Monday, November 20, 2017
10:30 a.m. – 2:00 p.m.

The Fairmont Royal York
100 Front Street West
Toronto, ON M5J 1E3
Canada

Please join us for one (or both) of our sessions.

During the first session, our speakers will provide an overview of debt capital market trends in 2017 and what to expect in the months ahead. We will discuss some of the regulatory developments that are, and will continue to, impact issuances by financial institutions, including the Canadian banks. In particular, we will discuss issuance trends for financial institutions in the United States, the prospects for regulatory burden relief and tax reform, and related matters. We will also discuss the bail-in regime in Canada and the proposed TLAC requirement. Lastly, we will discuss recent NVCC issuances in the United States by Canadian banks, as well as other funding activity, including covered bonds.

During the second session, our speakers will discuss the application of blockchain in financial services, payments and financial products with a focus on use cases. In particular, we will discuss the applicable regulatory and tax considerations in the United States and conclude with some tips to assist the audience in navigating these regimes.

Session 1: Debt Capital Markets, Regulatory Developments & Market Outlook
10:30 a.m. – 12:00 p.m.

  • Overview of the debt capital markets;
  • Issuance levels and trends;
  • What to expect in the months ahead;
  • U.S. regulatory developments;
  • Canadian regulatory developments;
  • NVCC issuances; and
  • Modifying issuance programs for the bail-in regime.

Speakers:

  • Tom Connell
    Managing Director, Standard & Poor’s
  • Bryan Farris
    Associate Director, UBS Investment Bank
  • Peter Hamilton
    Partner, Stikeman Elliott LLP
  • Ahmet Yetis
    Americas Head of Capital Solutions, UBS Investment Bank
  • Oliver Ireland
    Partner, Morrison & Foerster LLP
  • Anna Pinedo
    Partner, Morrison & Foerster LLP

Lunch: 12:00 p.m. – 12:30 p.m.

Session 2: Blocked? Navigating the U.S. Regulatory and Tax Regimes Applicable to Blockchain
12:30 p.m. – 2:00 p.m.

  • What is blockchain and how does it work?;
  • Which laws apply?;
  • Timing, finality, and enforceability;
  • System accountability and responsibility;
  • Use cases;
  • Digital tokens, token sales, and U.S. regulation;
  • IRS Notice 2014-21;
  • Case study: Department of Justice Coinbase summons; and
  • Interesting issues relating to taxation of financial instruments and crypto.

Speakers:

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

Below, a continuation of our bibliography of thought-provoking articles on issues related to right-sizing regulation, staying private versus going public, and related topics:

The Decline in IPOs and the Private Equity Market

In their piece, “The Evolution of the Private Equity Market and the Decline in IPOs,” Michael Ewens and Joan Farre-Mensa discuss the decline in the number of initial public offerings in the United States in recent years and how it has impacted the ability of startups to finance.  The authors focus on venture-backed startups.  Interestingly, the paper notes that the percentage of M&A exits has remained fairly constant since the early 1990s.  Many commentators in the popular press have suggested that the number of M&A exits had increased, therefore negatively affecting the number of U.S. IPOs.  Prior to 1997, approximately 87% of startups with over 200 employees went public and of those with over $40 million in sales 67% undertook IPOs.  Since 2000, the fractions have declined to 29% and 30% respectively.  Private capital has filled the breach and as a result the decline in the number of IPOs has not negatively affected the ability of companies to raise capital.  In part, the authors attribute the change to a reduction in the costs associated with remaining a private company.  The authors also discuss changes in the private markets.  For example, the paper shows that VCs have changed how they deploy their capital, with a greater percentage of their investments being devoted to late-stage investments (as opposed to earlier stage companies).  Non-VC investors have provided a very significant percentage of financing in late-stage rounds.  These investors include private equity funds, corporations making minority investments, mutual funds and hedge funds and investment banks.

Up-C IPOs

A blog reader recently shared with us a paper titled “Private Benefits in Public Offerings:  Tax Receivable Agreements in IPOs,” written by Gladriel Shobe.  The paper considers some of the criticisms of up-C IPOs as a result of the tax receivable agreements put in place in these transactions.  For background on up-C IPOs, see our Practice Pointers.  The paper notes that in recent years, 5% of IPOs included use of tax receivable agreements (“TRAs”).  The author identifies three “generations” of TRAs.  The first generation from the early to mid-1990s involved companies that were taking additional steps in connection with their IPOs to create additional tax assets, or new basis.  The second generation TRAs appeared in 2007 with a Duff & Phelps IPO.  The paper identifies a third generation TRA that came about in 2010.  Finally, the paper notes some recent up-C IPOs that have not used TRAs.  After analyzing the various types of TRAs and the rationales for their use, the paper considers whether in the case of TRAs in up-C IPOs pre-IPO owners receive benefits that may not be properly valued or understood by IPO participants.

Dual-Class Structures

In his paper, “Sunrise, Sunset:  An Empirical and Theoretical Assessment of Dual-Class Stock Structures,” author Andrew Winden presents an analysis of initial and sunset dual-stock provisions based on over 100 companies, including pre-2000 and post-2000 structures excluding up-C IPOs.  The paper notes that among the sample set there are many different sunset provisions and provides very useful analysis of these.  The types of sunset provisions include passage of a specified period of time, dilution of high vote shares or controller ownership of such shares down to a low percentage of the aggregate number of outstanding shares, a reduction in the number of high vote shares or the number of high vote shares held by the controller as a percentage of the controller’s original ownership, death or incapacity of certain control persons or the departure of the founder, or conversion upon transfers of the high vote shares to persons that are not permitted holders.  Of course, a significant percentage of companies with dual-class structures, approximately 39% of those that went public after 2000, did not have sunset provisions.  The paper then offers an assessment of the utility of each of the particular approaches to implementing a sunset provision.

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.