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March 2018

Business Transactions Newsletter

Gordon Rees Scully Mansukhani's Business Transaction Group is pleased to publish our Business Transactions Newsletter, a quarterly take on trends, legal updates and news impacting business transactions in the U.S. and globally.
  1. SEC No-Action Letter Addresses Adviser's Soft Dollars Policy in light of New EU Financial Markets Directive
  2. SEC’s New Cyber Fraud Unit Reports Its First Action
  3. New Year – New Focus on Compliance for New Technologies
  4. Commodity Exchanges Seek to Introduce Bitcoin Futures Products
  5. NYSE Proposal to Allow "Non-IPO" Direct Listings is Accelerated by the SEC
  6. Successes and Awards
  7. About Gordon & Rees's Business Transactions Practice; Highlighted in this Issue - Entertainment, Fashion, Media & Sports Group

In an October 26, 2017 No-Action Letter,* the SEC staff addressed whether an investment adviser with clients in the European Union may rely on the safe harbor of Section 28(e) of the Securities Exchange Act of 1934 ("Exchange Act") when paying for investment research through the use of research payment accounts ("RPAs"), a device created under EU regulations.

The letter was in response to a request by the Securities Industry and Financial Markets Association (“SIFMA”) to clarify the impact of the European Union’s ("EU") Directive on Markets in Financial Instruments,** which became effective on January 3, 2018, on the SEC’s long standing “soft-dollar” policies. SIFMA’s request was in response to the increasing globalization of investment management and sought “to allow the long-standing approach in the U.S. for research payments and related regulatory guidance to work in tandem with the MiFID II construct.” SIFMA was very concerned that without clarity from the SEC, U.S.-based money managers and broker-dealers could be precluded from operating in the EU.

In the U.S., Section 28(e) provides a safe harbor to money managers who use client commissions (“soft dollars”) to obtain research and brokerage services. Thus, asset managers may avoid liability to their clients for breach of fiduciary duty solely for having paid more than the lowest commission rate for “brokerage and research.” Advisers often rely on “client commission arrangements” to pay their broker-dealers bundled commissions for both securities trading and Section 28(e)-eligible brokerage and research services. Executing broker-dealers, who typically administer client commission arrangements, credit the research-related portion of the commission to the arrangement while retaining the remainder of the commission as payment for the execution services. In some cases there is an external administrator or "aggregator" to whom the broker-dealer forwards the research-related portion of the commission.

MiFID II will, among other things, prohibit certain money managers from receiving "inducements" from third parties in connection with providing investment or ancillary services to clients. Such inducements can include a money manager's receipt of research from an executing broker-dealer, among others. In the U.S., this component must comply with Section 28(e). Under MiFID II, when paying for investment research, investment managers have the option of using client commissions to fund a RPA, not just charge a cash fee directly to their clients.

In an RPA, the executing broker-dealer is contractually required to collect the research payments, alongside payments for execution services, made by the money manager out of client assets and pay such amounts into the RPA, which is under the money manager’s control. In contrast to a client commission arrangement, once research payments are deposited into an RPA they may be used solely to pay for research, or they must be refunded to clients.

The staff concluded that a money manager may operate in reliance on Section 28(e) if it pays for research through the use of an RPA conforming to the requirements in MiFID II, provided that all other applicable conditions of Section 28(e) are met. An adviser may rely on the no-action letter if:

  • The money manager pays the executing broker-dealer out of client assets for research alongside payments to that executing broker-dealer for execution;
  • The payments are for research services that are eligible for the safe harbor under Section 28(e);
  • The executing broker-dealer effects the securities transaction for purposes of Section 28(e); and
  • The executing broker-dealer is legally obligated by contract with the money manager to pay for research through the use of an RPA in connection with a client commission arrangement.

* SEC No-Action Letter, SIFMA Asset Management Group (pub. avail. Oct. 26, 2017).

** Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 ("MiFID II") amended Directives 2002/92/EC and 2011/61/EU. MiFID II.

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The Securities and Exchange Commission created its new Cyber Unit in September 2017 to focus the Enforcement Division's cyber-related expertise on misconduct involving distributed ledger (“blockchain”) technology and initial coin offerings ("ICOs"), and the spread of false information through electronic and social media, hacking and threats to trading platforms.

ICOs – also called coin or token launches or sales – are recent techniques used to raise capital. They are similar to a crowdfunding campaign, but instead of offering a product/service like Kickstarter or shares of equity in a startup company like Crowdfunder, ICOs offer digital “tokens.” This process results in funding received via cryptocurrency, most commonly in Bitcoin or Ether. As cited in an August 9, 2017 article by, reported that in June 2017 ICO funding exceeded $550 million and surpassed, for the first time, angel and seed VC funding.

On December 4, 2017, the Cyber Unit – with the assistance of Quebec's Autorité Des Marchés Financiers – filed its first charges and obtained an emergency asset freeze to halt a quickly spreading U.S.-Canadian ICO fraud. The case alleged that a recidivist Quebec securities law violator, Dominic Lacroix, and his company, PlexCorps, marketed and sold securities called “PlexCoin” on the internet to investors in the U.S. and elsewhere. The defendants claimed that investors would achieve a 1,354% profit in less than 29 days. Lacroix's partner, Sabrina Paradis-Royer, was also charged with raising up to $15 million from thousands of investors since August 2017 by falsely promising a 13-fold profit in less than a month. The SEC obtained an emergency court order to freeze the assets of the defendants, and sought permanent injunctions, disgorgement plus interest and penalties, an officer-and-director bar and a bar from offering digital securities.

On July 25, 2017, the SEC issued a Report of Investigation under Section 21(a) of the Securities Exchange Act of 1934 describing an SEC investigation of The DAO, a virtual organization, and its use of blockchain technology to facilitate the offer and sale of “DAO Tokens” to raise capital. Applying existing U.S. federal securities laws, the SEC determined that DAO Tokens were securities.  The SEC has pointed out, in investor alerts (see, e.g.,, that an ICO or other offering of virtual coins or tokens may, depending on the facts and circumstances, involve the offer and sale of securities, which requires registration with the SEC or reliance on a valid exemption from registration.

State regulators are also pursuing enforcement actions against ICO promoters for failure to register tokens as securities under state law. See the Massachusetts Securities Division's Administrative Complaint dated January 17, 2018, In the Matter of Caviar and Kirill Bensonoff (Docket No. E-2017-0120).

Gordon & Rees has a team of lawyers to assist clients in navigating this rapidly evolving cyber-environment, from both the issuer and investor perspective.

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In late September 2017, the North American Securities Administrators Association (NASAA), an organization of U.S. State and Canadian Provincial securities regulators, issued a guide to assist investment advisers in developing compliance practices and procedures. NASAA conducted a series of more than 1,200 coordinated examinations of state-registered investment advisers in 2017, which uncovered nearly 700 deficiencies involving cybersecurity. Based on data from that national survey the following “Best Practices for Investment Advisers” was recommended. Further, NASAA published a comprehensive Cybersecurity Checklist to assist registrants to avoid privacy and data problems.

  • Prepare and maintain all required records, including financial records; back-up electronic data and protect records; and document all checks that are forwarded to clients and third parties.
  • Prepare and maintain client profiles or other client suitability information.
  • Review and revise Form ADV and disclosure brochure annually to reflect current and accurate information.
  • Review and update all client advisory contracts.
  • Calculate and document fees correctly in accordance with contracts and the disclosure on the firm’s Form ADV.
  • Implement appropriate custody safeguards, especially for direct fee deduction.
  • Formulate and document cybersecurity policies, procedures, and measures.
  • Keep accurate and current financials; file them timely with the applicable jurisdictions; and maintain surety bonds, if required.
  • Review all advertisements, including website and performance advertising, for accuracy.
  • Update the written compliance and supervisory procedures manual relevant to the type of business, and include the current business continuity plan.

 Gordon & Rees lawyers are available to assist money managers and other investment advisers to tackle their compliance needs in 2018.

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On December 1, 2017, the Chicago Mercantile Exchange Inc. ("CME") and the CBOE Futures Exchange ("CFE") “self-certified” new contracts for bitcoin futures products. Also, the Cantor Exchange self-certified a new contract for bitcoin binary options. This development will see the Commodity Futures Trading Commission ("CFTC") and the National Futures Association engaged in oversight of virtual currencies for the first time.

The CFTC’s self-certification process is unique among financial regulators. Prior to listing new contracts, the Commodity Exchange Act (“CEA”) provides designated contract markets (“DCMs”) with the option to either submit a written self-certification to the CFTC that the contract complies with the CEA and CFTC regulations, or voluntarily submit the contract for CFTC approval.

When a DCM self-certifies a new contract it must determine that the offering complies with the CEA and CFTC regulations, including that the new contract is not readily susceptible to manipulation. This is the same standard the CFTC uses when reviewing products for approval and the CFTC web site provides a list of the DCM “core principles” that apply to new product review. All DCMs must provide an explanation and analysis to justify the certification process. Unless the CFTC finds that a new product would violate its regulations or CEA provisions, the DCM may list the new product no sooner than one full business day following the self-certification.

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On February 2, 2018, the SEC published notice (with an order granting accelerated approval) of an amended proposal by the NYSE to facilitate direct listings for certain non-IPO offerings. See A "direct listing" is an immediate listing upon the effectiveness of an Exchange Act registration statement (e.g., Form 10 or Form 20-F) without any concurrent IPO or Securities Act registration. Attention to this listing approach is being spurred by Spotify’s interest in the process.

Note that Nasdaq has always allowed such direct listings. A recent example of one was the direct listing of Mustang Bio, Inc. (NASDAQ: MBIO), whose common stock commenced trading on the Nasdaq Global Market on August 22, 2017. Unlike the NYSE proposal, Nasdaq does not impose special listing criteria beyond the issuer's demonstration of the valuation of the private non-listed securities.

Section 102.01B of the NYSE Listed Company Manual (“Section 102.01B”) currently recognizes that some companies that have not previously registered their common equity securities under the Exchange Act, but have sold those securities in a private placement, may wish to list them on the NYSE upon the effectiveness of a registration statement filed solely for the resale of securities held by selling stockholders. Footnote (E) and Manual Exhibit 5 of Section 102.01B currently provides that the NYSE will exercise its discretion on a case-by-case basis to list these companies by determining that a company has met the $100 million aggregate market value of publicly-held shares requirement, based on a combination of both (1) an independent third-party valuation of the company and (2) the most recent trading price for the company’s common stock in a trading system for unregistered securities operated by a national securities exchange or a registered broker-dealer (a “Private Placement Market”). Footnote (E) also sets forth specific factors for relying on a Private Placement Market price, stating that the NYSE will examine the stock’s trading price trends in the Private Placement Market over several months prior to a listing and will only rely on such market data if “consistent with a sustained history [of trading] over that several month period.”

Amendment No. 3 to the initial proposal (i) eliminates the requirement for a Private Placement Market trading price if there is a valuation from an independent third-party of $250 million in market value of publicly-held shares (this was picked up from Exhibit 5 to the Manual); (ii) sets forth several factors indicating when the independent third party providing the valuation would not be deemed “independent” under Footnote (E); (iii) amends NYSE Rule 15 to add a reference price for when a security is listed under Footnote (E); (iv) amends NYSE Rule 104 to specify Designated Market Maker requirements when facilitating the opening of a security listed under Footnote (E) when the security has had no sustained history of trading in a Private Placement Market; and (v) amends NYSE Rule 123D to specify that the NYSE may declare a regulatory halt prior to opening on a security that is the subject of an initial pricing upon NYSE listing and that has not, immediately prior to such initial pricing, traded on another national securities exchange or in the over-the-counter market.

Amendment No. 3 would require a company to either (1) file a resale registration statement for the resale, from time to time, of securities held by existing security holders or (2) undertake a primary offering. While this may reduce the efficiency of a direct listing, it may ensure that Securities Act Section 11 liability can be applied to the issuer.

Comments to the SEC on the proposal may be submitted by March 1, 2018 (within 21 days of its February 8, 2018 Federal Register publication - FR Document: 2018-02501; 83 FR 5650).

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Gordon & Rees Business Transactions Group Closes a Section 1031 Exchange Deal

Chicago and Milwaukee partner Jonathan Boulahanis, with the assistance of Chicago associate Tyler Duff, and Boston of counsel Tom Moylan, successfully closed a 1031 simultaneous exchange for a national firm client in Milwaukee, Wisconsin on December 21, 2017.  Approximately two years before closing, the client was approached by a developer that was interested in acquiring their property to build a new residential development. The developer offered another parcel of land, and offered to build the firm client a brand new facility to headquarter its Wisconsin operations for its transportation company. 

Our lawyers helped from the onset for more than two years on the project, including negotiating and documenting the initial exchange agreement, working through construction issues and assisting the client during the construction process, working through zoning and permitting issues as they arose, working through title issues, drafting easement agreements, drafting all closing documents, and attending the live closing in Milwaukee. Moylan lent his expertise in Section 1031 Exchange issues to assist advising the client about the tax implications of the land swap. The client’s former property was appraised at approximately $1.8 million, and the acquisition cost plus construction expenses of the new site exceeded $8 million, resulting in a fantastic deal for the client.

Multi-Office Business Transactions Team Successfully Closes $6.5 Million Solar Deal

Our firm’s attorneys, including Robert Shaw, Justin Puleo, Greg Bryant, Mark Davis, and Scott Theobald from the Raleigh, Pittsburgh, San Francisco, and Phoenix offices, recently closed a $6.5 million deal on behalf of a large multinational solar power developer based in Germany. After California, North Carolina ranks second in the nation for installed solar electric capacity so the state has attracted the attention of international investors and developers in the industry.

Gordon & Rees was able to earn the representation in the matter via its presence in Raleigh with Robert Shaw and Justin Puleo, Greg Bryant’s industry experience; and the firm’s deep bench led by the renewable energy transactional experience of Mark Davis and the regulatory expertise of Scott Theobald.

The deal involved a Membership Interest Purchase Agreement, an Engineering, Procurement, and Construction Contract, and an Operation and Maintenance Contract, as well as numerous regulatory and diligence issues.

The client was attracted to the value proposition that Gordon & Rees offered as well as its national reach and sophisticated practitioners.

Gordon & Rees Business Transactions Group Successfully Closes Multi-Million Dollar Business Transaction for National Venture Capital Client

Our Pittsburgh-based Partner and National Co-Chair of the Business Transactions practice group, Craig Heryford, successfully closed a $10 million investment in common stock and a secondary sale of $5 million of series a preferred stock and common stock issued by a national credit card technology and logistics company. This multi-million dollar transaction needed to be closed in a very short time frame. Gordon & Rees represented the lead investor in this transaction who is a national venture capital company with more than $1 billion in investments under management. The transaction provides the firm's client’s portfolio company the necessary capital to move its business forward to sustainable profitability. 

Multi-Office Business Transactions Team Handles Management Buy-Out, Recapitalization and $9 Million Mezzanine Financing

In December 2017, after six months of negotiation, diligence, strategy and documentation, Craig Heryford, National Co-Chair of the Business Transactions practice group, together with Sarah Hancher of our Pittsburgh office and Jon Boulahanis and Tyler Duff of our Chicago office, closed a management buy-out and recapitulation of our client, a cloud analytics company and a $9 Million Mezzanine financing with equity warrants from private financing entity.

Orange County Business Transactions Group Successfully Closes $100 Million Business Transaction for Long Time Technology Client

Orange County, California Partner, Lisa Klein, successfully represented the founders of a national platform technology business with a $100 million sale to a strategic buyer. The transaction provided the founders of the business, a long time client, with cash on exit, while the next generation of family management obtained both a significant cash payment and the opportunity to remain in place and manage the company that was sold as part of the buyer's larger platform.  With the buyer's access to capital, management expects to bring its business to another level of success. The strategic buyer funded the transaction with investments from a global PE fund that is an active investor in the technology, business and financial services sectors and currently has $2 billion of capital under management.  Ms. Klein was assisted by Bruce Holden, a leader in the business department from the Orange County office.

Business Transactions Group Successfully Closes $35 Million Business Transaction for Environmental Services Client

Orange County, California Partner, Lisa Klein, successfully represented San Diego Partner Jason Meyer’s long-time client; a California based environmental services company, in the sale of 65 percent of the company to a financial buyer. The transaction allowed the founders to take money off the table, remain as managers, and to have access to capital to expand the company's current regional platform to a national scope. The transaction was funded by a loan on the assets from a commercial lender and investments sourced, in part, from the investment arm of a publicly traded company. Ms. Klein was assisted by Peter Ente, a taxation specialist also resident in the Orange County office.

Business Transactions Group Successfully Closes $35 Million Loan Facility for Borrower

In December 2017, Bruce Holden, a partner in our Irvine, California office, closed a $35,000,000 asset-based (eligible receivables plus eligible inventory) loan facility for the borrower, a supplier of goods to cruise lines and other entertainment venues.  The purpose of the loan was to refinance a prior credit facility and provide working capital to the borrower.

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The Entertainment, Fashion, Media & Sports (EFMS) practice group, which dovetails with the Business Transactions Practice Group, announces a new blog, Bright Lights & Legal Cites, to provide insightful analysis of legal developments, hot topics, news, and our team’s perspectives that affect the universe of entertainment, fashion, media, and sports, i.e. the Glitz, Riffs, Scripts, and Blitz Industries.  Edited by partner Philip Robert Brinson, the blog offers pertinent, topical, and informative perspectives on the intersection of law and the ubiquitous entertainment industry.

Gordon & Rees’s Business Transactions Practice Group includes 65 attorneys nationwide and provides full service counsel to public and privately held U.S. and foreign clients, ranging from start-up entrepreneurs to Fortune 100 corporations. Our services cover the wide range of challenges and opportunities clients encounter throughout the business life cycle, from formation to mergers and acquisitions, daily operations to protecting intellectual property, raising capital to securities law compliance, and corporate governance to international ventures and tax management.

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Business Taxation

Lawrence Cohen

Business Taxation