In recent months notable investors, wealth managers, and banks have begun to explore (if they were not already invested in) bitcoin and other cryptocurrencies. Many banks are beginning to offer cryptocurrency investment options to high net worth individuals, and there are multiple bitcoin exchange traded fund applications pending with the Securities and Exchange Commission.

If you are interested in exploring different avenues to become invested in the digital assets and cryptocurrency space, whether on a personal or a business level, in addition to being aware of the various state regulations there are a number of important Financial Crimes Enforcement Network (“FinCen”) rulings to be aware of. Depending on the type of business opportunity you wish to pursue, these rulings can impact you from a regulatory standpoint. The below chart is a non-exhaustive overview of some of the FinCen rulings. Please contact us with any questions, or to discuss how we can help you pursue any opportunities.

Regulation Scenario Ruling
FIN 2014 R001 A company mines bitcoin, the mined coins have not yet been used or transferred, but the company may decide to: (a) use the coins to purchase goods or services; (b) convert the coins into a currency of legal tender; and/or (c) transfer the coins to the owner of the company. The company as described is a user of bitcoin and not a money services business provided that the mined coins are used to: (a) pay for the purchase of goods or services, debts previously incurred, or distributions to owners; or (b) purchase fiat currency or another virtual currency provided the currency is sued solely to make payments or for the company’s investment purposes.
FIN 2014 R002 A company will produce a piece of software that facilitates the company’s purchase of virtual currency from sellers by automating the collection of the virtual currency and the payment in currency of legal tender. The company will limit its activities to investing in convertible virtual securities for its own account. The company will purchase the virtual securities from a seller and sell them when it is sensible for the company’s business plan. The company as described is a user of the currency and not a money transmitter when it invests in a convertible virtual currency for its own account and then realizes the value of the investment. However, any transfers to third parties at the behest of the company’s counterparties, creditors, or owners who are entitled to direct payments should be closely scrutinized as these could cause the company to become a money transmitter.
FIN 2014 R007 A company will rent mining computer systems to third parties, allowing the third party to mine virtual currencies. The company developed a system that mines cryptocurrencies and the third party gives the company information about the mining pool. The company enters the third-party information into the system for enabling the third party to benefit directly and exclusively from the mining pool. All virtual currency mined by the third party remains with the third party The company is not a money transmitter solely by virtue of renting a computer system to a third party allowing the third party to obtain convertible virtual currency to fund activities as an exchanger. The rental activity by itself does not qualify the company as a money transmitter.
FIN 2014 R011 A company will set up a platform consisting of a trading system which will buy and sell virtual currency for currency of legal tender and a maintain a set of book accounts in which customers can deposit funds to cover their exchanges. Customers deposit funds into the funding accounts, and once funded a customer can submit an order to purchase or sell the deposited currency. The platform will attempt to match each purchase order to a sell order. The company will not allow inter-account transfers, third party funding of a customer accounts, or payments from a customer to a third party The company qualifies as a money transmitter because the company here is an exchanger of virtual currency and not a user because it accepts convertible virtual currency from one person and transmits it to another as part of the acceptance and transfer of currency, funds, or other value that substitutes for currency.
FIN 2014 R012 A company will set up a virtual currency payment system to provide payments to merchants who wish to receive customer payments in bitcoin. The company will provide virtual currency based payments to merchants who wish to receive payments for goods or services sold in a currency other than legal tender in the merchants own jurisdiction. The company would receive payment from the buyer or debtor in a currency of legal tender and transfer the equivalent amount of bitcoin to the seller or creditor The company qualifies as a money transmission because it accepts currency, funds, or other value that substitutes for currency from one person and transmits currency, funds, or other value that substitutes for currency to another location or person.
FIN 2015 R001 A company provides internet-based brokerage services between buyers and sellers of precious metals, will buy and sell precious metals on its own account, and will hold metals for buyers via a digital wallet on the Bitcoin blockchain ledger. The company receives a transaction fee on transfers of digital certificates and a custody fee for the metals held in custody. The company qualifies as a money transmitter because there is a transfer of funds between a customer and a third party to fund the account, there is a transfer of value from a customer’s currency or commodity position to another’s account, and there is a closing out of a customer’s position with a transfer of proceeds to a third party.

 


The information provided herein is general in nature and is purely for informational purposes and does not constitute legal advice, nor does it create an attorney-client relationship. You should accept legal advice only from a licensed legal professional with whom you have an attorney-client relationship.

As digital assets, and cryptocurrencies specifically, have continued to gain worldwide popularity, you might be wondering whether you can pursue opportunities within the industry. The answer in large part depends on what type of involvement you seek to achieve, and where you plan on pursuing such opportunity. For convenience and ease of use, attached here is a chart of the regulations surrounding cryptocurrencies and digital assets on a state-by-state basis. Please note that while this chart is comprehensive, it is not an exhaustive list. Additionally, this chart does not detail regulations by country, but those vary significantly and frequently change as well. For instance, El Salvador recently became the first country to consider bitcoin as legal tender, and now there are reports of a few other countries contemplating doing the same.

At a very high level, forty-nine of the fifty states, and Washington D.C., have at least one proposed or enacted regulation as it pertains to digital assets and cryptocurrencies. Regarding licensing requirements, thirteen states have a proposed or enacted regulation. Twenty-five states have a proposed or enacted marketplace facilitator regulation and nine states have a proposed or enacted money transmitter law. Additionally, forty-two states have a proposed or enacted law that regulates digital assets and cryptocurrencies and twenty-three states have a proposed or enacted regulation to create a sandbox or committee to study the implementation and use of digital assets and cryptocurrencies. Outside of those five overarching categories (Licensing Requirements, Marketplace Facilitator, Money Transmitter, Regulation and Sandbox) thirty-seven states have other proposed or enacted regulations which range from tax regulations to inclusion in the Uniform Commercial Code of the State.

The regulations vary greatly by state and are frequently changing. Depending on what type of business opportunity you plan to pursue, you may be subject to federal regulations (for an overview of FinCen rulings click here) beyond the various state regulations listed on the chart provided in the first paragraph. If you are considering pursuing opportunities within the digital asset or cryptocurrency industry, please do not hesitate to contact us with any questions, or to discuss how we can help you pursue any opportunities. Additionally, if you would like to receive the chart as it is updated, please let us know.

 


The information provided herein is general in nature and is purely for informational purposes and does not constitute legal advice, nor does it create an attorney-client relationship. You should accept legal advice only from a licensed legal professional with whom you have an attorney-client relationship.

Many transactions begin with the delivery by one party to the other of a letter of intent (“LOI”).[1]  The LOI is a document setting forth the parties’ intent to enter into a transaction and summarizing certain salient business terms.  If the parties cannot agree, it would be better to learn that early on during the LOI stage rather than later after expending substantially more time and resources.  In many cases, LOIs include both non-binding and binding terms, each of which should be clearly delineated to avoid ambiguity.

A signed LOI can ignite deal momentum, comfort parties with respect to key terms, and facilitate and serve as guide for the preparation of definitive agreements.  The LOI can be as specific or vague as the circumstances require, but typically includes some understanding or a proposal with respect to the following areas:

  1. Structuring.  Most acquisition transactions are structured as stock purchases, asset purchases, or mergers.  Each transaction structure carries with it differing tax treatment and legal distinctions that can have an impact both on risk-allocation between the parties and speed/certainty of closing.  In addition, at times, advance tax structuring may be required due to tax complications of a transaction.
  2. Purchase Price and Payment. Customarily, the LOI will include the buyer’s proposal with respect to the purchase price which may include, without limitation, an upfront cash payment, deferred payments payable in installments post-closing, earnout payments based on the achievement of agreed financial targets, and equity in the buyer or a parent company of the buyer (commonly referred to as rollover equity and customarily between 10% and 20% of the total transaction consideration).  It is also common to include a basis on which the purchase price was calculated (for example, some multiple of the seller’s EBITDA or revenues).
  3. Closing Conditions. The LOI will often include conditions precedent to closing which can include financing, diligence and other contingencies such as obtaining any required third-party consents.
  4. Due Diligence. By the time the LOI is negotiated, the parties will likely have exchanged some preliminary diligence material subject to a confidentiality agreement (see below). Once the LOI is signed, the buyer will undertake a more comprehensive review of the target.  The LOI may include basic parameters of such further review and a timeline for completion.
  5. Confidentiality. Again, parties may exchange diligence prior to the execution of the LOI and in such case, it is imperative for the seller to have a binding confidentiality agreement in place prior to sharing any diligence.  The LOI should either refer to an existing confidentiality agreement or include binding confidentiality provisions absent such prior existing agreement.
  6. Exclusivity. In exchange for dedicating resources to a transaction, the buyer will want comfort that the seller is not simultaneously negotiating with other potential buyers.   Accordingly, it is customary for an LOI to include a binding agreement that the seller will not, for some period of time after signing the LOI, discuss or pursue a transaction with any other prospective buyer.  Many times this is related to the due diligence period plus a period of time following completion of due diligence with an extension right.

Some parties will opt to front-load the negotiation of certain other deal points for inclusion in the LOI, addressing matters such as the scope of indemnification, caps, baskets, deductibles, and survivability of representations, warranties, and covenants.  In general, sellers prefer a more comprehensive LOI to limit the buyer’s positioning later on and to ferret out any preliminary issues.  Conversely, buyers prefer a less comprehensive approach to the LOI to provide for flexibility, account for what they have learned in due diligence, and preserve leverage for later on.

The LOI is the first step in a long process.  Often times the business principals negotiate the LOI without counsel, resulting in lack of specificity or key terms.  If you are planning to send out or anticipate being in receipt of an LOI, the earlier you involve counsel the better suited you will be to negotiate your transaction.


[1] This article focuses on letters of intent; however, in some instances, discussions are memorialized or proposals are made under a term sheet, an expression of interest or a memorandum of understanding.

On January 8, 2021, the U.S. Small Business Administration (“SBA”), in consultation with the Department of Treasury, announced the re-opening of the Paycheck Protection Program (“PPP”) to first-time borrowers and certain existing borrowers. Through a series of Interim Final Rules (each, an “Interim Rule”), the SBA provided guidance on the expanded PPP as enacted by the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (the “Act”), with respect to PPP loan applications, eligible borrowers and lenders, and loan forgiveness applications submitted both pre and post-enactment of the Act.

Below is a summary of the key provisions and updates to the PPP as contained in the Interim Rules:

Additional lending under the PPP will be open first to community financial institutions, with First Draw PPP Loans (i.e., new PPP loans under the expanded PPP) available starting on January 11, 2021 and Second Draw PPP Loans (i.e. additional advances to existing PPP borrowers) available starting on January 13, 2021. Funds will be available to PPP borrowers until March 31, 2021. The First Draw application and Second Draw application are available on the SBA website (and linked here), and are substantially similar to the original application required under the initial PPP.

  1. First Draw PPP Loans. The Act, as refined by the Interim Rules, permits existing PPP borrowers to obtain new or additional funding in that event that such PPP borrower (i) was previously ineligible under the initial PPP, (ii) did not receive the full amount of PPP funds available to such PPP borrower, or (iii) returned all or any portion of the original PPP loan advanced to such borrower under the initial PPP. Eligible borrowers who did not accept the full amount of the initial PPP loan are now allowed to apply for an increase up to the maximum amount initially authorized.

(a) Additional Borrowers. The Act and Interim Rules expand eligibility under the PPP to the following enterprises:

    • 501(c)(6) non-profit organizations and destination marketing organizations with 300 or fewer employees, provided that such organization derives less than 15% of its gross receipts from lobbying activities;
    • Hospitals owned by governmental entities, provided that they receive less than 50% of funding from state or local government sources, excluding Medicaid;
    • Housing cooperatives with 300 or fewer employees;
    • Television, radio and other eligible news outlets (NAICS Code 511110 or 5151) and public broadcasting entities; and

(b) Limitation on Corporate Groups. In addition to (and not in lieu of) existing SBA affiliation rules, the Interim Rules impose a limitation on aggregate borrowing by “corporate groups” in an amount not to exceed $20 million. For purposes of this limitation, businesses are part of a single corporate group if they are majority owned, directly or indirectly, by a common parent. The burden is on the PPP borrower to notify the lender in the event of borrowings in excess of the $20 million threshold, and withdraw or request cancellation of any pending or approved application for excess funds. Failure to do so will be deemed as an unauthorized use of PPP funds, and therefore such PPP loan will not be eligible for forgiveness.

  1. Second Draw PPP Loans. Under the Act and the Interim Rules, eligible borrowers may now apply for a Second Draw PPP Loan, provided that such supplemental loan shall not exceed $2 million and the aggregate amount of all loans to all affiliated borrowers from both the first and second round of funding shall not exceed $10 million. The covered period for all new loans advanced under the PPP extends through March 31, 2021.

(a) Eligible Borrowers. In order to apply for a Second Draw Loan under the PPP, the applicant must be a business with 300 or fewer employees (decreased from 500 under the initial program) and have experienced a decline in gross receipts of 25% or greater in any quarter in 2020 relative to the corresponding quarter in 2019. The Interim Rules clarify that an applicant is deemed to have experienced the required revenue reduction if it has experienced a reduction in annual receipts of 25% or greater in 2020 compared to 2019. It is worthwhile to note that any amounts forgiven on a First Draw PPP Loan received in 2020 is excluded from borrower’s gross receipts for purposes of such determination.

(b) Limitation on Corporate Groups. With respect to Second Draw Loans, businesses that are part of a single corporate group (as described above) shall not receive more than $4 million of Second Draw PPP Loans in the aggregate. The corporate group limit is applicable to all borrowers, including restaurant and hospital businesses operating under NAICS Code 72.

  1. Use of Proceeds for New PPP Loans. The Act, as expanded by the Interim Rules, substantially expands the provisions of the existing PPP relating to authorized uses of PPP loan proceeds in an effort to address certain non-ordinary course expenses incurred by businesses in connection with COVID-19 safety measures. New categories of acceptable uses of PPP loan proceeds include:
  • Payroll costs, including costs related to the continuation of group health care, life, disability, vision, or dental benefits during periods of paid sick, medical or family leave, and group health care, life disability, vision, or dental insurance premiums.
  • Covered operational expenditures, which are defined as payments by a business for any business software or cloud computing service that facilitates business operations, product or service delivery, the processing, payment or tracking of payroll expenses, human resources, sales and billing functions, or accounting or tracking of supplies, inventory, records and expenses.
  • Covered property damage costs related to property damage, vandalism and looting due to public disturbances that occurred during 2020, to the extent not covered by insurance or other compensation.
  • Covered supplier costs, which are defined payments to suppliers pursuant to a contract, order, or purchase order in effect before the date of disbursement of the PPP loan, for the supply of goods that are essential to the operations of the business at the time such expenditure is made.
  • Covered worker protection expenditures, which include any operating or capital expenditures required to facilitate the adaptation of the applicant’s business to requirements established or guidance issued by the Department of Health and Human Services, the Centers for Disease Control, or the Occupational Safety and Health Administration, or any equivalent State or local requirements, related to the maintenance of standards for sanitation, social distancing or any other worker or customer safety requirement related to COVID-19, in all cases during the period commencing on March 1, 2020 and ending on the date on which the COVID-19 national emergency declaration expires. Such expenditures may include costs or expenses incurred in connection with the following:
    • purchase or maintenance of a drive-through window, air filtration or ventilation system or physical barriers (e.g. sneeze guards);
    • expansion of additional indoor, outdoor or combined business space;
    • onsite or offsite health screening capabilities;
    • purchase of particulate filtering face-piece respirators;
    • purchase and maintenance of personal protective equipment

The above notwithstanding, in order to obtain full forgiveness of any PPP loan no less than 60% of loan proceeds must be used to fund payroll and associated eligible costs (inclusive of the amount of any refinanced EIDL).

The full text of each Interim Rule summarized in this alert is linked here and here. We are continuing to monitor as additional guidance is released and will provide any updates as needed. Our attorneys are available to guide you and answer any questions regarding the Interim Rules, the PPP and related pandemic relief measures.

 


As the law continues to evolve on these matters, please note that this article is current as of date and time of publication and may not reflect subsequent developments. The content and interpretation of the issues addressed herein is subject to change. Cole Schotz P.C. disclaims any and all liability with respect to actions taken or not taken based on any or all of the contents of this publication to the fullest extent permitted by law. This is for general informational purposes and does not constitute legal advice or create an attorney-client relationship. Do not act or refrain from acting upon the information contained in this publication without obtaining legal, financial and tax advice.  For further information, please do not hesitate to reach out to your firm contact or to any of the attorneys listed in this publication.

On December 27, 2020, the President signed into law the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act, an integral portion of the Consolidated Appropriations Act of 2021 (the “Act”). As detailed in our Alert released on December 24, 2020, the Act includes the continuation and expansion of the Paycheck Protection Program (“PPP”), subject to certain eligibility requirements and borrowing restrictions. With respect to PPP matters, the Act has been enacted without modification to its initial proposed form.

In the coming weeks, we expect supplemental guidance and regulations in furtherance of the administration and implementation of the Act. The U.S. Small Business Administration is directed to issue regulations to effectuate the PPP-related provisions of Act within 10 days of its enactment.

Our attorneys are available to guide you and answer your questions regarding the Act and related pandemic relief measures.

 


As the law continues to evolve on these matters, please note that this article is current as of date and time of publication and may not reflect subsequent developments. The content and interpretation of the issues addressed herein is subject to change. Cole Schotz P.C. disclaims any and all liability with respect to actions taken or not taken based on any or all of the contents of this publication to the fullest extent permitted by law. This is for general informational purposes and does not constitute legal advice or create an attorney-client relationship. Do not act or refrain from acting upon the information contained in this publication without obtaining legal, financial and tax advice.  For further information, please do not hesitate to reach out to your firm contact or to any of the attorneys listed in this publication.