How Do You tell If The Corporation Passed the QSBS “Active Business Requirement” During Your Holding Period?

It is not easy for an investor, especially as a minority investor with limited, if any, visibility into the Company’s operations, to know if the Company has used at least 80% of its assets towards activities that qualify for QSBS. 

Unless the Company changed directions in a significant way during the time you held your shares, the best support for the Active Business Requirement may be the corporation’s representation they may have made at the time the shares were issued.  Your Share Purchase Agreement may include a QSBS clause, which may contain language where the corporation represents that they will aim to maintain the securities QSBS eligibility, such as the corporation stating that it,

 “will use its reasonable efforts to cause such shares to qualify as Qualified Small Business Stock; provided, however, that “reasonable efforts” as used in this Section shall not be construed to require the Company to operate its business in a manner which would adversely affect its business, limit its future prospects or alter the timing or resource allocation related to its planned operations or financing activities.”

More on Eligible Entities

This article does not constitute legal or tax advice. Please consult with your legal or tax advisor with respect to your particular circumstance.

About QSBS Expert

QSBS Expert was founded by a group of entrepreneurs, investors, accountants and lawyers who came together when trying to navigate a QSBS situation of their own. We quickly realized that the regulations left a lot of open questions and the publicly available information was confusing to sift through…so we thought that others may also benefit from having a “go to” resource for all things QSBS.