Opportunity Zone Magazine Volume 1, Issue 3 | Page 82

82 OPPORTUNITY ZONE MAGAZINE | VOLUME 1 • ISSUE 3 THE SECURITIES LAWS LANDSCAPE FOR OZ FUNDS AND THEIR MANAGERS
and companies owned exclusively by those with $5 million
in investments and/or other “qualified purchasers” (“§3(c)
(7)” funds). Therefore, if a QOF is structured to be a private
fund, ideally by design but often by lucky happenstance, it
usually need not be overly concerned with the registration
requirements of the Company Act. But any QOF nearing
the 100 beneficial owner mark, and has any owners who
are not “qualified purchasers” as defined in the Act, needs
to pay careful attention to whether or not the fund invests
in securities and to its obligations under the Company Act.
Funds may impose internal restrictions on transfer to help
comply with these exceptions.
Advisers Act: Keeping with the theme of the other
securities laws, the Advisers Act requires all investment
advisers to register with the SEC, unless exempt or prohibited
because of the adviser’s home state regulation. An “investment
adviser” includes “any person who, for compensation, engages
in the business of advising others . . . as to the value of
securities or as to the advisability of investing in, purchasing,
or selling securities . . ..” 3 Most states have similar definitions
of investment adviser and often requires state registration
without any exemption for limited assets under management.
Investment advisers are subject to strict limitations on
charging fees and performance compensation to the accounts
of persons (in this context, the investors) who are not
“qualified clients,” a threshold far higher than the traditional
“accredited investor” bar.
Reduced to its main elements, an investment adviser is one
who for compensation, engages in the business of advising
others regarding securities. The compensation element is
generally satisfied by the receipt of any economic benefit
related to the services provided. 4 For example, a management
fee, administrative services fee, or carried interest paid to a
QOF manager are each likely “compensation.” A person is
“in the business” if her activities occur on such a basis that it
constitutes a business activity occurring with some regularity.”
Unless the manager is neglecting her responsibilities to
manage the affairs and investments of the QOF, she probably
meets the business element as well. Again, the analysis often
will turn on whether or not the QOF invests in “securities.”
Among others, QOFs that seek to benefit from the working
capital safe harbor of the OZ Incentive probably have a
dual-tier structure in which the QOF owns OZ Stock or OZ
Partnership Interests, among other potential assets. If any
of the QOF’s assets consist of securities (such as OZ Stock
or passive OZ Partnership Interests), the third element is
likely satisfied. Accordingly, a QOF manager is probably an
investment adviser if the manager receives any fees, carried
interest, or other compensation for its services and the QOF
owns securities.
SO WHAT IF THE QOF MANAGER IS AN INVESTMENT
ADVISER?
Advisers regulatory treatment under the Advisers Act
depends, in part, on the extent of its RAUM, including
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the gross assets of any private fund for which it provides it
supervises or manages, including uncalled commitments. 5
In this context, not just one QOF, but all that she manages
count toward the RAUM calculation. Small advisers with less
than $25 million RAUM generally look to the requirements
of the regulatory authority in their home states. Mid-sized
advisers with RAUM of $25 -$110 million must register with
the SEC (or be eligible for an exemption) unless required to
be registered as an investment adviser in its home state (e.g.,
because it qualifies for a state exemption). Advisors with
RAUM exceeding $110 million must register with the SEC
regardless of any state-registration, unless the advisor advises
solely private funds (such as 3(c)(1) and 3(c)(7) funds).
Private fund advisers, however, must register with the SEC
upon having $150 million RAUM. Importantly, despite the
above thresholds, advisors with at least $25 million in RAUM,
and not state-registered are “exempt reporting advisers” and
must file reports with the SEC under Rule 204-4. 6
In addition to the registration requirements under the Advisers
Act (and corollary state laws), investment advisers must
comply with the Advisers Act’s compensation rules, disclosure
obligations, record keeping, and funds custody requirements.
Even more, to become registered as an investment adviser, an
adviser or investment adviser representative may be required
to pass the Series 65 exam. All of which is important to know
before it’s too late.
If a QOF manager or potential manager is concerned about
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