What due diligence should investors do?
This is a great question to ask a fund before investing. There are professional service firms that can be hired to do an analysis and provide comfort to the fund and its investors that the program is being adhered to and should qualify for all related tax benefits.
Though this is not really a tax question (i.e., there is no right answer), I do have some thoughts on this. Basically, this is no different than the due diligence you should do for any investment. As a passive investor, you have little control over fund compliance, just like you would have no control over whether or not a public mutual fund is SEC compliant. Thus, I would suggest at a minimum that you do business with a "trusted" organization. Here are some examples of what that means to me. A well-established reputable firm should have a track record of success, compliance, etc. Due diligence should be conducted on the people involved with the executive and fund management. What are their backgrounds, proven history, other organizations worked with? How did you come to know about the fund? A referral from a knowledgeable trusted resource? A better business bureau profile is good. What are their assets under management? Who is their insurance company? These are just some items that you may consider in your due diligence. None guarantees anything, but if the firm is well-known, rated high, insured, etc., there may be some legal recourse if they fail their compliance.
Look at the pitch deck and PPM carefully, possibly with professional assistance. Ask who the law, accounting, and consulting firms are. If you're making a large enough investment, you should be able to speak not only with the sponsor but also with the professionals working on the deal.
Investors should read the offering/investment reps and warranties carefully and make sure that the developer or fund manager is working with experienced OZ counsel. I would request a copy of the written capital plan for QOZB safe harbor purposes. Investigate the sources and uses for capital and inquire how firm the capital stack is.
Get a good tax lawyer and a good tax accountant who is familiar with the area.
You should establish and or obtain the necessary compliance assurance from the QOF and its managers. This should be agreed upon upfront during the due diligence performed before investing.
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