires
that all offers of a security be registered with the SEC, unless
an exemption applies. Among other exemptions, Regulation
D under the Securities Act permits an issuer (e.g., a QOF)
to offer and sell a security (e.g., an interest in a QOF) to any
number of “accredited investors” without registration, subject
to certain solicitation limitations and notice filings. There
is a laundry list of who qualifies as an accredited investor. It
includes a natural person who has a net worth exceeding $1
million, exclusive of the value of his or her home (calculated
with a little nuance) and entities owned exclusively by
accredited investors. Most QOF offerings are structured to
comply with this exemption.
Notably, the Securities Act also imposes prohibitions on
the making of misstatements of material facts or the making
of material omissions necessary to make any statements of
fact that are made not misleading. These restrictions apply
regardless of whether or not the offering is exempt from
registration (e.g., offered in compliance with Regulation D).
Most importantly for fund sponsors, any person engaged in
the offer or sale of a security is jointly and severally liable for
those material misstatements or omissions. Thus, it is crucial
to prepare appropriate offering materials and use care in verbal
statements during that process.
Company Act: Like the Securities Act, the Company
Act requires all “investment companies” to register with the
SEC, absent an exemption or exclusion. The definition of
“investment company” includes any company that “is or holds
itself out as being engaged primarily, or proposes to engage
primarily, in the business of investing . . . in securities.” The
Company Act excludes “private funds” from the definition
of “investment company.” Private funds are companies
with fewer than 100 beneficial owners (so-called “§3(c)(1)”
funds, after the exemption section of the Company Act)
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