Category Archives: Publications

Is a Pension Plan the Right Potential Investor For Your Company?

Pension Plan There are more than $25 trillion dollars in U.S. pension plan assets as of December 31, 2016.[1]  To a company (for purposes of this article the entity seeking pension plan investment is referred to as the “Company”) seeking investment capital, pension plans may be important potential investors.  This blog article identifies two important considerations when seeking pension plan investment:  1.  Will the assets of the Company be considered “plan assets”? and 2. Will an investment in the Company result in an income tax liability for the investing plan?

PLAN ASSETS:    The first hurdle is whether the Company’s assets will be considered “plan assets” and what are the implications if the Company’s assets are regarded as plan asset?  The general rule is in general that a portion of the Company’s assets will be treated as plan assets in percentage that pension plan investment bears to all investment.[2]  As having the Company’s assets treated as plan assets turns the Company’s management into plan fiduciaries, plan asset treatment is to be avoided.  To avoid a portion of its assets being treated as plan assets of the investing plans, the Company must meet one of the exceptions listed in the plan asset regulation.[3]

  1.  Debt. The plan asset regulation applies to equity and equity-participating debt instruments.  Straight debt is not subject to the plan asset regulation.[4]  Convertible debt is only treated as equity on conversion unless the conversion feature is more than an incidental feature of the debt instrument[5].   Relying on the determination that the conversion right in a debt instrument is “incidental” would be risky.
  2. Publicly offered security. The plan asset regulation exempts a class of security that is sold to the public under a registration statement effective under the Securities Act of 1933[6] and that is registered under Section 12(b) or 12(g) of the 1934 Act within 120 days after the end of the fiscal year in which the registration statement was declared effective.[7]  To avoid manipulation of this exception, a publicly offered security must have a minimum investment of $10,000 or less and be held by 100 or more investors independent of the Company.[8]
  3. Operating company. The plan asset regulation exempts equity securities issued by an “operating company”.  The plan asset regulation gives no helpful guidance on what would constitute an “operating company.”[9]  Instead, the plan asset regulation offers two safe harbors, for a venture capital operating company[10] and for a real estate operating company[11].   A venture capital operating company is a company 50% or more of whose assets are securities of companies in which the company obtains and actually exercises management rights.[12]  A real estate operating company is a company 50% or more of whose assets consist of real estate that the company manages and develops.[13]  Real estate that is net leased on a long term basis is not considered “managed” for purposes of qualifying for the real estate operating company safe harbor.[14]  On the other hand, where the Company has the obligation to maintain and operate the real estate and hires a manager on a short term basis, the Company may still be a real estate operating company.[15]
  4. No significant participation. Probably the most relied on exception from the plan asset rules is the no significant participation exception, meaning that at all times pension plans hold less than 25% of the value of any class of equity interest in the Company.[16]  Investment in the Company’s securities by the Company’s sponsor or managers is ignored.  The effect of that computational rule is to make it harder to meet the test for not significant participation.  If the Company raises $1,000,000 in capital, $200,000 from a pension plan and $200,000 from management, the pension plan’s investment will be 25% (200,000/800,000), with the investment by management being excluded from the calculation.  On the other hand, if a manager were to invest through his IRA or 401K, that investment would be included in the aggregate pension plan investment in the Company.[17
  5. Tax implications of plan asset treatment. If the assets of the Company are treated as pension plan assets—because none of the exemptions in the plan assets regulation has been met—the managers of the Company will be deemed fiduciaries[18] of the plan assets under management. Use of the plan assets to benefit the Company’s managers would be susceptible of being treated as a prohibited transaction, with the Company’s managers potentially liable for a 15% penalty excise tax imposed on the investment.[19]  That tax rate jumps to 100% of the amount involved if the transaction is not reversed by the time the IRS issues a notice of deficiency to the fiduciaries with respect to the prohibited transactions.[20]
  6. ERISA Fiduciary implications of plan assets treatment. Section 406 of the Employee Retirement Income Security Act of 1974 (“ERISA”)[21] creates a civil cause of action against plan fiduciaries and in appropriate cases against non-fiduciaries who are “parties in interest.”[22] If a plan suffers an economic loss in a transaction that involved a prohibited transaction, the fiduciaries can expect to be required to personally restore those losses.  With that understanding, no entrepreneur should want pension plan investors without assurance that the entrepreneur will not be a fiduciary to the pension plan investors, meaning management of the Company should be motivated to avoid plan asset treatment.

UNRELATED BUSINESS INCOME.  Another issue for pension plan investors, completely apart from the prohibited transactions discussed above, is the determination of whether an investment in a Company will generate unrelated business income (“UBI”)[23] for the pension plan or exempt organization investor.  As noted above, an operating company is not subject to plan asset treatment, but an operating company may well generate unrelated business income.[24]  Income from a business that an exempt organization or pension plan operates or invests in is treated as UBI.  UBI less allowable deductions results in unrelated business taxable income, upon which the unrelated business income tax is imposed[25].

Income from dividends, interest, royalties, rents and capital gains are excluded from UBI[26].  Rents of personal property and rents based on the income or profits of any person are includible in UBI.[27]   A portion of dividends, interest, royalties, rents and capital gains derived from debt-financed property will be included in UBI.[28]

The allocation of net profits to an investing pension plan by a limited liability company (“LLC”) or other partnership that itself conducts an operating business will be treated as UBI to the investing Plan.[29]  A plan really has three choices when considering an investment, (a) avoid an investment in an active business through a pass-through entity like an LLC, (b) invest in an active business through a pass-through entity and pay the tax on the UBI, or (c) form a wholly-owned C corporation to hold the interest in the operating LLC (generally known as a blocker corporation).  Where a sponsor is promoting an investing in an operating business through a pass-through entity, the sponsor itself may form the blocker corporation through which plans, exempt organizations and foreign taxpayers may invest.

As a general rule, the purchase of an interest in an investment that would otherwise be exempt from UBI, for instance because it generates royalties, dividend, interest or rents, by incurring debt or buying subject to debt will cause a portion of the income to be taxed as UBI.[30]  The determination that an investment constitutes “debt financed property” that will cause a portion[31] of the income from the investment to be UBI can be made at the investing plan level and at the investment level.  For example, if a plan borrows to buy a corporate bond, a portion of the interest from that bond will debt-financed property.  In addition, if a plan invests in an LLC that borrowed to acquire an asset, the debt-financed character of a portion of the income will be passed through to investing plans.

Section 514 provides a limited exception from acquisition indebtedness treatment for mortgage debt secured by real property owned by a “qualified organization”.  The term “qualified organization” includes (a) a charitable educational organization, (b) a pension trust, (c) a corporation formed to hold real estate for a pension plan or charitable educational organization, and (d) a church retirement income account.[32]  If a partnership or LLC will acquire real estate subject to mortgage debt, as is typical, the sponsor may make the investment more attractive to potential pension plan investors by satisfying the requirements for partnerships to avoid debt financed income for investing plans in the LLC’s operating agreement or the limited partnership’s limited partnership agreement.[33]

Pension Plan Michael Shaff joined the firm in 2011 as Of Counsel. He is chairperson of the Tax Practice Group.Michael specializes in all aspects of federal income taxation. Mr. Shaff has served as a trial attorney with the office of the Chief Counsel of the Internal Revenue Service for three years. Mr. Shaff is certified by the Board of Legal Specialization of the State Bar of California as a specialist in tax law. Mr. Shaff is a past chair of the Tax Section of the Orange County Bar Association.  He is co-author of the “Real Estate Investment Trusts Handbook” published annually by West Group. Michael received his A.B. at Columbia College in 1976, his J.D. from New York University School of Law in 1979 and his LL.M. in taxation from New York University School of Law in 1986. He is admitted to practice law in the States of California, New York and Massachusetts and is a member of the Orange County Bar Association.

For more information about our Tax & Estate Planning practice, contact Michael Shaff at 

[2]   29 C.F.R. §2510-3.101(a)(2)(second sentence); the first sentence of subsection (a)(2) establishes the “general rule” that a pension plan’s assets consist of its investment but not the underlying assets of the entity.  The second sentence relegates that rule to being an exception.
[3]  29 C.F.R. §2510.3-101 will be referred to as the “plan asset regulation” in this article.
[4]  29 C.F. R. §2510-3.101(b)(1).
[5]  29 C.F.R. §2510-3.101(j)(example 1).
[6]  As Regulation D is an exemption from registration pursuant to Section 5 of the Securities Act of 1933, securities offered pursuant to Rule 504 or 506 would not satisfy this part of the plan asset regulation.
[7]  29 C.F.R. §2510-3.101(b)(2).
[8]  29 C.F.R. §2510-3.101(b)(3) and (4).
[9]  29 C.F.R. §2510-3.101(c)(1): “An ‘operating company’ is an entity that is primarily engaged, directly or through a majority owned subsidiary or subsidiaries, in the production or sale of a product or service other than the investment of capital.”
[10]  29 C.F.R. §2510.3-101(d).
[11]  29 C.F.R. §2510.3-101(e).
[12]  29 C.F.R. §2510.3-101(d)(3).|
[13]  29 C.F.R. §2510.3-101(e).
[14]  29 C.F.R. §2510.3-101(j)(example 7).
[15]  29 C.F.R. §2510.3-101(j)(example 8).
[16]  29 C.F.R. §2510.3-101(f).
[17]  29 C.F.R. §2510.3-101(f)(1).
[18]  26 U.S.C. §4975(e)(3).
[19]  26 U.S.C. §4975(a)).
[20]  26 U.S.C. §4975(f)(2).
[21]  29 U.S.C. §1106
[22]  Harris Trust Savings v. Salomon Smith Barney Inc., 530 U.S. 238 (2000).  Salomon Smith Barney acted as broker for a pension plan’s fiduciary, executing trades that constituted self-dealing prohibited transactions.  (Id.)  The Supreme Court found that although not a fiduciary, Salomon Smith Barney was a party in interest and therefore could be sued for the plan’s actual damages, effectively making the defendant the insurer of every transaction that the fiduciaries engaged in.
[23]  Internal Revenue Code (I.R.C.), 26 U.S.C. §511-514.
[24]  I.R.C. §512(a).
[25]  Id.
[26]  I.R.C. §512(b).
[27]  I.R.C. §512(b)(3).
[28]  I.R.C. §511(a)(1).
[29]  I.R.C. §512(c)(1).
[30]  I.R.C. §514(a).
[31]  In short, the ratio that average acquisition indebtedness bears to the average basis of the debt financed property will determine the portion of the income from the debt financed property that will be UBI.  As the amount of debt and the adjusted basis of the debt-financed property change, the portion of the income treated as UBI will change. I.R.C. §514(a).
[32]  I.R.C. §514(c)(9)(C).  The exemption for these organizations may reflect Congress’s determination that pension plans and certain educational institutions often invest in leveraged real estate.
[33]  I.R.C. §514(c)(9)(E).


In Case You Missed It! Preccelerator Demo Day Class 5 Pitch Video

What an exciting evening it was!  4 talented entrepreneurs gave their 5 minute pitches to a crowd of over 100 people at the May 18, 2017 Preccelerator Demo Day.  The evening was topped off by the motivating presentation on “Fearless Media” by SAM CREATV Ventures Partner Peter Csathy.  In case you missed it, check out the video!

About the Preccelerator Program
The Preccelerator® Program is a platform offered to select start-up companies out of the Santa Monica office of Stubbs Alderton & Markiles, LLP that provides interim office space, sophisticated legal services, mentorship and access to a strategic perks portfolio with the objective of helping you grow your idea from business concept to funded startup. The Preccelerator® Program provides these benefits to as many as 10 promising young startups in separate growth tracks.

For more information about the Preccelerator, contact Heidi Hubbeling, COO at


SAM Client HouseCanary Featured in Forbes Magazine

HouseCanaryCongratulations to Stubbs Alderton & Markiles’ client HouseCanary for being featured in Forbes magazine as the leaders of the real estate data revolution. Jeremy Sicklick, co-founder and CEO of San Francisco-based HouseCanary saw a great opportunity to use technology and data science to modernize the real estate industry. He partnered with economist and statistician Chris Stroud – then a 27-year-old doctorate student – and the two formed HouseCanary in 2014. Their goal was to aggregate and analyze vast amounts of real estate data to help investors, lenders and real estate professionals make decisions in real-time. To date HouseCanary has raised $33 million in Series A financing from investors like Hillspire, Eric Schmidt’s family office, Alpha Edison, Raven Ventures and ECA Ventures.

To read the full article on Forbes click here.

About HouseCanary
Founded in 2014, HouseCanary’s mission is to help people make better real estate decisions. Built on a foundation of great data, powerful models and predictive analytics, the HouseCanary platform aggregates millions of data elements, including more than four decades of property data and a rapidly expanding arsenal of proprietary data calculations and analytics, to accurately define and forecast values and market influences. The company is headquartered in San Francisco.

For more information about our Internet, Digital Media & Entertainment practice, contact Greg Akselrud at


Stubbs Alderton & Markiles, LLP Ranked in Los Angeles Business Journal 200 Largest Law Firms

Los Angeles Business Journal

Stubbs Alderton & Markiles, LLP has been ranked in the #111th place in the 2017 edition of the Los Angeles Business Journal for “Largest Law Firms.”  The LA Business Journal provides comprehensive data and statistics on top-ranked Los Angeles companies across all industries.


About Stubbs Alderton & Markiles, LLP

Stubbs Alderton & Markiles, LLP is a Southern California based business law firm with robust corporate, public securities, mergers and acquisitions, entertainment, intellectual property, brand protection and business litigation practice groups focusing on the representation of, among others, venture backed emerging growth companies, middle market public companies, large technology companies, entertainment and digital media companies, investors, venture capital funds, investment bankers and underwriters. The firm’s clients represent a broad range of industries with a concentration in the technology, entertainment, videogame, apparel and medical device sectors. The firm’s mission is to provide technically excellent legal services in a consistent, highly-responsive and service-oriented manner with an entrepreneurial and practical business perspective. These principles are the hallmarks of the firm. For more information, visit


Stubbs Alderton & Markiles, LLP
Heidi Hubbeling
(310) 746-9803


SAM Partner Michael Sherman Featured in Law360 representing Cocrystal Pharma

Law360Stubbs Alderton & Markiles’ Partner Michael A. Sherman was featured on Law360 representing Cocrystal Pharma, Inc. (COCP) against BioZone Laboratories Inc. and provided his insight into the difficult situation facing both companies.

The full article on Law360 can be viewed here.

Michael Sherman is an accomplished trial lawyer in high-stakes, “bet-the-company” litigation, and has represented both large and early-stage companies as well as entrepreneurs in all facets of business and complex commercial litigation. He has evenly split his litigation practice on both the plaintiff and defense side of cases, has first-chaired numerous trials in complex matters in industries as varied as energy, securities, healthcare, environmental, consumer products, technology, project development/finance, advertising, real estate and apparel, and is highly skilled in class actions and unfair competition law.

For more information on our Business Litigation Practice, contact Michael A. Sherman at


Preccelerator® Program Company Ballerz World Featured on U.S. Defense Department Blog

Ballerz World Preccelerator® Program company Ballerz World was featured this week on the U.S. Defense Department Science Blog in an interview discussing how the military helped prepare founders Kyle E. Cox and Nicholas Damuth, for careers in technology.

Ballerz World is the single largest marketplace that is dedicate to all things basketball. The app allows the worldwide basketball market of 500 million, and 30 million in the U.S., to connect and play basketball with one another using geo-location technology. Ballerz World features courts, players, leagues, training, multimedia, and e-commerce all through a digital platform. During its MVP phase, the Ballerz World app received more than 10 awards, including the People’s Choice Award at the CES Mobile Apps Showdown, and the Best GPS-Enabled App at the Mobile App Awards.

To read the full article visit the U.S. Defense Department’s Blog here. 

For more about the Preccelerator® Program, contact Heidi Hubbeling, COO at
(310) 746-9803 or


Scott Alderton Featured in Built In LA Article

Built In LAStubbs Alderton & Markiles’ Partner Scott Alderton was featured on Built In LA this week giving his expert opinion on essential legal advice for early-stage startups.

To find some of the answers to your most difficult startup-related questions, read the full article on Built in LA here. 

Scott Alderton is a founding partner of the Firm, Managing Partner, and a member of the Firm’s Executive Committee. Scott is co-chair of the Firm’s Venture Capital and Emerging Growth Practice Group and chair’s the Firm’s Interactive Entertainment and Video Games Group. Scott advises both public and private clients across a number of industries, including technology, manufacturing and distribution of goods in commerce, finance, the Internet, interactive video games, and new media industries.

To learn more about Stubbs Alderton & Markiles, LLP contact Scott Alderton at

For more about the Preccelerator® Program, contact Heidi Hubbeling, COO at
(310) 746-9803 or


Founder of Preccelerator® Program Company Voter Acqui-hired by Brigade

Voter Hunter Scarborough, CEO of Preccelerator® Program company Voter, announced this week that Brigade, a civic engagement and activism platform, has brought him on as an acqui-hire.   Brigade hasn’t purchased Scarborough’s company or assets and there are plans to shutter Voter later this year. Scarborough will work on the product team to create tools that’ll enable citizens to become more active in local and state elections.

“I’m thrilled to be joining an such a talented and experienced team tackling some the same problems we were at Voter. We’ll be sunsetting Voter in 2017, but its spirit and mission will live on at Brigade,” Scarborough said in a statement.

Voter is matchmaking for politics.  Voter analyzes exorbitant amounts of data, including public stances, voting records, speeches, and more. All users have to do is answer a few simple questions about their political opinions. Swipe through issues quickly. Need more info about a question? Tap the card to get more information, including bullet points for and against. Voter displays users match score as a percentage, describing how closely their views align with each candidate. On Election Day Voter tell users where to vote, when to be there, and what to bring.

To read the article on Venture Beat click here. 

For more information about the Preccelerator® Program, contact Heidi Hubbeling, Chief Operating Officer at (310) 746-9803 or



SAM Client Alert: It’s Time to (Re-)Register Your DMCA Agent

Regardless of whether your company has previously designated an agent to receive notification of claimed infringement under the Digital Millennium Copyright Act (the “DMCA”)—a United States copyright law which, among other things, provides certain safe harbors for internet service providers who may host infringing material—it’s time to do it (again).

Effective as of December 1, 2016, the United States Copyright Office (the “Office”) issued its final rule (codified as 201 CFR Part 201) regarding designation of DMCA agents via the Office’s new electronic system. Under the new rule, any service provider that previously designated a DMCA Agent must resubmit through the electronic system by December 31, 2017, or it will lose safe harbor protection notwithstanding any prior registration.

If you need to register, or re-register, here’s what you should do:

  • Create an Account. In order to designate a DMCA agent using the new system, you must create an account. You may also engage a third party, including your legal counsel, to complete the registration on your behalf.
  • Register Your Company. Once an account has been created, you or your designated representative can log in and register your company and its current agent within the system. The fee for online registration is $6 per designation, which is a substantial savings compared to the paper-based system’s fees of $140 or more.
  • Designate Your Agent. You may determine your agent in one of a number of ways, as it can be (1) an individual, (2) a title or position at your company, (3) a specific department within your company, or (4) a third party. You must then provide the name, address, phone number, and email address of the agent. If you do elect to register an individual agent, be sure to promptly amend the registration if that person departs your company or the relevant role within your company.
  • Verify Your Information. Verify that the information on your website matches the information you are submitting to the Office, and that both are correct. Failing to maintain accurate information and failing to ensure that the two match each create a risk of losing safe harbor protection under the final rule.
  • Re-Register Every Three Years. The Office’s electronic system will send automated reminders to review and renew your designation, and for that reason you should be sure to register with regularly monitored contact information to ensure you receive the reminders. You will also need to re-register upon any change in your agent, even if prior to the required renewal time; doing so will reset the clock on your renewal period.

If you haven’t registered a DMCA Agent, you should do it now—and if you have, you should renew. Failing to follow the new online DMCA agent designation procedures by the end of 2017 may result in the loss important legal protections.

For more information on this and other Safe Harbor topics, contact Nick Feldman at or (818) 444-4500. Nick’s practice focuses on corporate transactions, including mergers and acquisitions, dispositions, private equity transactions and general corporate matters for both public and private clients, focusing on middle-market and emerging growth companies. In addition, Nick counsels companies in connection with entity formation, corporate governance, federal and state securities laws and compliance, joint ventures, employee incentive plans, executive employment agreements and other executive compensation matters.



Six Stubbs Alderton & Markiles’ Attorneys Listed as 2017 Southern California Super Lawyers

Stubbs Alderton & Markiles, LLP is pleased to announce that six lawyers have been named to the 2017 Southern California Super Lawyers. Super Lawyers is a rating service of outstanding lawyers from more than 70 practice areas who have attained a high-degree of peer recognition and professional achievement. The patented selection process includes independent research, peer nominations and peer evaluations.

Super Lawyers Magazine features the list and profiles of selected attorneys and is distributed to attorneys in the state or region and the ABA-accredited law school libraries. Super Lawyers is also published as a special section in leading city and regional magazines across the country. Lawyers are selected to a Super Lawyers list in all 50 states and Washington, D.C.

Stubbs Alderton & Markiles, LLP would like to congratulate the following attorneys named to the 2017 Super Lawyers list –

Scott Alderton - Super LawyersScott Alderton is a founding partner of the Firm, Managing Partner, and a member of the Firm’s Executive Committee.  Scott is co-chair of the Firm’s Venture Capital and Emerging Growth Practice Group and chair’s the Firm’s Interactive Entertainment and Video Games Group. Scott advises both public and private clients across a number of industries, including technology, manufacturing and distribution of goods in commerce, finance, the Internet, interactive video games, and new media industries.

Joe Stubbs - Super LawyersJoe Stubbs is a founding partner of the Firm, and a member of the Firm’s Executive Committee. He is co-chair of the Firm’s Venture Capital and Emerging Growth Practice Group, and of the Firm’s Mergers and Acquisitions Practice Group. Joe practices in the areas of corporate and securities law, emphasizing the corporate representation of both publicly-held and privately-held emerging growth and middle-market companies, venture capital and private equity firms, angel investment groups and investment banks.

Michael Sherman - Super LawyersMichael Sherman is an accomplished trial lawyer in high-stakes, “bet-the-company” litigation, and has represented both large and early-stage companies as well as entrepreneurs in all facets of business and complex commercial litigation. He has evenly split his litigation practice on both the plaintiff and defense side of cases, has first-chaired numerous trials in complex matters in industries as varied as energy, securities, healthcare, environmental, consumer products, technology, project development/finance, advertising, real estate and apparel, and is highly skilled in class actions and unfair competition law.

Jeffrey F. GershJeff Gersh - Super Lawyers is a Partner of the Firm. He has litigated, arbitrated, or mediated complex business and commercial matters, for both plaintiffs and defendants, whether individuals, public or private corporations, partnerships, limited liability companies and/or its members, shareholders and partners, involving various types of disputes, including contract matters, trade secrets, intellectual property (trademarks, copyrights and trade dress) negligence and fraud, employment, real estate, license agreements, the apparel and garment industry, and general business matters.

Kevin Debre - Super LawyersKevin D. DeBré is the chair of the Firm’s Intellectual Property & Technology Transactions Practice Group.  Kevin advises entrepreneurs and companies that use intellectual property to build their businesses.  Kevin has particular expertise in structuring and negotiating technology commercialization and patent licenses, strategic alliances, research and development collaborations, trademark licensing and brand merchandising agreements and manufacturing, distribution and marketing arrangements.  He also counsels clients on compliance with data security and privacy laws and regulations.

Tony Keats is a partner of the Firm and Co-chair of the Trademark and Copyright Practice Tony Keats - Super LawyersGroup. Tony’s almost three decade legal career has focused on both the legal and business protection of brands and creative content from consumer products to entertainment, from designer goods to the Internet. Since he commenced practice, he has provided counsel and has litigated cases on behalf of many of the world’s largest consumer product and entertainment companies, as well as individual entrepreneurs, actors, and musicians. Tony’s litigation background also includes related commercial matters involving unfair competition, contract disputes, rights of publicity violations, business torts, domain name infringement, and idea submission claims.

The official Super Lawyers 2017 publication can be read in its entirety here.

For more information about Stubbs Alderton & Markiles, contact Heidi Hubbeling at or (310) 746-9803.