Opportunity Zone Magazine Volume 1, Issue 3 - Page 56

56 OPPORTUNITY ZONE MAGAZINE | VOLUME 1 • ISSUE 3
But there is a way to make sure this community resource
doesn’t go untapped. QOFs can bring in main-street investors
into OZ investments by “mixing” funds. Specially, it is the
union of all accredited investors inside the QOF, or nonaccredited
investors outside the QOF, that can be used to
finance an OZ business or property. Of course the investors
outside the QOF will not receive the capital gains tax benefits,
but they may still investor in a OZ business or property.
First, the investors in the QOF itself can use a mixture of
qualifying investors (i.e. funds from qualified capital gains
realizations) and non-qualifying investors (i.e. funds that
are not from capital gains realizations.) These are termed
“mixed-use” funds in Section 1400Z-2 and are permissible if
the two sources of funds are tracked and reported separately.
While this source of QOF funding is still limited to accredited
investors only, QOFs are not bound only to investors with
large, accumulated capital gains. Taxable accounts and,
importantly, accounts that are already taxed advantaged (e.g.
IRA accounts) are also valuable funding sources for QOFs
investors. 16 Neither the qualified capital gains investor, nor
the already tax-advantaged IRA investor, pays any capital
gains tax on their QOF investment. 17 Accredited investors in
IRAs are far more numerous and more main street than the
accredited investors with very large unrealized capital gains.
Of course, IRA investors and taxable account investors must
evaluate the risks and other characteristics of the QOF, but
they can certainly participate in a mixed-use QOF if they are
comfortable with the investment and look to contribute to the
economic impact in OZ communities.
Secondly, the SEC has noted that a different offering
exemption enables a mixture of funds to finance an OZ
business or property: “a pooled investment vehicle (a “fund”)
could rely on Rule 506(c) to offer and sell securities of the
fund to accredited investors and use the proceeds to finance a
portion of a [OZ] project, while a Regulation Crowdfunding
offering to non-accredited investors is made at the same time
to fund the remainder of the [OZ] project.” 18 Under crowdfunding,
non-accredited investors outside the QOF can
participate alongside the accredited investors inside the QOF.
Crowdfunding is a practical, widely accepted, and innovative
way for individuals and businesses to access capital through
small investments made by multiple individuals. The
crowdfunding strategy utilizes technology, social media,
and targeted sites to collect data, elevate experience and
involvement, and facilitate funding. There are a multitude
of benefits outside of additional capital that stem from
crowdfunding, of which include expanded audience,
community engagement, and a shared interest for success.
There are several channels that a QOF can assist the
crowdfunding portion of an OZ investment that is outside the
QOF. The engagement of local agents on deal sourcing and
economic impact objectives is a common need for both the
QOF and the crowdfund. Similarly, the ongoing tracking and
shareholder voting on the OZ investment is shared across both
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