Lots of confusion out there on the 351 diversification test vs. RIC diversification rules. Let’s clear it up. If you see bad info, let us know. 🚨 Disclaimer: This is not tax or legal advice. Consult a qualified professional before making tax-related decisions. 🧵👇

1️⃣ 351 Diversification (IRC §368(a)(2)(F)) Governs contributions to an ETF (or any RIC). Rule: The top 5 contributors must be <50% of total asset value. This test only applies at the moment of contribution. 🔗 https://t.co/t7Z2epnhPq

2️⃣ RIC Diversification (IRC §851(b)(3)) Governs ETF tax status under Subchapter M. Rule: The sum of positions ≥5% can’t exceed 50% of assets. This test is only measured at quarter-end. 🔗 https://t.co/t9YpxMeoB8

Key distinction: ✅ ETF can pass 351 diversification test at launch ❌ But fail RIC diversification on Day 1 Good news: RIC compliance is only checked at quarter-end.

Example: Launch ETF via 351 on Jan 1 Portfolio fails RIC diversification on Day 1 Not the end of the world: We have until 3/31 to get in compliance. That said—do you really want to bottom tick and scramble? Probably not.

Best practice = aggregate 351 portfolio contributions should already comply with RIC rules at launch. If you build it right from the start, you avoid unnecessary risk.