Questions surrounding the use of virtual currencies and other digital tokens (“tokens”) as compensation came to the forefront last month following formal guidance from the U.S. Securities and Exchange Commission (“SEC”) on token offerings. This alert discusses the U.S. federal income tax consequences to employees (and other service providers, including directors, consultants and other advisers) who receive compensation in the form of tokens.

Read our client alert.

The Nasdaq recently published a report, titled “The Promise of Market Reform,” which sets out proposed structural changes that are intended to relieve some of the burdens associated with being a public company.  The report notes the decline in the number of U.S. public companies and notes the trend in U.S. IPOs and the increased reliance on private placements.  The report suggests reform of the proxy process, by, among other things, raising the minimum ownership amount and holding period to introduce a proxy proposal and addressing proxy advisory firms.  The report suggests various measures that would streamline corporate disclosures by eliminating quarterly reporting requirements, providing additional accommodations for smaller reporting companies, and reducing politically motivated disclosure obligations.  The report notes that litigation reform also is needed.  Various tax reform measures also are discussed as possible incentives to encourage investment.  Finally, the report discusses possible market structure changes.  Finally, the report addresses measures that are intended to promote long-termism.

The report can be accessed here:  https://globenewswire.com/news-release/2017/05/04/978502/0/en/U-S-Financial-Markets-Require-Comprehensive-Market-Reform-to-Reignite-Job-Growth-and-Create-a-Healthier-Economic-Ecosystem.html

Wednesday, November 30, 2016
11:00 a.m. – 12:30 p.m. EST

Traditionally, most public companies in the US were organized as C-corporations. However, tax developments in recent years have given corporate planners a wide range of new tools to structure a public company. For example, tax pass-through MLP and REIT structures are spreading into new asset classes. Also, traditional double taxed ‘C’ corporations are using tax pass-through entities, including partnerships, to reduce or eliminate entity-level taxes as well as optimize their internal structures with tax ‘disregarded entities’. These new tools lead to a variety of tax choices in deciding how to structure a public company.

During this briefing, which is intended for a general audience, the speakers will explain the structures, restrictions and pitfalls in this evolving hybrid world of C-corporations mixed with tax pass-throughs. Specifically, they will discuss:

  • Master limited partnerships;
  • REITs and alternative assets that may qualify as ‘real estate’;
  • Business development companies;
  • Consolidated groups of corporations and disregarded entities; and
  • Up-C structures.

Speakers:

CLE credit is pending for California and New York.

For more information, or to register, please click here.

In a structure commonly referred to as an “up‑C,” an existing LLC or other partnership form undertakes a public offering through a newly formed corporation, which is structured as a holding company that owns an interest in the LLC.  Traditionally, if the owners wanted to undertake a public offering of the entity’s securities, the owners would re-organize the LLC or partnership as a corporation and offer and sell that company’s common stock to the public in the offering.  Increasingly, owners are employing the up‑C structure as an alternative.  Use of the up‑C approach allows the LLC or other entity to undertake a public offering, albeit through a holding company, while maintaining the partnership status for the LLC, where the principal assets and operations of the business remain.  This structure is particularly attractive to private equity-backed companies because it maintains many of the tax benefits of a partnership, offers an ongoing exit strategy, and enables the sponsors to preserve some control over the business.

For more information, see our “Practice Pointers on the Up-C Structure” available at: http://www.mofo.com/~/media/Files/Articles/2016/05/160500PracticePointersUpCStructure.pdf

On October 20, 2015, at 12:00 pm EST, Morrison & Foerster Partners Thomas Humphreys and Remmelt Reigersman will lead a teleconference on the Tax Considerations of Up-C IPOs. The IPO market is humming along and so is the use of “Up-C” structures. Under the right circumstances, an Up-C structure has the potential to deliver significant economic and tax benefits to financial sponsors and other selling shareholders. In this teleconference, we explain when an “Up-C” structure might be appropriate for an IPO candidate and how such structures are most commonly implemented. We also explain the various economic and tax benefits associated with such structures, including an explanation of the key terms of the “Tax Receivable Agreement” that is typically entered into by the selling shareholders and the public company.

CLE Credit is Pending.

To register for this session, or for more information, please click here.

For technology and other start-ups, going public can be doubly taxing—literally.

“Traditionally, a pre-IPO company is structured as a C corporation, which is legally subject to two tax layers, the first assessed on income earned by the entity, and then again on historic partners and other shareholders when selling stock or receiving dividends,” says New York-based Morrison & Foerster tax partner Remmelt Reigersman. “Setting up initially as a limited liability company keeps it to one layer—as a pass-through, the entity is not taxed—except that when it comes time to go public, the partnership is treated as a corporation and taxed accordingly.”

While this double dip may appear unavoidable, an innovative technique known as “Up-C” leverages the LLC advantage to help pre-IPO companies achieve significant tax savings and favorable deal economics while preserving control for the founding partners.

“Named after UPREIT, an umbrella structure originated by real estate investment trusts, or REITs, Up-C establishes a new corporation above the historic partnership, which retains all of the business assets—and the LLC tax advantage—as its subsidiary,” says Anna Pinedo, a New York-based Morrison & Foerster securities partner. “The new entity is the one then used for the IPO, downstreaming the proceeds to the LLC.”

As Pinedo explains, Up-C provides upside for everyone. “To maintain control of the business, historic partners must control the PubCo, which is achieved by dual-stock issuance,” she says. “Sold to public investors, Class A shares generate the cash and look after the economic side of the deal, while Class B shares give voting rights in PubCo to the founding partners.”

The deal includes an “Income Tax Receivable Agreement” between the partners and PubCo. “PubCo purchases partnership units from the founders using proceeds from the IPO,” Pinedo explains. “Differing from a traditional stock purchase, this method under Up-C creates a step-up in the tax basis, which in turn permits the partners and PubCo to take significant depreciation and amortization deductions over time. PubCo then pays the founders the majority, typically 85 percent, of the federal and state benefits it has gained from the step-up.”

Complicated, yes, but put to numbers, this translates into some very attractive economics. “Say the tax basis step-up is valued at $300 million, with an annual amortization of $20 million over 15 years,” offers Reigersman. “Assuming a combined federal and state tax rate of 40 percent, that saves PubCo $8 million a year while paying the historic partners $6.8 million annually—or $102 million over time.”

Up-C is not for everyone. “From an administrative and compliance perspective, this structure is far more involved than going public via the traditional route,” Reigersman says. “But for larger companies, especially, it can be very effective.”

This article was originally published in the Fall/Winter 2014 edition of MoFo Tech, available here.