NASDAQ Capital Markets Lowers Initial Listing Requirements to Benefit SmallCap Stock Listings

The NASDAQ Stock Market received approval from the SEC on April 18, 2012 to lower its initial listing requirements for its Capital Markets listing tier.  The stated purposes of the changes were to allow NASDAQ to compete with the NYSE’s AMEX listing and to benefit Smallcap market entrants. We summarize the new standards below.

The existing rules required that a company seeking to list its securities on NASDAQ must comply with a host of quantitative and qualitative initial listing requirements, including, among others, a $4.00 per share minimum bid price requirement. Under the new rules, a company that does not meet the $4.00 per share minimum bid price requirement may still list its securities on NASDAQ if it meets all other initial listing requirements and:

• evidences the $3.00 minimum bid price and qualifies under the Equity or Net Income initial listing standards, or

• evidences the $2.00 minimum bid price and qualifies under the Market Value of Listed Securities initial listing standard.

Under the Equity Standard, a company must show stockholders’ equity of at least $5 million, market value of publicly held shares of at least $15 million and two-year operating history.

Under Net Income Standard, a company must show net income from continuing operations of $750,000 in the most recently completed fiscal year or in two of the three most recently completed fiscal years, stockholders’ equity of at least $4 million and market value of publicly held shares of at least $5 million.

Under the Market Value of Listed Securities Standard, a company must show market value of listed securities of at least $50 million (current publicly traded companies must meet this requirement and the price requirement for 90 consecutive trading days prior to applying for listing if qualifying to list only under the market value of listed securities standard), stockholders’ equity of at least $4 million and market value of publicly held shares of at least $15 million.

In order to avail itself of the alternative minimum initial bid price listing standard, the company must demonstrate that it has net tangible assets in excess of $2 million if the company has been in continuous operation for at least three years, or of $5 million if it has been in continuous operation less than three years.

Please contact Brian Daughney (bdaughney@becker-poliakiff.com) or Michael Goldstein (MGoldstein@becker-poliakoff.com) for more insight related to the new listings standards.

Interest Charge-Domestic International Sales Corporations:

If your business sells goods and/or services outside the U.S., you may be able to reduce your federal tax liability in more than half through the use of an interest charge-domestic international sales corporation (IC-DISC).  This may be the case even if export sales represent a fraction of your company’s overall sales. 

Sound too good to be true?  The IC-DISC is not an exotic strategy designed to “game” the system; it expressly sanctioned by Congress as means of promoting export sales of U.S. goods and services.  IC-DISCs were actually introduced back in 1971 and were originally intended to be a tax deferral mechanism.  They were used -- as my old tax professor used to say, “a tax deferred is money in your pocket” -- but never quite caught on.  That all change in 2004 when amendments to the Tax Code caused dividends from qualified corporations, including IC-DISCs, to be taxed at capital gains rates of 15%.  Informed exporters stampeded to take advantage of IC-DISCs, which allowed taxation of export profits to be permanently reduced from an effective rate of approximately 35% to the reduced capital gains rate for qualifying dividends. 

While government statistics show that IC-DISCs remain underutilized, informed exporters continue to take advantage of the arbitrage tax savings of 20% offered by the structure; if your company is eligible, you should as well. 

Candidates for an IC-DISC

·        Manufacturers or distributers of products manufactured, produced, grown or extracted in the U.S. that sell or lease such products outside the U.S. or that sell such products to other U.S. companies that export such products outside the U.S.  

·        Architectural and engineering firms providing services for construction projects outside the U.S.

·        Developers of computer software licensed for reproduction outside the U.S.

·        Agricultural and mineral producers that export products outside the U.S.

What is an IC-DISC?

An IC-DISC is a domestic corporation that makes an election be treated as an IC-DISC for federal income tax purposes. Despite the connotations of its esoteric name, the IC-DISC is generally regarded as a “paper” company in that it is not required to have employees, office space or tangible assets and is not required to provide any services.  The sole purpose of the IC-DISC is to receive commissions from the operating company

In order to be eligible to make the IC-DISC election, the corporation must satisfy certain technical requirements, a 95% qualified gross receipts test and a 95% qualified export test.  The qualified gross receipts test is met if 95% or more of the gross receipts of the IC-DISC consist of commissions earned with respect to qualified export property, which is property (i) manufactured, produced, grown or extracted in the U.S. by a person other than an IC-DSC; (ii) is held primarily for sale, lease or rental for direct use, consumption or disposition outside the U.S.; and (iii) not more than 50% of the value of which is attributable to imported materials. 

The qualified export test is satisfied if an IC-DIC’s tax basis in its qualified export property (plus certain other assets) equals or exceeds 95% of the sum of the adjusted bases of all the assets of the IC-DISC at the close of the year. 

Structure and Tax Benefits of an IC-DISC

In the most common structure, the operating company pays a tax-deductible “commission” payment to the IC-DISC, which is tax-exempt and therefore pays no tax on the commission.  The IC-DISC then either distributes its earnings in the form of a dividend (taxable at the 15% qualified dividend rate) or defers tax by retaining all or a portion of its income.  IC-DISC shareholders can annually defer the payment of tax on up to $10 million of net income attributable to qualifying export revenue (at the cost of a small interest charge), so long as the corporation reinvests such income in the export business.

The amount of federal income tax benefit that may be achieved by utilizing an IC-DISC structure depends both on the amount of the operating company’s export sales and the amount of commission that may be paid to the IC-DISC. Generally, the commission is determined by analyzing three potential formulas provided in the Internal Revenue Code, and choosing the one that maximizes the benefit in a taxpayer’s particular circumstance.  The key takeaway, though, is that the business owners receive a 20% tax savings on the amount of the commission paid – i.e., the difference between the 35% ordinary income tax rate and the 15% qualified dividend rate. 

In addition to the foregoing tax savings, the IC-DISC can also provide a number of ancillary benefits.  For example, dividend distributions from the IC-DISC are not subject to Federal Social Security (FICA), Medicare, or self-employment taxes.  Also, because the IC-DISC is not required to be owned by, or in the same manner as, the operating company, a significant estate planning opportunity is available. 

It should be noted that separate and apart from the commission income, an IC-DISC may be able to purchase accounts receivable from the affiliated exporter at a discount (on a factoring basis), and to conduct certain promotional activities fro the operating company on a cost-plus basis.  Where applicable, these additional items of income would not count against the annual limitation of $10 million of qualifying net income, and would be eligible for either current distribution at the preferred rates applicable to dividends or deferral. 

No Impact on Business Operations

As mentioned above, the IC-DISC is merely “paper” company; it does not perform any services or engage in any activities that in would in any way impact the operating company’s business operations or day-to-day dealings with its customers.  The operating company continues to provide the services and bill its customers, who do not even know the IC-DISC exists.   

Conclusion

Properly structured and implemented, an IC-DISC can provide an enormously powerful vehicle for reducing and/or deferring an exporter’s income tax liability.  While the concept is simple, the rules can be complex and the intercompany documents need to be carefully drafted.  It is necessary for a business owner to consult a legal advisor to determine whether they may benefit from an IC-DISC based on their particular situation. 

If you would like to determine whether you may be eligible to take advantage of the tax breaks offered by an IC-DISC, please contact Andrew Berger at 954-364-6074 or aberger@becker-poliakoff.com.

Andrew Berger is a tax and estate planning attorney with Becker & Poliakoff, P.A. He received his LL.M. in Taxation from New York University School of Law, his J.D. from Fordham University School of Law, and his B.A. from Emory University. He is admitted to practice law in Florida, New York and New Jersey.

Jobs act update - us senate and house pass legislation to ease capital raising for private companies and reduce reporting obligations for certain public companies

The US Senate last night passed legislation entitled “Jumpstart Our Business Startups Act” ("JOBS” Act) which, with a similar law passed by the House of Representatives earlier in March, claims to make it easier and less burdensome for companies, especially start-up companies, to raise capital from outside investors.  A second purpose of the proposed law is to reduce the reporting compliance requirements for certain public companies.

The two versions, while similar, will have to be reconciled before the Jobs Act can be made into law.  

Proponents of the JOBS Act claim that it would facilitate the private offering process by (1) eliminating the prohibition on general solicitation or advertising for offerings under Rule 506 of Regulation D to accredited investors and for secondary sales under Rule 144A to qualified institutional buyers; (2) lifting the cap on Regulation A offerings from $5 million to $50 million; and (3) creating an exemption for so-called "crowdfunding." Crowdfunding is a term that has evolved to describe a method of raising capital, usually through the Internet, among people who network and pool money, typically in very small individual contributions.

The JOBS Act would permit crowdfunding up to $2 million in any 12 month period in the aggregate, with individual investors limited to the lesser of $10,000 and 10% of an investor's annual income. For companies without audited financial statements the amount raised would be capped at $1,000,000.   The legislation also would ease requirements for broker-dealer registration requirements for intermediaries that facilitate offerings under Rule 506 of Regulation D and the crowdfunding exemption.  

The proposed Act also includes provisions which are designed to reduce the regulatory reporting requirements for public companies which qualify as an "emerging growth company."  Under one version of the proposed Act, "emerging growth companies" are those which, during its most recently completed fiscal year at the time of registration with the SEC, had less than $1 billion in annual gross revenues.   Among other changes in the current reporting scheme, these emerging growth companies would be exempt Sarbanes-Oxley Section 404(b) auditor attestation of internal controls and procedures, and from certain other accounting and auditing standards (including auditor rotation requirements if such requirements are imposed). This exemption previously applied only to companies with less than $75 million of public float in their securities.

Both versions of the proposed bill increase the number of stockholders of record a company with more than $10 million in assets must have prior to triggering the SEC's registration and periodic reporting requirements under the Securities Exchange Act of 1934 from 500 to 2,000, provided that no more than 500 such holders are not accredited investors.

General advertising would be permitted in connection with private placements made exclusively to accredited investors.  This proposed change is a fundamental change in prior law which expressly forbid such activities. 

The proposal also includes an exemption from broker-dealer registration for “intermediaries” in the capital raising market.  Persons who maintain a platform the is designed to facilitate Regulation D offerings under Rule 506 will be exempt from the registration requirements as a broker-dealer provided such persons do not receive compensation, does not hold any customer funds or securities and such persons are not “bad boys”.   These persons would be allowed to provide due diligence services but would not be allowed to negotiate the terms of any offering, 

Please contact Brian Daughney in our New York office with any questions.

Brian C. Daughney
Attorney at Law
New York
212.599.3322

Mustached Americans are Demanding a $250 Tax Deduction

Mustached Americans are sponsoring the Stache Act. Stache stands for “Stimulus to Allow for Critical Hair Expenses”.  These mustache having individuals are demanding a $250-annual tax deduction for expenditures on mustache grooming supplies.  An interesting observation:  the Stache Act talks about “Mustached American”, not “Mustached male American”.  This begs the question:  If both husband and wife have a mustache, will they get a $500 deduction?  Along those lines, what if the husband has beard and the wife a mustache, or vice versa?  These inquiries might seem like a joke, but they raise real concerns about the ramifications of this proposed legislation.  If passed, these thorny issues could get hairy.

Here is the link:  https://www.facebook.com/hrblock?sk=app_173550109426757.

For additional tax questions, whether or not related to personal grooming, please contact Jean-Pierre Lavielle at (212) 599-3322 or jplavielle@becker-poliakoff.com.

NYSE Further Restricts Broker Discretionary Voting

On January 25, 2012, the New York Stock Exchange LLC (“NYSE”) issued an Information Memo announcing a change in the application of Rule 452 to certain corporate governance proposals, which further restricts the ability of brokers to vote their customers’ shares. Under NYSE Rule 452, a broker may vote its customers’ shares in the absence of specific customer instructions for “routine” matters. Rule 452, however, prohibits this discretionary voting of uninstructed shares in “non-routine” matters.     

NYSE stated that it is changing its approach on these matters in light of recent congressional and public policy trends disfavoring broker voting of uninstructed shares. The matters on which brokers may no longer vote without specific customer instructions include proposals to:

• declassify a company’s board of directors;
• implement majority voting on the election of directors;
• eliminate supermajority voting provisions in a company’s governing documents;
• provide for the use of written consent;
• provide the right to call a special meeting; and
• override certain types of anti-takeover provision.

The practical implication of the NYSE’s new position is that companies may face increased difficulty in obtaining the necessary shareholder support for these proposals. This could be most acutely felt for companies seeking shareholder approval for proposals that require the approval of a majority (or more) of the shares outstanding, such as proposals seeking to amend the certificate of incorporation to implement a specified corporate governance change. For these proposals, any resulting broker non-votes will have the effect of an “against” vote.    

Please contact the author of this post, Michael Goldstein, at (212) 599-3322 or mgoldstein@becker-poliakoff.com for more information.

When it Comes to Tax, Do Not Trust Your Dentist

Tax advice is serious business.  A married coupled learned this the hard way when they retained their dentist as their tax adviser. Based on their dentist's “advice”, and on their own “research”, they concluded, to their chagrin, that the Internal Revenue Code did not impose any liability on them.  The IRS and the U.S. Court of Appeals had a different view.  See United States v. Allen, 1^st Cir., No 10-2160, 1/6/2012 at http://op.bna.com/dt.nsf/r?Open=vmar-8qcvjw.

The facts of the case present what can be described as a "unique" situation.  For a number of years, like most law abiding citizens, the Allens filed annual federal income tax returns.  The Allens worked in a number of fields including nutrition, vitamin supplement sales, and health care.  On the advice of their dentist, and based on their own personal interpretation of the Internal Revenue Code, they concluded that no provision of the Internal Revenue Code imposed “liability” on them for taxes.  When defending their position, they did not dispute any of the IRS's findings; rather, they argued that their own research and the advice of their dentist provided them with  the basis to form a "good faith belief" that they did not owe any taxes.  A jury of their peers found this claim of a "good faith" belief to be unconvincing. 

There is more to this case than meets the eye, but merely scratching the surface provides us with an important pearl of wisdom:  when it comes to taxes, do not trust your dentist, and when it comes to a dental hygiene, do not trust your tax attorney.

For more information, contact Jean-Pierre Lavielle at (212) 599-3322 or jplavielle@becker-poliakoff.com, not your dentist.



Current SEC Developments Regarding Small Businesses and Capital Formation: A Call You Will Want to Take

On January 4, 2012, the Securities and Exchange Commission announced that the Securities and Exchange Commission Advisory Committee on Small and Emerging Companies (the "Committee") will hold a public meeting by conference telephone call on Friday, January 6. The meeting will begin at 1:00 p.m. EST. Among other topics, the agenda of the call will include the discussion of a recommendation to the Commission on relaxing the restrictions on general solicitation and advertising of securities offerings that are exempt from registration.

The Committee was formed last year to provide a formal mechanism for the Commission to receive advice and recommendations on privately held small businesses and publicly traded companies with a market capitalization less than $250 million. More information about the Committee can be found here: http://www.sec.gov/info/smallbus/acsec.shtml.

For example, in November 2011 the U.S. House of Representatives passed a "crowdfunding" bill entitled the "Entrepreneur Access to Capital Act" (H.R. 2930). If enacted, this bill would exempt from the registration requirements of the Securities Act of 1933, and applicable state securities laws, offerings of securities where the total amount raised by a company, and the maximum amount an individual investor can invest in an offering, are subject to annual limitations.

In addition, on December 15, 2011, the SEC announced that it would review 17 current rules over the next year in order to determine whether they should be continued, amended or rescinded, in order to minimize any significant economic impact these rules may have upon small companies. Among the rules that the SEC stated it would review are rules related to selective disclosure (Regulation FD); insider trading (Rules 10b5-1 and 10b5-2); delivery of proxy materials to households; and auditor independence requirements. This review is being undertaken in accordance with the Regulatory Flexibility Act of 1980.

For more information, contact Michael Goldstein at (212) 599-3322 or mgoldstein@becker–poliakoff.com