Tag: investment

Investing in SAFE and Convertible Note Rounds ꟷKnow Your Bedmates!

Early-stage companies often rely on Simple Agreements for Future Equity (SAFEs) and convertible promissory notes to raise capital either prior to a company’s first priced preferred equity round, or to raise bridge capital between priced equity raises. In addition to the economic terms, investors considering participation in these financings should seek visibility as to the other investors in the round, and the potential misalignment of incentives among those investors.

Raising funds via SAFEs and convertible notes has a number of advantages for the issuer, not least of which is the speed with which such financings can be achieved. SAFE and convertible note financings involve significantly less documentation, legal lift, and expense than a standard preferred stock financing. Further, depending on how a SAFE or convertible note is structured, it can allow an early-stage company experiencing rapid growth (and, accordingly, valuation) to raise capital without selling equity at a valuation materially lower than the valuation it can justify in the next 12-24 months.

Similarly, SAFEs and convertible note rounds can appeal to early-stage investors. Again, the documentation is relatively straightforward and, to a large extent, consistent from transaction to transaction. Further, more recent iterations of Y-Combinator’s form SAFE include investor-favorite provisions that protect investors from dilution associated with the issuance of other convertible instruments.

That said, most SAFEs and convertible promissory notes include amendment provisions providing that their terms can be amended or waived with the approval of holders representing a majority of the total invested amount. Such amendments can fundamentally change the terms on which investors originally based their decision to participate in the SAFE or note round. For example, common amendments include reductions in the conversion discount, valuation cap, and/or required equity financing threshold at which the SAFE or note is required to convert. Perhaps more drastic, we increasingly see companies raising significant funds in multiple SAFE or note rounds without ever needing to do an equity financing prior to a liquidity event. In those instances, it is not uncommon for the company to get a majority-in-interest of the SAFE or noteholders to convert into equity on terms that bear little or no relation to what was contemplated in the original investment instrument.

Of course, you may ask, why would a majority-in-interest of the SAFE or noteholders agree to an amendment or adjustment that is not in their best interests? The answer is that savvy founders will often ensure that a majority-in-interest of the investors are “company-friendly,” with incentives that may be very different than those of a passive investor. For example, founders and their friends and family may control a majority of the round. Similarly, SAFE and noteholders may already have equity interests in the company, such that they see a net benefit to agreeing to changes in their note or SAFE terms that, viewed in isolation, are subpar.

Accordingly, before making a material investment in a SAFE or convertible note financing, investors should have a clear understanding of the maximum amount that can be raised, and the likelihood that a significant number of those investors may sign off on amendments that undermine the original deal terms.

© 2024 Winstead PC.

Third Time’s a Charm? SEC & CFTC Finalize Amendments to Form PF

On February 8, the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) jointly adopted amendments to Form PF, the confidential reporting form for certain registered investment advisers to private funds. Form PF’s dual purpose is to assist the SEC’s and CFTC’s regulatory oversight of private fund advisers (who may be both SEC-registered investment advisers and also registered with the CFTC as commodity pool operators or commodity trading advisers) and investor protection efforts, as well as help the Financial Stability Oversight Council monitor systemic risk. In addition, the SEC entered into a memorandum of understanding with the CFTC to facilitate data sharing between the two agencies regarding information submitted on Form PF.

Continued Spotlight on Private Funds

The continued focus on private funds and private fund advisers is a recurring theme. The SEC recently adopted controversial and sweeping new rules governing many activities of private funds and private fund advisers. The SEC’s Division of Examinations also continues to highlight private funds in its annual examination priorities. Form PF is similarly no stranger to recent revisions and expansions in its scope. First, in May 2023, the SEC adopted requirements for certain advisers to hedge funds and private equity funds to provide current reporting of key events (within 72 hours). Second, in July 2023, the SEC finalized amendments to Form PF for large liquidity fund advisers to align their reporting requirements with those of money market funds. And last week, this third set of amendments to Form PF, briefly discussed below.

SEC Commissioner Peirce, in dissent:

“Boundless curiosity is wonderful in a small child; it is a less attractive trait in regulatory agencies…. Systemic risk involves the forest — trying to monitor the state of every individual tree at every given moment in time is a distraction and trades off the mistaken belief that we have the capacity to draw meaning from limitless amounts of discrete and often disparate information. Unbridled curiosity seems to be driving this decision rather than demonstrated need.”

Additional Reporting by Large Hedge Fund Advisers on Qualifying Hedge Funds

These amendments will, among other things, expand the reporting requirements for large hedge fund advisers with regard to “qualifying hedge funds” (i.e., hedge funds with a net asset value of at least $500 million). The amendments will require additional disclosures in the following categories:

  • Investment exposures, borrowing and counterparty exposures, currency exposures, country and industry exposures;
  • Market factor effects;
  • Central clearing counterparty reporting;
  • Risk metrics;
  • Investment performance by strategy;
  • Portfolio, financing, and investor liquidity; and
  • Turnover.

While the final amendments increase the amount of fund-level information the Commission will receive with regard to individual qualifying hedge funds, at the same time, the Commission has eliminated the aggregate reporting requirements in Section 2a of Form PF (noting, in its view, that such aggregate information can be misleading).

Enhanced Reporting by All Hedge Funds

The amendments will require more detailed reporting on Form PF regarding:

  • Hedge fund investment strategies (while digital assets are now an available strategy to select from, the SEC opted not to adopt its proposed definition of digital assets, instead noting that if a strategy can be classified as both a digital asset strategy and another strategy, the adviser should report the strategy as the non-digital asset strategy);
  • Counterparty exposures (including borrowing and financing arrangements); and
  • Trading and clearing mechanisms.

Other Amendments That Apply to All Form PF Filers

  • General Instructions. Form PF filers will be required to report separately each component fund of a master-feeder arrangement and parallel fund structure (rather than in the aggregate as permitted under the existing Form PF), other than a disregarded feeder fund (e.g., where a feeder fund invests all its assets in a single master fund, US treasury bills, and/or “cash and cash equivalents”). In addition, the amendments revise how filers will report private fund investments in other private funds, “trading vehicles” (a newly defined term), and other funds that are not private funds. For example, Form PF will now require an adviser to include the value of a reporting fund’s investments in other private funds when responding to questions on Form PF, including determining filing obligations and reporting thresholds (unless otherwise directed by the Form).
  • All Private Funds. Form PF filers reporting information about their private funds will report additional and/or new information regarding, for example: type of private fund; identifying information about master-feeder arrangements, internal and external private funds, and parallel fund structures; withdrawal/redemption rights; reporting of gross and net asset values; inflows/outflows; base currency; borrowings and types of creditors; fair value hierarchy; beneficial ownership; and fund performance.

Final Thoughts

With the recent and significant regulatory spotlight on investment advisers to private funds and private funds themselves, we encourage advisers to consider the interrelationships between new data reporting requirements on Form PF and the myriad of new regulations and disclosure obligations being imposed on investment advisers more generally (including private fund advisers).

The effective date and compliance date for new final amendments to Form PF is 12 months following the date of publication in the Federal Register.

Robert Bourret also contributed to this article.

©2024 Katten Muchin Rosenman LLP

by: Adam Bolter of Katten 

For more SEC and CFTC news, visit the NLR Securities & SEC section.

Upstream and Affiliate Guaranties in NAV Loans

Guaranties are a common feature in fund finance transactions. Particularly in NAV loans, upstream and affiliate (or “sideways”) guaranties are used. Below we discuss some of the context for the use of these types of guaranties, as well as some of the issues that lenders should consider in relying on them.

Upstream Guaranties

It is not uncommon in NAV loan transactions for the borrower to hold the underwritten assets for the financing (i.e., the fund’s portfolio of investments) through one or more controlled subsidiary holding vehicles (each, a “HoldCo”). Lenders may take a pledge of the management and economic interests in the HoldCos (rather than the underlying investments). In order to get as close to the underlying investments as possible (without taking a pledge), lenders may require that a HoldCo issue a guaranty directly to the lenders (or the administrative agent, on behalf of the lenders), guaranteeing the borrower’s obligations under the NAV loan facility. This “upstream” guaranty provides the lenders a direct claim against the HoldCo for amounts due under the loan, mitigating some of the risk of structural subordination to potential creditors (expected or unexpected) at the level of the HoldCo.[1]

Affiliate Guaranties

It is also common in NAV loan facilities for the borrower’s portfolio of investments to be held by multiple subsidiaries and/or affiliates of the borrower. Each such subsidiary or affiliate may be designated as a guarantor for repayment of the loan. As a result, such entities end up guaranteeing the obligations of their affiliates. The purpose of these affiliate guaranties is the same as the upstream guaranties discussed above – namely, to provide the lenders with a more direct enforcement claim in a default scenario.

Use of Such Guaranties

Motivations for the use of such upstream and affiliate guaranties may include:

a lender’s desire to underwrite a broader portfolio of investments, mitigating concentration risk to the portfolio of a single holding entity;
a lender’s desire to ensure that it is not subordinate to creditors that may arise at the level of the entity that directly owns the investment; or
a borrower’s desire to obtain a higher loan-to-value ratio than the lenders would otherwise provide based on the investments alone.
While upstream and affiliate guaranties can help to address these issues, they may raise nuanced legal issues that should be discussed with counsel in light of the relevant facts and circumstances.

Enforceability Considerations

Guaranties constitute the assumption of the liabilities of another entity and are contingent claims against the guarantor. Under certain insolvency laws, guaranties may be subject to challenge, and payments under guaranties may be subject to avoidance. Upstream or affiliate guaranties may be subject to heightened scrutiny and challenge in a bankruptcy or distress scenario. Below are a few potential issues lenders should bear in mind with respect to upstream and affiliate guaranties.

1. Constructively Fraudulent Transfer Avoidance. Under Bankruptcy Code section 548 and certain state laws, (a) transfers of property (including grants of security interests or liens), or (b) obligations assumed (such as incurring a loan or guaranty obligation) may be avoided as constructively fraudulent if BOTH of the following requirements are satisfied:[2]

  • (i) the transferor/guarantor does not receive reasonably equivalent value; AND
  • (ii) the transferor/guarantor is insolvent or undercapitalized or rendered insolvent, undercapitalized or unable to pay its debts because of the transfer or the assumed liability.

A guaranty by a parent of the obligations of a wholly owned and solvent subsidiary, a so-called downstream guaranty, is generally regarded as providing the parent with reasonably equivalent value through an enhancement of the value of its equity ownership of the subsidiary.

Upstream and affiliate guaranties require more scrutiny than guaranties by a borrower parent to determine whether any potential enforceability issues are present.

a. Reasonably Equivalent Value. The determination of value is not formulaic or mechanical, but rather generally determined by the substance of the transaction. Value or benefits from a transfer may be direct (e.g., receipt of loan proceeds) or indirect. But if indirect, they must be “fairly concrete.”

In each of the above scenarios, we are assuming that the upstream or affiliate guarantor would not use the proceeds of any loans and, consequently, would not be added to the loan facility as a borrower. However, other indirect but tangible benefits or value to the guarantor should be identified, e.g., favorable loan terms or amendments, use of the NAV facility proceeds that may indirectly but materially benefit the guarantor, maintenance of the entire fund group of entities that benefits the guarantor, etc.

b. Financial Condition of Guarantor. The financial condition of the transferor/guarantor is evaluated at the time of the incurrence of the guaranty. The evaluation is made from the debtor/guarantor – in what condition was the guarantor left after giving effect to the transfer or assumption of the obligation. Diligence regarding a guarantor’s financial condition may demonstrate that such guarantor is sufficiently creditworthy to undertake the guaranty and remain solvent and able to conduct its respective businesses. Representations from the guarantor may be sought to confirm its financial condition.

c. Potential Mitigants. In addition to performing diligence with respect to the above points, lenders and their counsel will often include contractual provisions to mitigate the possibility that a guaranty may be found to constitute a fraudulent transfer. Savings clauses, limited recourse guaranties, and net worth guaranties are all tools that can be used to address the issues noted above. The scope and appropriateness of such provisions is beyond the scope of this article and should be discussed with external deal and restructuring counsel.

2. Preference Challenge. Under Bankruptcy Code section 547, a transfer made by a debtor to a creditor, on account of an antecedent debt, that is made while the debtor was insolvent and within 90 days before the bankruptcy case has been commenced may be subject to avoidance as a preferential transfer. Certain defenses may apply to a potential preferential transfer, including the simultaneous exchange of “new value” by the creditor. However, note that any pre-bankruptcy transfers of value, like payments under a guaranty, may be subject to scrutiny and potential challenge by the guarantor/debtor or a bankruptcy trustee.

Guaranties can be an important element in structuring NAV loan transactions to achieve the terms desired by the parties and to provide necessary protections for the lenders, but consideration needs to be given to the legal issues, such as the ones mentioned here, that their inclusion can present.

[1] Lenders will typically also require the HoldCo to pledge its accounts to which proceeds of the underlying investments are paid, allowing lenders to foreclose on such cash at the HoldCo level, without the need for such cash to first be distributed up to the borrower.

[2] Note that the precise language of certain state fraudulent transfer laws may differ, but conceptually, most state statutes require a showing of (i) insufficient or unreasonably small consideration in exchange for the transfer or liability incurred, and (ii) the transferor/debtor being insolvent at the time of the transfer, or becoming insolvent or subject to financial distress as a result of the transfer.

© Copyright 2023 Cadwalader, Wickersham & Taft LLP

Multi-Club Ownership – For the Good of the Game?

Alongside the rise of investment from sovereign wealth and private equity funds, sport has also seen an increase in multi-club/franchise ownership groups. These groups, often spanning across different sports, leagues, countries, and continents, allow investors to diversify their portfolios and spread their risks.

However, in football, the rise of the Multi-Club Ownership (MCOs) model poses a challenge for how the sport is governed and has implications on current and future financial regulation. MCOs acquire multiple football clubs, building a network of related teams in the process. This, consequentially, has a knock-on effect on player transfers, commercial opportunities, and the overall competitive balance of football across the globe.

In this article, we discuss the benefits of MCOs for both clubs and owners, the potential competitive advantages clubs can gain through MCOs, and whether the existing financial regulations are fit for purpose given the increasing number of MCOs within the sport.

Governance

One of the key benefits for clubs under an MCO structure is the ability to leverage centralized governance infrastructure and apply lessons learned from across the group. By centralizing key departments at the portfolio level, and incentivizing knowledge sharing within the group, MCOs can apply synergies and implement best practices with each new acquisition, leading to a more effective and efficient operation. Additionally, the centralized governance structure within an MCO brings with it opportunities for financial benefits in the form of cost savings and potentially increased revenues.

Sponsorships and Commercial Deals

Operating under an MCO allows clubs to benefit from sponsorships and other commercial deals negotiated at the group level, while also increasing individual brand awareness for each respective club. For example, an MCO could negotiate a group sponsorship agreement with a kit manufacturer or shirt sponsor covering a number of teams within the group, including the flagship club.

Agreements of this kind would be beneficial for all parties involved. The sponsor increases its own profile by being associated with the flagship club, while also getting instant access to a variety of markets through the other clubs in the agreement. At the group level, the homogeneity created by having clubs within the group playing in similar kits creates a stronger brand identity, whilst also boosting the brand profile for the smaller clubs by further associating them with the flagship club. Additionally, a group agreement would allow the MCO to secure a competitive rate that may have been unattainable for a solitary club.

Player Scouting, Acquisition, and Development

The other major financial benefit for clubs in an MCO structure relates to how players are scouted, acquired, and developed. A common feature of MCOs is the application of a uniform strategy, across all portfolio clubs, set at a group level by a Sporting/Technical Director. When trickled down to each club, this results in a global scouting network, acquiring local talent with the group’s playing style in mind. These players will then be brought into an academy, through which they will be developed to play in the MCO’s preferred playing style.

While this does not represent an immediate cost saving, this network of local scouting and academies at the club level can lead to a significant competitive and financial advantage as players move within the group from smaller clubs to the flagship club. By transferring or loaning players “in-house”, MCOs can ensure that a player’s development is not hampered by being played in an unfavorable position, or by being asked to perform a different role, protecting their value.

Additionally, by acquiring players from within the group, clubs save both time and money on scouting, as players are already a known quantity within the network. Furthermore, the receiving club acquires a player tailor-made to their playing style, reducing the time required to bed them in.

“In-house” Transfer Agreements

As exemplified by the transfer of Hassane Kamara between Pozzo family-owned clubs Watford and Udinese, “in-house” transfers can be leveraged to alleviate financial constraints for clubs within the group. Kamara, initially purchased by Watford in January 2022 for £4m, and who went on to be Watford’s player of the season, was subsequently sold to Udinese in August 2022 for £16m.

However, Kamara was then loaned straight back to Watford for the 2022/23 season. Although prima facie, this transfer does not benefit Udinese, it allowed Watford to recognize an £8m profit on Kamara while retaining his services, and strengthening their cash flow at a time when they were negotiating contracts with other star players. While “in-house” transfers of this kind raise questions regarding their fitness and propriety, they also have implications on competitive balance.

Parent Feeder

The most recognizable transfer strategy within MCOs is the feeder club model. This can be mutually beneficial to both clubs, with the best-performing players transferring to the “parent” clubs” and the “feeder” club receiving transfer income, as well as occasional loan transfers of youth team players to develop while remaining in the MCO structure.

Such a relationship can be seen between Red Bull owned, RB Leipzig (RBL) and FC Red Bull Salzburg (FCS). Since 2015, twelve players have transferred directly from FCS to RBL, with transfer fees totaling £119.75m. Eight of these players, bought for a total of £73.85m have subsequently been sold for a total of £117.50m, generating £43.65 profit RBL. The cumulative market value of the four players still playing for RBL has risen by £26.32m since their relevant transfers. For perspective, there have only been four transfers from RBL to FCS in the same period. [i]

Competition Integrity

Although centralized governance structures provide a wealth of benefits to clubs and owners within MCOs, there is a regulation to limit the effects of centralized governance on the integrity of competition.

UEFA’s regulations on common ownership prohibit teams from competing in the same competition where a single person or entity has a de facto control over both clubs. For clubs under common ownership to compete in the same competition, they must demonstrate that there are disparities within the clubs’ corporate matters, financing, personnel, and sponsorship arrangements.

On only one occasion since 2002 has UEFA’s rule on common ownership been considered. RBL and FCS both qualified for the 2017/18 Champions League and had to make significant structural changes in order for both teams to be admitted to that season’s edition. Therefore, as long as MCOs are willing to sacrifice centralized operations to an extent satisfactory to UEFA regulations, mutual competition is allowed. However, while many smaller clubs within more centralized MCO structures may not have short-term goals of European Football, UEFA regulations do raise questions over the investor’s long-term footballing ambitions for those clubs.

Financial Sustainability Regulations

In addition to the on-field benefits, being part of an MCO also provides opportunities for clubs to improve their financial position, and potentially exploit loopholes in existing financial regulation. UEFA’s recently introduced Financial Sustainability Rules (FSR) are built upon three pillars: solvency, stability, and cost control. The new cost control regulation, known as the squad cost ratio, states that a club’s outlays on wages, agents’ fees, and amortization costs must be less than 70% of club revenues. [ii]

In a scenario where an MCO owned club requires to decrease their squad cost ratio, it is possible that group sponsorship agreements and in-house transfers could be used to achieve this. By selling players within an MCO, and then receiving those players back on loan, clubs will recognize a profit on the sale for the purposes of FSR and bring down their squad cost ratio.

When considering group sponsorship agreements in respect of FSR, it is also possible that the accounting treatment of this contract at the club level could be engineered to assist a club in complying with the squad cost ratio. The allocation of revenue from a group-level sponsorship to each of the clubs under the agreement is not required to be split evenly, which provides MCOs with an opportunity to funnel revenues from group sponsorships to their clubs complying with FSR. With no current guidance or regulation on how group sponsorships should be treated from an accounting perspective, group sponsorships are another tool that can be utilized to improve their squad cost ratio.

Fair Value Regulations

Although MCOs bring opportunities to improve squad cost ratios, the FSR regulations also require all transactions to be made at “fair value”. This means that financial arrangements for sponsorships and player transfers must be accounted for on an “arm’s length” basis. Where there are doubts amongst the Club Financial Control Body (CFCB) board, it can request an adjustment of the proceeds resulting from the transfer of a player, or the allocation of sponsorship monies.

However, there is currently no precedent or evidence to indicate how UEFA would view the accounting treatment for a club under a group sponsorship agreement or the transfer of players within MCOs. Furthermore, while there is a clear means to value a sponsorship agreement, this is considerably more difficult with regard to transfers, specifically the valuation of a player.

While age, injury record, marketability, and contract length, are all attributable factors, a player’s worth comes down to how much the selling club desires weighted against how much the buying club is willing to pay. An MCO structure circumvents this issue and allows for “in-house” transfers at an inflated value stipulated by the shared owner/s. Given the regulations, it is unlikely any club would want to pique the interests of the CFCB by hyper-inflating the value of a transfer, but whether MCOs will be deterred from increasing the value of in house transfers by smaller, nominal values remains to be seen.

The Future of MCOs

Recent trends have shown that the existence of MCOs will be sustained over the coming years. Sport has developed alongside the increasingly commercialized world, resulting in significant growth in investor interest across multiple clubs and sports. However, how the governance and regulation of MCOs evolves will define their development in the long term. Another factor that must be considered is whether investors will prefer multi-sport ownership (MSOs), which bring with them their own regulatory considerations, particularly in relation to conflicts of interest. Nonetheless, in the immediate future we expect continued investment in Football, the question is whether they remain satisfied with just one club, or one sport.

[i] All figures have been taken from https://www.transfermarkt.co.uk/

[ii] A full copy of UEFA’s new regulations can be found here

Kurun Bhandari (Director) and James Michaels (Associate) at Ankura authored this article.

For more entertainment, art, and sports legal news, click here to visit the National Law Review.

Copyright © 2023 Ankura Consulting Group, LLC. All rights reserved.

Who Owns the Crypto, the Customer or the Debtor?

Whose crytpo is it? With the multiple cryptocurrency companies that have recently filed for bankruptcy (FTX, Voyager Digital, BlockFi), and more likely on the way, that simple sounding question is taking on huge significance. Last week, the Bankruptcy Court for the Southern District of New York (Chief Judge Martin Glenn) attempted to answer that question in the Celsius Network LLC bankruptcy case.

The Facts of the Case

Celsius and its affiliated debtors (collectively, “Debtors”) ran a cryptocurrency finance platform. Faced with extreme turbulence in the cryptocurrency markets, the Debtors filed Chapter 11 petitions on July 13, 2022. As part of their regular business, the Debtors had allowed customers to both deposit cryptocurrency digital assets on their platform and earn a percentage yield, as well as take out loans by pledging their cryptocurrencies as security. One specific program offered by the Debtors was the “Earn” program, under which customers could transfer certain cryptocurrencies to the Debtors and earn “rewards” in the form of payment of in-kind interest or tokens. On the petition date, the Earn program accounts (the “Earn Accounts”) held cryptocurrency assets with a market value of approximately $4.2 billion. Included within the Earn Accounts were stablecoins valued at approximately $23 million in September 2022. A stablecoin is a type of cryptocurrency designed to be tied or pegged to another currency, commodity or financial instrument.

Recognizing their emerging need for liquidity, on November 11, 2022, the Debtors filed a motion seeking entry of an order (a) establishing a rebuttable presumption that the Debtors owned the assets in the Earn Accounts and (b) permitting the sale of the stablecoins held in the Earn Accounts under either section 363(c)(1) (sale in the ordinary course of business) or section 363(b)(1) (sale outside the ordinary course of business) of the Bankruptcy Code. The motion generated opposition from the U.S. Trustee, various States and State securities regulators and multiple creditors and creditor groups. The Official Committee of Unsecured Creditors objected to the sale of the stablecoins under section 363(c)(1) but argued that the sale should be approved under section 363(b)(1) because the Debtors had shown a good business reason for the sale (namely to pay ongoing administrative expenses of the bankruptcy cases). On January 4, 2023, the court issued its forty-five (45) page memorandum opinion granting the Debtors’ motion.

The Court’s Decision

Although the ownership issue may appear complex given the nature of the assets (i.e., cryptocurrency), the bankruptcy court framed the issue into relatively straightforward state law questions of contract formation and interpretation. The court first analyzed whether there was a valid contract governing the parties’ rights to the cryptocurrency assets in the Earn Accounts. Under governing New York law, a valid, enforceable contract requires an offer and acceptance (i.e., mutual assent), consideration and an intent to be bound. The court found that all three elements were satisfied. The Debtors required that all customers agree to and accept “Terms of Use.” The Terms of Use was set up as a “clickwrap” agreement that required customers to agree to the terms and prevented the customers from advancing to the next page and completing their sign up unless they agreed to the Terms of Use. Under New York law, “clickwrap” agreements are sufficient to constitute mutual assent. The court also found that consideration was given by way of allowing the customers to earn a financing fee (i.e., the rewards in the form of payment of in-kind interest or tokens). Finally, the court noted that no party had presented evidence that either the Debtors or the customers lacked intent to be bound by the contract terms. Accordingly, the court held that the Terms of Use constituted a valid contract, subject to the rights of customers to put forth individual contract formation defenses in the future, including claims of fraudulent inducement based on representations allegedly made by the Debtors’ former CEO, Alex Mashinsky.

Having found a valid contract to presumptively exist, the court turned its attention to what the Terms of Use provided in terms of transfer of ownership. In operative part, the Terms of Use provided:

In consideration for the Rewards payable to you on the Eligible Digital Assets using the Earn Service … and the use of our Services, you grant Celsius … all right and title to such Eligible Digital Assets, including ownership rights, and the right, without further notice to you, to hold such Digital Assets in Celsius’ own Virtual Wallet or elsewhere, and to pledge, re-pledge, hypothecate, rehypothecate, sell, lend or otherwise transfer or use any amount of such Digital Assets, separately or together with other property, with all the attendant rights of ownership, and for any period of time, and without retaining in Celsius’ possession and/or control a like amount of Digital Assets or any other monies or assets, and use or invest such Digital Assets in Celsius’ full discretion. You acknowledge that with respect Digital Assets used by Celsius pursuant to this paragraph:

  1. You will not be able to exercise rights of ownership;
  2. Celsius may receive compensation in connection with lender or otherwise using Digital Assets in its business to which you have no claim or entitlement; and
  3. In the event that Celsius becomes bankrupt, enters liquidation or is otherwise unable to repay its obligations, any Eligible Digital Assets used in the Earn Service or as collateral under the Borrow Service may not be recoverable, and you may not have any legal remedies or rights in connection with Celsius’ obligations to you other than your rights as a creditor of Celsius under any applicable laws.

Based on this language, the court held that the Terms of Use unambiguously transferred ownership of the assets in the Earn Accounts to the Debtors. Central to the court’s decision was that under the Terms of Use customers had granted the Debtors “all right and title to such Digital Assets, including ownership rights.” Based on this language, the court found that title and ownership of the cryptocurrency held in the Earn Accounts was “unequivocally transferred to the Debtors and became property of the Estate on the Petition Date.”

Finally, the court found that the Debtors had shown that they needed to generate liquidity to fund the bankruptcy cases, and that additional liquidity would be needed early this year. Accordingly, the court held that the Debtors had shown sufficient cause to permit the sale of the stablecoins outside of the ordinary course of business in accordance with section 363(b)(1).

Implications

Given the turbulent nature of the cryptocurrency market and the likelihood of further cryptocurrency bankruptcy filings, the court’s ruling is sure to have significant implications. First, unless it is reversed on appeal, the opinion means that the Debtors’ Earn program customers do not own the funds in their digital accounts and will instead be relegated to the status of unsecured creditors with a highly uncertain recovery. Second, the opinion underscores the Wild West nature of crypto and the fact that unlike deposits at a federally insured financial institution, deposits at cryptocurrency exchanges are not similarly insured and may be at risk. Third, customers or account holders in other cryptocurrency exchanges or businesses should carefully review the applicable terms of use to determine if those terms transferred ownership of their digital assets to their cryptocurrency counterparty. It is likely a fair assumption that such other terms of use transferred ownership in the same way that the Celsius Terms of Use did, in which case customers must remain vigilant of the financial health of their cryptocurrency counterparty. Finally, all parties engaging in on-line business transactions, including those outside of cryptocurrency, are on notice that clickwrap agreements commonly found in such transactions are, at least under New York law, enforceable. In short, those agreements mean something, and the fact that a party did not read the terms before agreeing to them through a “click” is likely not going to be a viable defense to the enforcement of those terms.

For more Bankruptcy Legal News, click here to visit the National Law Review.

© Copyright 2023 Squire Patton Boggs (US) LLP

UK Prohibits Certain Investment in Russia

From 19 July 2022,1 it is a violation of UK financial sanctions for any person who knows or has reasonable cause to suspect that they are carrying out, directly or indirectly, certain investment activity in Russia. These prohibitions follow the UK Government’s 6 April 2022 announcement of its intention to introduce an outright ban on all new outward investment in Russia.

The prohibitions are subject to exceptions and do not impact acts undertaken to satisfy obligations under a contract concluded before 19 July 2022, or an ancillary contract necessary for the satisfaction of that contract, subject to notifying Her Majesty’s Treasury at least five working days before the day on which any related act is carried out. There is also the option to apply for a specific Treasury licence, such as to enable humanitarian assistance activity or if connected with the provision of medical goods or services.

Furthermore, General Licence INT/2022/2002560 has been granted, taking effect from 19 July 2022 and expiring on 26 July 2022, allowing a seven-day wind-down period in respect of the prohibited activities.

What Is Prohibited?

The Regulations prohibit:

  • Directly or indirectly establishing any joint venture with a person connected with Russia;
  • Opening representative offices or establishing branches or subsidiaries in Russia;
  • Directly or indirectly acquiring any ownership interest in Russian land and persons connected with Russia for the purpose of making funds or economic resources available directly or indirectly to, or for the benefit of, persons connected with Russia;
  • Directly or indirectly acquiring any ownership interest in or control over a relevant entity or persons (other than an individual) with a place of business in Russia for the purpose of making funds or economic resources available, directly or indirectly, to, or for the benefit of, persons connected with Russia; and
  • The provision of investment services directly related to all the activities summarised above.

Definitions

A “person connected with Russia” means:

  • any individual or group of individuals who are ordinarily resident or located in Russia, or an entity which is incorporated or constituted under Russian law or domiciled in Russia;2

and is not:

  • A Schedule 2 Entity, as detailed in the Regulations;3 or
  • An entity domiciled outside of Russia or a branch, or subsidiary, of such a non-Russian entity.4

A “branch”5 means, in relation to a person other than an individual, a place of business which forms a legally dependent part of that person and which carries out all or some of the transactions inherent in the business of that person.

A “relevant entity”6 means a person, other than an individual, which has a place of busines located in Russia, but is not a person connected with Russia.

A person directly or indirectly “acquiring any ownership interest in or control over a person or entity”7 means:

  • Acquiring any share in the person or entity;
  • Acquiring any voting rights in the person or entity;
  • Acquiring any right to appoint or remove a majority of the board of directors of the person or entity; or
  • Acquiring any means of ensuring that the affairs of the person or entity are conducted in accordance with the wishes of the person.

Exceptions

The exceptions8 introduced enables a person to deal directly or indirectly with:

  • A transferable security otherwise prohibited by Regulation 16;
  • A relevant security issued by a person connected with Russia; or
  • A relevant security issued by a relevant entity.

Full definitions of the terms above are included within Regulation 60ZZA.

From 19 July 2022,1 it is a violation of UK financial sanctions for any person who knows or has reasonable cause to suspect that they are carrying out, directly or indirectly, certain investment activity in Russia. These prohibitions follow the UK Government’s 6 April 2022 announcement of its intention to introduce an outright ban on all new outward investment in Russia.

The prohibitions are subject to exceptions and do not impact acts undertaken to satisfy obligations under a contract concluded before 19 July 2022, or an ancillary contract necessary for the satisfaction of that contract, subject to notifying Her Majesty’s Treasury at least five working days before the day on which any related act is carried out. There is also the option to apply for a specific Treasury licence, such as to enable humanitarian assistance activity or if connected with the provision of medical goods or services.

Furthermore, General Licence INT/2022/2002560 has been granted, taking effect from 19 July 2022 and expiring on 26 July 2022, allowing a seven-day wind-down period in respect of the prohibited activities.

What Is Prohibited?

The Regulations prohibit:

  • Directly or indirectly establishing any joint venture with a person connected with Russia;
  • Opening representative offices or establishing branches or subsidiaries in Russia;
  • Directly or indirectly acquiring any ownership interest in Russian land and persons connected with Russia for the purpose of making funds or economic resources available directly or indirectly to, or for the benefit of, persons connected with Russia;
  • Directly or indirectly acquiring any ownership interest in or control over a relevant entity or persons (other than an individual) with a place of business in Russia for the purpose of making funds or economic resources available, directly or indirectly, to, or for the benefit of, persons connected with Russia; and
  • The provision of investment services directly related to all the activities summarised above.

Definitions

A “person connected with Russia” means:

  • any individual or group of individuals who are ordinarily resident or located in Russia, or an entity which is incorporated or constituted under Russian law or domiciled in Russia;2

and is not:

  • A Schedule 2 Entity, as detailed in the Regulations;3 or
  • An entity domiciled outside of Russia or a branch, or subsidiary, of such a non-Russian entity.4

A “branch”5 means, in relation to a person other than an individual, a place of business which forms a legally dependent part of that person and which carries out all or some of the transactions inherent in the business of that person.

A “relevant entity”6 means a person, other than an individual, which has a place of busines located in Russia, but is not a person connected with Russia.

A person directly or indirectly “acquiring any ownership interest in or control over a person or entity”7 means:

  • Acquiring any share in the person or entity;
  • Acquiring any voting rights in the person or entity;
  • Acquiring any right to appoint or remove a majority of the board of directors of the person or entity; or
  • Acquiring any means of ensuring that the affairs of the person or entity are conducted in accordance with the wishes of the person.

Exceptions

The exceptions8 introduced enables a person to deal directly or indirectly with:

  • A transferable security otherwise prohibited by Regulation 16;
  • A relevant security issued by a person connected with Russia; or
  • A relevant security issued by a relevant entity.

Full definitions of the terms above are included within Regulation 60ZZA.

FOOTNOTES

1 Regulation 18B introduced via The Russia (Sanctions) (EU Exit) (Amendment) (No. 12) Regulations 2022 [2022 No. 801], in force as of 19 July 2022.

2 Regulation 19A(2), The Russia (Sanctions) (EU Exit) Regulations 2019 [2019 No. 855] – as amended.

3 See pp. 123-124.

4 Regulation 16(4D), Ibid.

5 Regulation 18B(8), The Russia (Sanctions) (EU Exit) (Amendment) (No. 12) Regulations 2022 [2022 No. 801].

6 Regulation 18B(8), Ibid.

7 Regulation 18B(8), Ibid.

8 Regulation 60ZZA, Ibid.

Article By Annabel Thomas, Jo Rickards, Gavin Costelloe, Bethany Histed, Kara M. Bombach, and Erik de Bie of Greenberg Traurig, LLP

For more global law legal news, click here to visit the National Law Review.

©2022 Greenberg Traurig, LLP. All rights reserved.

EV Buses: Arriving Now and Here to Stay

In the words of Miss Frizzle, “Okay bus—do your stuff!”1 A favorable regulatory environment, direct subsidy, private investment, and customer demand are driving an acceleration in electric vehicle (EV) bus adoption and the lane of busiest traffic is filling with school buses. The United States has over 480,000 school buses, but currently, less than one percent are EVs. Industry watchers expect that EV buses will eventually become the leading mode for student transportation. School districts and municipalities are embracing EV buses because they are perceived as cleaner, requiring less maintenance, and predicted to operate more reliably than current fossil fuel consuming alternatives. EV bus technology has improved in recent years, with today’s models performing better in cold weather than their predecessors, with increased ranges on a single charge, and requiring very little special training for drivers.2 Moreover, EV buses can serve as components in micro-grid developments (more on that in a future post).

The Investment Incline

Even if the expected operational advantages of EV buses deliver, the upfront cost to purchase vehicles or to retrofit existing fleets remains an obstacle to expansion.  New EV buses price out significantly more than traditional diesel buses and also require accompanying new infrastructure, such as charging stations.  Retrofitting drive systems in existing buses comparatively reduces some of that cost, but also requires significant investment.3

To detour around these financial obstacles, federal, state, and local governments have made funding available to encourage the transition to EV buses.4 In addition to such policy-based subsidies, private investment from both financial and strategic quarters has increased.  Market participants who take advantage of such funding earlier than their competitors have a forward seat to position themselves as leaders.

You kids pipe down back there, I’ve got my eyes on a pile of cash up ahead!

Government funding incentives for electrification are available for new EV buses and for repowering existing vehicles.5 Notably, the Infrastructure Investment and Jobs Act committed $5 billion over five years to replace existing diesel buses with EV buses. Additionally, the Diesel Emissions Reduction Act provided $18.7 million in rebates for fiscal year 2021 through an ongoing program.

In 2021, New York City announced its commitment to transition school buses to electric by 2035.  Toward that goal, the New York Truck Voucher Incentive Program provides vouchers to eligible fleets towards electric conversions and covers up to 80% of those associated costs.6  California’s School Bus Replacement Program had already set aside over $94 million, available to districts, counties, and joint power authorities, to support replacing diesel buses with EVs, and the state’s proposed budget for 2022-23 includes a $1.5 billion grant program to support purchase of EV buses and charging stations.

While substantial growth in EV bus sales will continue in the years ahead, it will be important to keep an eye out for renewal, increase or sunset of these significant subsidies.

Market Players and Market Trends, OEMs, and Retrofitters

The U.S is a leader in EV school bus production:  two of the largest manufacturers, Blue Bird and Thomas Built (part of Daimler Truck North America), are located domestically, and Lion Electric (based in Canada) expects to begin delivering vehicles from a large facility in northern Illinois during the second half of 2022.  GM has teamed up with Lighting eMotors on a medium duty truck platform project that includes models prominent in many fleets, and Ford’s Super Duty lines of vehicles (which provide the platform for numerous vans and shuttle vehicles) pop up in its promotion of a broader electric future. Navistar’s IC Bus now features an electric version of its flagship CE series.

Additionally, companies are looking to a turn-key approach to deliver complete energy ecosystems, encompassing vehicles, charging infrastructure, financing, operations, maintenance, and energy optimization. In 2021, Highland Electric Transportation raised $253 million from Vision Ridge Partners, Fontinalis Partners (co-founded by Bill Ford) and existing investors to help accelerate its growth, premised on a turn-key fleet approach.7

Retrofitting is also on the move.  SEA Electric (SEA), a provider of electric commercial vehicles, recently partnered with Midwest Transit Equipment (MTE) to convert 10,000 existing school buses to EVs over the next five years.8 MTE will provide the frame for the school uses and SEA will provide its SEA-drive propulsion system to convert the buses to EV.9 In a major local project, Logan Bus Company announced its collaboration with AMPLY Power and Unique Electric Solutions (UES) to deploy New York City’s first Type-C (conventional) school bus.10

Industry followers should expect further collaborations, because simplifying the route to adopting an EV fleet makes it more likely EV products will reach customers.

Opportunities Going Forward

Over the long haul, EV buses should do well. Scaling up investments and competition on the production side should facilitate making fleet modernization more affordable for school districts while supporting profit margins for manufacturers. EVs aren’t leaving town, so manufacturers, fleet operators, school districts and municipalities will either get on board or risk being left at the curb.

Article By Michael J. Small and Samantha Ruppenthal at Foley & Lardner LLP

For more utilities and transportation legal news, click here to visit the National Law Review.

 

 

1https://shop.scholastic.com/parent-ecommerce/series-and-characters/magic-school-bus.html

2https://www.busboss.com/blog/having-an-electric-school-bus-fleet-is-easier-than-many-people-think

3https://thehill.com/opinion/energy-environment/570326-electric-school-bus-investments-could-drive-us-vehicle

4https://info.burnsmcd.com/white-paper/electrifying-the-nations-mass-transit-bus-fleets

5https://stnonline.com/partner-updates/electric-repower-the-cheaper-faster-and-easier-path-to-electric-buses/

6https://www1.nyc.gov/office-of-the-mayor/news/296-21/recovery-all-us-mayor-de-blasio-commits-100-electric-school-bus-fleet-2035

7https://www.bloomberg.com/press-releases/2021-02-16/highland-electric-transportation-raises-253-million-from-vision-ridge-partners-fontinalis-partners-and-existing-investors

8https://www.electrive.com/2021/12/07/sea-electric-to-convert-10k-us-school-buses/#:~:text=SEA%20Electric%20and%20Midwest%20Transit,become%20purely%20electric%20school%20buses.

9 Id.

10https://stnonline.com/news/new-york-city-deploys-first-type-c-electric-school-bus/

© 2022 Foley & Lardner LLP

A Virtual Discussion Series | Part I: Labor, Employment and OSHA Developments and Strategies for Companies and PE Investors Navigating COVID-19 Hurdles

In this webinar, Partners in the Private Equity/Mergers and Acquisitions Practice Group, Heather Rahilly and Andrew Ritter, moderate a discussion with Partners in the Labor, Employment and OSHA Practice Group, Michael Miller and Lawrence Peikes, to discuss developments and strategies in labor, employment and OSHA for companies and investors navigating COVID-19 hurdles.

Key takeaways from this webinar include:

  • New developments and trends in labor and employment laws
  • Summary of current changes to OSHA regulations and standards
  • New litigation and regulatory concerns and how to mitigate risk
  • How legal developments in OSHA, labor and employment may affect current and future deal practice

© 1998-2020 Wiggin and Dana LLP

For more on OSHA labor regulation, see the National Law Review Labor & Employment law section.

National Security vs. Investment: Are we striking the right balance?

The U.S. Treasury Department’s final regulations, giving it more power to scrutinize any national security risks that may arise from deals between U.S. and foreign companies, are scheduled to go into effect this week, Feb. 13, 2020.

CFIUS New Regulations

The regs implement the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA) and provide the interagency Committee on Foreign Investment in the United States (CFIUS) broader authority over certain investments and real estate transactions. Critics say the regs will change cross-border M&A deal-making for years to come, and advance increasingly protectionist U.S. policy.

Treasury Secretary Steven T. Mnuchin said the regs will strengthen national security and “modernize the investment review process,” while maintaining “our nation’s open investment policy by encouraging investment in American businesses and workers, and by providing clarity and certainty regarding the types of transactions that are covered.”

We have previously described in the MoginRubin Blog how not everyone shares the Treasury Secretary’s respect for CFIUS.

Financial writer and author Robert Teitelman described it in an article for Barron’s as “a creature from the shadows of the administrative state” that “defines obscurity in the federal government.” He said it “encourages the very practices the administration condemns in China.” Hernan Cristerna, co-head of global mergers and acquisitions at JPMorgan Chase, told the New York Times that CFIUS is the “No. 1 weapon in the Trump administration’s protectionist arsenal” and called it “the ultimate regulatory bazooka.”

Enacted in August 2018, FIRRMA gives CFIUS much greater reach into deals where national security is a potential issue. Specifically, the law extends CFIUS’s jurisdiction over “certain non-controlling investments into U.S. businesses involved in critical technology, critical infrastructure, or sensitive personal data. Big data, artificial intelligence, nanotechnology, and biotechnology are among the specific technologies the law was designed to protect. It also establishes CFIUS’s jurisdiction over real estate deals.

The regulations limit CFIUS’s application of its expanded jurisdiction to “certain categories of foreign persons,” and has “initially” designated a handful of countries as “excepted foreign states.” They are Australia, Canada, and the U.K., countries with which the U.S. has “robust intelligence sharing and defense industrial base integration mechanisms.” The list may be expanded in the future, according to the regs.

‘Controlling interest’ redefined.

Attorneys, in-house counsel and other professionals deeply involved in cross-border transactions are already experiencing some nuts and bolts changes that other professionals want to be aware of.

For example, deals that would give foreign companies “controlling interest” are no longer the only deals the committee will examine; it is now interested in deals that would transfer non-controlling but “substantial interest” when critical technologies, critical infrastructure, or the private data of U.S. citizens are involved. Deals that fall into these categories now require filing; previously they were optional. Deals that would once have sailed through scrutiny may now be delayed by investigations. CFIUS also has more time to review transactions. The initial stage ends within 45 days and the second phase can last from 45 to 60 days. Filing fees are set but cannot be more than 1% of the value of the transaction or $300,000, whichever figure is lower. And, of course, there is increased risk that they be ultimately be blocked.

The regs include a new definition of “principal place of business” as the “primary location where an entity’s management directs, controls, or coordinates the entity’s activities, or, in the case of an investment fund, where the fund’s activities and investments are primarily directed, controlled, or coordinated by or on behalf of the general partner, managing member, or equivalent.” If the entity is determined to be in the U.S. and has represented in its most recent submission or filing to a U.S. or foreign government that if either its principal place of business, principal office and place of business, address of principal executive offices, address of headquarters, or equivalent, is outside the U.S. then that location is deemed the entity’s principal place of business unless it can prove that the location has changed since the filing.

These new regulations will impact many purely private cross-border transactions, especially in the areas of critical infrastructure, sensitive personal data, and real estate.

Early consideration important.

M&A counsel must now consider CFIUS implications early-on, not only to avoid delay and frustration, but to account for CFIUS clearance in deal timing and closing deadlines. Fines may be levied if CFIUS notices are not timely filed.

Fund managers who make large investments in U.S. companies can also expect to be asked to represent in deal documents that their funds or investors do not require a mandatory CFIUS filing.

For more background and additional insights, please read our previous post, CFIUS: A Guardian of National Security or a Protectionist Tool? Also, you can download the regulations from the MoginRubin website:  Part-800-Final-Rule-Jan-17-2020  & Part-802-Final-Rule-Jan-17-2020

© MoginRubin LLP

ARTICLE BY Dan Mogin and  Jennifer M. Oliver of MoginRubin.
For more on CFIUS regulations, see the National Law Review Global Law section.

Swap New Year’s Resolutions for Real Property with a 1031 Tax-Deferred Exchange

A 1031 Tax-Deferred Exchange (“§ 1031 Exchange”) is an extremely useful tax strategy for taxpayers that maintain real property for productive use in trade, business or for investment. It allows a taxpayer to defer payment of capital gains tax on investment properties that are sold.

A taxpayer continues to qualify for a § 1031 Exchange if the following rules are met: (1) the properties being exchanged must be “like-kind”; (2) the taxpayer must transfer property held for productive use in a trade, business or for investment (the “Relinquished Property”) and subsequently receives property to be held either for productive use in a trade, business or for investment (the “Replacement Property”)”; (3) the Replacement Property value must be greater than or equal to the Relinquished Property value; (4) the taxpayer must not receive “boot” in order for the exchange to remain tax-free; (5) the name on title of the Relinquished Property must mirror the name on the title of the Replacement Property; (6) the taxpayer must identify a replacement property within 45 days after the taxpayer transfers the Relinquished Property; and (7) the taxpayer must receive the Replacement Property within 180 days of the transfer of the Relinquished Property, or on the date the taxpayer’s tax return is due, whichever is earlier.

Section 1031 Exchanges, while an excellent tax deferral tool, are not without complications. Section 1031 Exchanges must be used exclusively for the exchange of real property held for investment or business purposes. Section 1031 Exchange rules also require the title of the Replacement Property to be under the same name as the title of the Relinquished Property. Any real property interests owned by a limited liability company or a partnership must be reinvested by the entity in real property of “like-kind” nature for investment or business purposes in order for it to qualify under § 1031. This is a problem if an individual member or partner of the entity wishes to “cash out” or reinvest in something other than “like-kind” real property. To remedy this problem, many transactions are structured as a “drop and swap” where the interests in the real property are transferred to the individuals as tenants in common and those tenants in common, as individuals, deed the Relinquished Property to the buyer. Because the taxpayers, as individuals, sold the Relinquished Property, it is the individuals that must reinvest in the Replacement Property to utilize the tax deferrals under § 1031. Because the individuals are tenants in common, each is able to choose independently whether to reinvest in a Replacement Property and defer tax under § 1031 or cash out and pay the tax on their individual earnings from the sale of the property.

However, this “drop and swap” technique is increasingly disfavored by the IRS and may create tax implications for the taxpayers if the real property is acquired by the individual taxpayers immediately prior to the sale. Since real property must be for investment or business purposes to be eligible under a § 1031 Exchange, it is best practice to distribute the interests in the property to the individuals well in advance of the date of the relinquishment so each individual holds the property long enough to constitute an investment. While the IRS has not provided guidelines on the length of the holding period, it is recommended that such transfer, or “drop” to the individuals occur at least a year in advance before the closing on the Relinquished Property and that records be kept of the transfer and the intent of the taxpayers to hold the real property for business or investment. Moreover, taxpayers need to take care when transferring (“dropping”) the interest in the real property from the entity to individual tenancy-in-common interests to ensure the taxpayers aren’t viewed as operating as a partnership and thus, subject to ownership constraints of a partnership (this would likely negate the drop and swap technique and require the individuals, as tenants-in-common but operating as a partnership, to all invest in the Replacement Property for some to benefit from tax deferral under a §1031 Exchange).

There does not appear to be any limitation on how an individual taxpayer uses their proceeds if they are cashing out, and have no intent to defer tax under a § 1031 Exchange. However, for a taxpayer to defer tax under a § 1031 Exchange the above requirements must be met, and there can be no actual or constructive receipt of money or other property before the taxpayer actually receives the Replacement Property. Even if the taxpayer may ultimately receive the like-kind Replacement Property, any receipt of cash or other property, including an interest in an additional entity or personal property, prior to that Replacement Property will make the transaction a sale rather than a deferred exchange and prevent the taxpayer from gaining the tax deferral under a § 1031 Exchange.

© 2020 Davis|Kuelthau, s.c. All Rights Reserved

See more on the topic via the National Law Review Tax Law page.