Do You Need to Use a Broker-Dealer for an Opportunity Zone Fund?

The latest real estate-based tax-deferral investment strategy, opportunity zone funds, has only begun to impact the market. As more of these funds become available, issuers will have to consider how to distinguish their offerings to potential investors. One such way is to use a broker-dealer to conduct your offering. By partnering with a broker-dealer, an issuer gets the benefit of experience with offering structuring, assurance to potential investors that a third-party reviewed the offering, and a back-office to handle investor processing.

Offering Structuring

When an opportunity zone fund issuer engages a broker-dealer to assist with an offering, the issuer gains access to all of the knowledge a broker-dealer has to share about the marketplace, which can be used to improve that issuer’s offering. For example, a broker-dealer specializing in private placements, particularly in real estate, has reviewed the structure and documents of hundreds of offerings. As a result, a broker-dealer will often give feedback to the issuer that a certain structure is more or less likely to attract investors or whether or not the offering materials are easy to understand. The tax advantages that come with opportunity zone funds are not, on their own, enough to sell investors on an offering. Additionally, an issuer can rest easy knowing that a broker-dealer reviewed the entire offering and did not find violations of SEC or FINRA rules, which could result in regulatory punishments.

Third-Party Diligence Review

Securities sales, including those of opportunity zone funds, are governed by a host of regulators, from the SEC to your local state, and one misstep can cost you a fine, your offering, and even the possibility of future offerings. While a good securities attorney is a huge asset in avoiding many of these potential pitfalls, having a broker-dealer managing the offering provides an additional review for potential issues with both federal and state securities laws. Broker-dealers are incentivized to be extra thorough on offerings because, should a violation occur, they take on the liability, protecting the issuer. As part of conducting diligence on an offering, a broker-dealer will review the offering materials to ensure that the materials are not fraudulent or misleading. In particular, a broker looks at the claims made to ensure that they are reasonable and based on facts. Additionally, for any advertising or marketing materials, a broker-dealer ensures that the materials comply with a higher standard (FINRA Rule 2210). This allows issuers to take comfort that their marketing materials will not be considered inflammatory or manipulative if the broker-dealer evaluates the material against FINRA Rule 2210.

Investor Processing

Engaging a broker-dealer can also aid the issuer in the actual process of conducting the offering. A broker-dealer likely has a more efficient process, system, or technology to facilitate the required back-office reviews of investors, such as suitability verification, know-your-customer requirements, and customer-identification-program requirements.

In addition, many broker-dealers can handle the flow of funds, either through holding the funds in escrow themselves or through an outside bank. Escrow is required if the offering has a minimum contingency that needs to be met before the raise is successful. Along with managing the flow of funds, a broker-dealer will conduct diligence to ensure that the funds are not involved in criminal activity or money-laundering. This protects the issuer from the circumstance where they receive money that is subsequently locked up by the U.S. government, or end up with a bad investor.

Conducting a securities transaction can be a very complicated undertaking for an issuer. And with new and subject-to-change regulations surrounding opportunity zone funds, the job of ensuring an offering is conducted correctly is even more complex. But a broker-dealer with expertise in the industry is a good step towards a successful offering.

Understanding Opportunity Zone Funds

Qualified Opportunity Zone Funds join an increasingly popular group of tax-advantaged investments that allow investors to defer or avoid capital gains taxes on the sale of certain investment properties.

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