Infrastructure Bill May Broaden Definition of “Broker” to Include Cryptocurrency Miners and Developers

The United States Senate recently passed an infrastructure bill, H. R. 3684, which contains new regulations regarding the reporting of digital assets for cryptocurrency miners and software developers.

The regulations in the bill, entitled “Information Reporting for Brokers and Digital Assets” aims to extend cryptocurrency tax reporting requirements, which could raise money to help offset some infrastructure development. At issue is an addition to the definition of the term broker in Section 6045(c)(1) of the Internal Revenue Code of 1986. Currently, the bill would insert a new subparagraph which makes the definition include “any person who (for consideration) is responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person.” H. R. 3684, at 2434 (as of 8/11/2021). Such a literal addition would cause not only the intended effect of encouraging reporting from crypto exchanges, but also require that anyone who is involved with any service that involves cryptocurrency transfers be required to report their transactions, as a broker is required to do. This could include crypto miners, software developers, and others involved in crypto exchanges who cannot know who their “customers” are because of the anonymous nature of crypto mining, and are therefore incapable of reporting the necessary information that a broker is required to report by law.

The definition amendment was the source of public backlash and concern that the cryptocurrency sector could potentially be outsourced outside of the United States as a result of this legislation. A bipartisan compromise to the amendment was drafted in an attempt to correct the over-broad language of the bill. However, this amendment was blocked by the Senate on Monday, August 9th, 2021. The following day, the Senate and passed the bill in its original form without additional amendments. It is still possible for the bill to be changed in reconciliation, as it has yet to reach the floor of the House of Representatives for a vote. In addition, the IRS may further narrow the definition (should the bill be passed and signed into law) when adding the amendment to the definition of broker in the Internal Revenue Code.

Indemnification, Not as Simple as You Think

On the surface, indemnification seems like a fairly simple concept. If a company indemnifies a person, the person will be reimbursed for their expenses including legal fees. This at-a-glance view of indemnification, however, fails to answer some important questions that often get brought up when one party claims indemnity. These questions include when indemnification is due, if the outcome of a proceeding is essential to the determination of indemnification rights, whether the claim is ripe for adjudication, and the legitimacy or legality of the claim for indemnification itself. These questions can be tricky to navigate, evidenced by how often they crop up in litigation. This article provides a general overview of indemnification law and some of the intricate questions that arise when dealing with indemnification issues.

The Law of Indemnification

Delaware Indemnification Laws

As many corporations and limited liability companies (“LLC”) are incorporated and organized in Delaware, this article first examines Delaware indemnification law.

Under Delaware LLC law, indemnification is a broad concept. For these businesses, indemnification is governed by 6 Del. C. § 18-108, which states: “Subject to [restrictions and standards] in its [LLC operating] agreement, a [LLC] may, and shall have the power to, indemnify and hold harmless any member or manager or other person from and against any and all claims and demands whatsoever.” Indemnification may be offered by a Delaware LLC even if there is no obligation to indemnify. Symonds & O’Tolle on DE Limited Liability Cos. § 11.02 (2019). If there is no obligation to indemnify, Delaware courts apply the business judgement rule to determine if the company has made the decision to indemnify absent agreement which would otherwise create an obligation. See Lola Cars Int’s Ltd. v. Krohn Racing, LLC, No. 6520 -VCN.

Delaware corporations are governed by Del. Code Ann. tit. 8, § 145. This statute states in pertinent part that:

A corporation shall have power to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that the person is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by the person in connection with such action, suit or proceeding . . . .

In other words, corporations incorporated in Delaware have the power to indemnify anyone working for the corporation. It is required, however, that “the person acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe the person’s conduct was unlawful.” Del. Code Ann. tit. 8, § 145 (a).

Delaware Advancement Law

For LLCs, advancement of expenses is covered under the same statute (6 Del. C. § 18-108) as indemnification, with a similar broad scope  See Senior Tour Players 207 Mgmt. Co. v. Golftown 207 Holding Co., 2004 Del. Ch. LEXIS 22 (Del. Ch. Mar. 10, 2004) (the statute’s provisions are “broadly empowering and deferential to the contracting parties’ wishes regarding indemnification and advancement . . .”). A “right to advancement is not ordinarily dependent upon a determination that the party in question will ultimately be entitled to be indemnified . . .” Id. However, “advancement implies a general obligation to repay if the underlying conduct is ultimately judged to be not indemnifiable.” Id. In other words, a party’s right to advancement is not dependent on its right to indemnification, even if it may have to repay the funds in the future.

For corporations, section (e) of Del. Code Ann. tit. 8, § 145 states that expenses may be paid in advance. The party who receives the funds, however, must show that it will repay the funds if it is later established that they would not be entitled to indemnification. Del. Code Ann. tit. 8, § 145 (e).

New York Indemnification Laws

Pastore regularly works with New York corporations and LLCs as a going concern. As such, we next turn to a discussion New York indemnification laws. Similar to Delaware law, New York LLC indemnification law is also broadly tailored to allow indemnification and advancement for managers, members or associated persons. N.Y. Ltd. Liab. Co. Law § 420 (pursuant to the LLC agreement, “a limited liability company may, and shall have the power to, indemnify and hold harmless, and advance expenses to, any member, manager or other person . . . from and against any and all claims and demands whatsoever”). This statute differs from the Delaware LLC statute by adding that:

no indemnification may be made [for a person] if a judgment . . . adverse to such [person] establishes (a) that his or her acts were committed in bad faith or were the result of active and deliberate dishonesty and were material to the cause of action so adjudicated or (b) that he or she personally gained in fact a financial profit or other advantage to which he or she was not legally entitled.

In other words, an LLC may not indemnify a person, member, or manager if the person to be indemnified loses their case and the penultimate judgement establishes that their actions were made in bad faith, were the result of deliberate dishonesty, or that the person personally made some kind of gain that they were not legally entitled.

In New York, indemnification for corporations is governed by N.Y. Bus. Corp. Law § 722. While it is written similarly to the Delaware law, the New York law only allows for the indemnification of directors and officers. N.Y. Bus. Corp. Law § 722 (a) states:

A corporation may indemnify any person made, or threatened to be made, a party to an action or proceeding (other than one by or in the right of the corporation to procure a judgment in its favor), whether civil or criminal, including an action by or in the right of any other corporation of any type or kind, domestic or foreign, or any partnership, joint venture, trust, employee benefit plan or other enterprise, which any director or officer of the corporation served in any capacity at the request of the corporation, by reason of the fact that he, his testator or intestate, was a director or officer of the corporation, or served such other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise in any capacity, against judgments, fines, amounts paid in settlement and reasonable expenses, including attorneys’ fees actually and necessarily incurred as a result of such action or proceeding, or any appeal therein, if such director or officer acted, in good faith, for a purpose which he reasonably believed to be in, or, in the case of service for any other corporation or any partnership, joint venture, trust, employee benefit plan or other enterprise, not opposed to, the best interests of the corporation and, in criminal actions or proceedings, in addition, had no reasonable cause to believe that his conduct was unlawful.

In summation, corporations can indemnify any director or officer, so long as they acted in good faith and pursuant to their fiduciary duty to the corporation. If the proceeding is a criminal one, then the director or officer needs to have had no reasonable cause to believe that their conduct was unlawful. Of course, the corporation can limit indemnification further than that, and indemnification under this statute is not required. See Donovan v. Rothman, 253 A.D.2d 627 (App. Div. 1st Dept. 1998) (where the Defendants were prevented from using corporate funds on the litigation because  there was no agreement to indemnify, there was no receipt of the corporation offering to indemnify, and the defendant may not have met the statutory requirements).

New York Advancement Laws

Similar to Delaware indemnification statutes, advancement for New York LLCs is governed by the same statute as indemnification. N.Y. Ltd. Liab. Co. Law § 420.  Rights to advancement are also based on the operating agreement of the LLC, similar to rights for indemnification under N.Y. Ltd. Liab. Co. Law § 420.

Advancement in regard to New York corporations, indemnification is governed by N.Y. Bus. Corp. Law § 723(c), and N.Y. Bus. Corp. Law § 725(a). Section 723(c) allows for indemnification, stating that “[e]xpenses incurred in defending a civil or criminal action or proceeding may be paid by the corporation in advance of the final disposition of such action” . . ., also adding that it must be done in accordance with § 725(a). Section 725(a) states that all advanced funds “shall be repaid in case the person receiving such advancement or allowance is ultimately found, under the procedure set forth in this article, not to be entitled to indemnification.”

Connecticut Indemnification Laws

In Connecticut, indemnification for LLCs is governed by Conn. Gen. Stat. § 34-255g(b), which allows for indemnification of current or former members, managers, or officers, so long as the liability does not arise from violations of §§ 34-255d (limitations on distributions), 34-255f (management of LLC), or 34-255h (standards of conduct for members and managers). Section 34-255g(c) further requires indemnification for people who are wholly successful in their defense, stating:

A limited liability company shall indemnify and hold harmless a person who was wholly successful, on the merits or otherwise, in the defense of any proceeding with respect to any claim or demand against the person by reason of the person’s former or present capacity as a member, manager or officer of the company from and against reasonable expenses, including attorney’s fees and costs incurred by the person in connection with such claim or demand.

For corporations, the relevant statute is Conn. Gen. Stat. § 33-1122, which broadly allows indemnification and advancement so long as they do not violate public policy. Section 33-1122 (a) states:

A corporation may indemnify and advance expenses under sections 33-1116 to 33-1125, inclusive, to an officer, employee or agent of the corporation who is a party to a proceeding because he is an officer, employee or agent of the corporation (1) to the same extent as a director, and (2) if he is an officer, employee or agent but not a director, to such further extent, consistent with public policy, as may be provided by contract, the certificate of incorporation, the bylaws or a resolution of the board of directors. A corporation may delegate to its general counsel or other specified officer or officers the ability under this subsection to determine that indemnification or advance for expenses to such officer, employee or agent is permissible and the ability to authorize payment of such indemnification or advance for expenses. Nothing in this subdivision shall in any way limit either the ability or the obligation of a corporation to indemnify and advance expenses under other applicable law to any officer, employee or agent who is not a director.

Conn. Gen. Stat. § 33-112(b) allows for indemnification for directors of a company if said director is also an employee or officer and indemnification is only offered to them in connection with their role as an employee or officer of the company. Section 33-1122(b) (“The provisions of subdivision (2) of subsection (a) of this section shall apply to an officer, employee or agent who is also a director if the basis on which he is made a party to the proceeding is an act or omission solely as an officer, employee or agent”).

For directors seeking indemnification in their role as a member of the board of directors, the relevant statute is C.G.S. § 33-1117, which provides that “a corporation can only indemnify a director who acted in good faith, in the best interests of the corporation, and in the case of a criminal proceeding, had no reason to believe their conduct was unlawful.” Indemnification for directors defending against a lawsuit or criminal proceeding is mandatory in Connecticut, so long as they were successful, on the merits or otherwise as provided for under C.G.S. § 33-1118 (“Mandatory Indemnification”).

Connecticut Advancement Law

For LLCs, advancement is authorized pursuant to C.G.S. § 34-255g(d), so long as the money is repaid if the person being advanced funds is, in fact, not owed advancement under § 34-255g(b).

For corporations, advancement is allowed for non-director employees. Conn. Gen. Stat. § 33-1122 (“A corporation may indemnify and advance expenses . . . .”). For directors, advancement is allowed under C.G.S. § 33-1119, which requires that the director provide the corporation a written affirmation of her good faith belief that the standard of conduct required by them has been met, and provide a written undertaking to repay all funds advanced if it is determined that the director is not entitled to mandatory indemnification under § 33-1118.

Indemnification vs. Advancement

Indemnification and advancement are often mistaken for one another. While indemnification is more common, most litigants prefer advancement of expenses.

A litigant’s right to indemnification cannot be established until the conclusion of the legal proceeding. Homestore, Inc. v. Tafeen, 888 A.2d 204, 212 (Del. 2005). This is because the litigant’s actual claim for indemnification cannot be brought until the underlying matter has been resolved with certainty. Scharf v. Edgcomb Corp., 864 A.2d 909,919-20 (Del. 2004). The matter can only be said to be resolved with certainty when the litigation or investigation has completely concluded. Id. at 919. The results of those proceedings can be determinative of whether or not the litigant has a right to indemnification, as it may not be authorized by either the terms of the agreement which gave the party the right, or the actual laws of the state.

In contrast, advancement differs from indemnification in that the party entitled to advancement receives their legal fees before the end of the underlying legal proceeding. While many states require that the party receiving the funds must repay them at the end of their lawsuit if they would not be entitled to indemnification at that time, it is still generally allowed in proceedings regardless of what kind of proceeding it is (legal or administrative, civil or criminal). See Senior Tour Players 207 Mgmt. Co. LLC v. Golftown 207 Holding Go. LLC, 853 A.2d 124, 29 (Del. Ch. 2004). Advancement has been allowed in a criminal prosecutions even after a guilty verdict, for the sake of paying for the appeal to the judgement. See Sun-Times Meia Group Inc. v. Black, 954 A2d 380 (Del. Ch. 2008). In Delaware, parties who are owed advancement may also initiate advancement actions, which are special summary proceedings to establish owed advancement. See Kaung v. Cole Nat. Corp., 884 A2d 500, 510 (Del. Sup. Ct. 2005). This type of action is not available for indemnification. Id.

Indemnification and Securities Violation Public Policy Rationale

One way a party loses their right to indemnification, even if a company is obligated to indemnify them by a violation of public policy

There is long standing public policy generally prohibiting indemnification arising from violations of federal and/or state securities laws, particularly in the case of intentional misconduct. For example, in Globus v. Law Research Service, Inc., the Second Circuit determined that it would be against public policy to permit someone who violated securities law to enforce their indemnification agreement. 418 F2d 1276, 1288 (1969). The court’s reasoning was that “one cannot insure himself against his own reckless, willful or criminal misconduct, and that allowing one to do so would run contrary to the purpose of the law that was violated.” Id. That being, to deter negligence and abuse. Id.

Indemnification may be upheld in cases when there is a determination that an indemnified party did not violate the securities laws. See, e.g., In re Residential Capital, LLC, 524 B.R. 563, 597 (Bankr. Ct. 2015) (“under New York law, Minnesota law does not preclude indemnification of fraud claims where there has not been a threshold ‘finding of illegal or even intentional misconduct’”); Credit Suisse First Boston, LLC v. Intershop Communs. AG, 407 F. Supp. 2d 541, 550-51 (S.D.N.Y. 2006) (“no court has extended Globus to preclude indemnification where, as in this case: (i) the claims against the party seeking indemnification have been dismissed with prejudice; and (ii) the ‘wrongful’ conduct that allegedly precludes indemnification was never alleged against the indemnitee in the underlying action”); Austro v. Niagara Mohwak Power Corp., 66 N.Y.2d 674 (1985) (“[i]ndemnification agreements are unenforceable as violative of public policy only to the extent that they purport to indemnify a party for damages flowing from the intentional causation of injury”).

In sum, public policy considerations can ultimately lead to a denial of indemnification despite an agreement that allows for indemnification otherwise. A party that has a contractual or legal right to indemnification may ultimately be denied that right if it is found that the party violated securities laws. Since such a determination cannot be made until after final resolution of the case, the party to be indemnified may not have a clear answer as to whether their fees will be reimbursed until after they have expensed fees to defend the action. Leaving litigants to seek to lock in their right to indemnification prior to final judgment by using tactics such as seeking a declaratory judgment that they are entitled to indemnification.

Indemnification and Declaratory Judgement

In another recent Pastore case, a former director of a Pastore client was attempting to obtain a declaratory judgement from the court declaring that they would be entitled to indemnification on a future claim for contribution. Pastore was successful in establishing that the declaratory judgment claim should be dismissed for being premature.

Indemnification is improper pending a final disposition of the underlying proceeding. Hermelin v. K-V Pharm. Co., 54 A3d 1093, 1107 n.51 (Del. Ch. 2012). Indemnification claims are premature, or not ripe, until after the merits of an action have been decided and everything has been resolved. Bamford v. Penfold, L.P., 2020 WL 967942, at *32 (Del. Ch. Fed. 28, 2020).

If there is no actual claim being made against a litigant, then they clearly cannot argue that they are owed indemnification, since the time to make that argument is after proceedings have ended. In In re Dow Chem. Co. Deriv. Litig., the Delaware Chancery Court described the plaintiff’s indemnification claim as “clearly not ripe,” because no litigation nor dispute existed nor was pending when they made their claim for indemnification. No. 4349-CC, 2010 Del. Ch. LEXIS 2, 55 (Ch. Jan. 11, 2010). As such, any claim for indemnification that arises before the existence of any litigation or dispute is obviously premature/unripe.

The Court ended up agreeing with Pastore’s argument on the count for declaratory judgement of the plaintiff’s indemnification claim. Holding, that the plaintiff was unable to get declaratory judgement for an indemnification claim based on a potential future claim that has not yet been filed. It was not the right time to establish a right to indemnification, and thus Pastore’s motion to dismiss was granted on that count.


In conclusion, indemnification is complicated and can cause complex questions when litigated. Indemnification is not simply something which allows for payment of fees involved in litigation whenever and however the indemnitee would like. It has its own rules and systems governing issues involving indemnification and advancement. The matters discussed here are a few of the many different issues which arise under the umbrella indemnification.

Is Revenue Generated in CT by an Out-of-State Individual for the Benefit of His Employer Sufficient to Assert Long-Arm Jurisdiction?

A recent Connecticut Superior Court holding says “NO.”

The issue at hand in this recent case was whether a Texas resident, the defendant in this action, who visited Connecticut for business several times, and who did business with CT residents could be haled into court in Connecticut for his role in the alleged theft of intellectual property. The Court in this case held that because the revenue generated by the TX resident was earned by the large, multi-national corporation he worked for rather than by him individually, a sufficient basis did not exist to exert personal jurisdiction over him under C.G.S. § 52-59b(a)(3)(B).

The statute relied upon by the Court in making their decision is C.G.S. § 52-59b(a)(3)(B), which states, in part, that: a court may exercise personal jurisdiction over any nonresident individual… who in person or through an agent commits a tortious act outside the state causing injury to person or property within the state,… if such person or agent expects or should reasonably expect the act to have consequences in the state and derives substantial revenue from interstate or international commerce. The court admits that the Texas resident committed a tortious act outside the state that caused injury within the state, however they held that the foreign resident himself did not derive substantial revenue from interstate commerce.

In explaining their rationale, the Superior Court found that because “[the] defendant was essentially if not actually always acting on behalf of his employer, who is not claimed to have done anything wrong” there can be no personal jurisdiction because “[h]is contacts [with Connecticut] had no connection with his personal business; it was all in his capacity as a representative of his employer, and there is no suggestion that his employer… was in any way involved in the tortious conduct about which the plaintiffs complain.” Thus, the substantial revenue was earned by the foreign resident’s employer, not by him personally, nor was the employer involved in the tortious activity, and as a result, the “substantial revenue” prong, the court held, was not satisfied.

Further, the court wrestled with the question of whether it is “consistent with issues of fairness and due process to assert personal jurisdiction over an individual engaged in interstate commerce when the act giving rise to claimed liability and jurisdiction is wholly unrelated to any such interstate activity?” The tortious acts in question were committed by the defendant, not the company he worked for, and although the company benefitted, their interstate commercial activity was not transferred to the defendant solely by his virtue of employment there.

The court ultimately distilled the argument down to the following: “[t]he due process notions of fairness and foreseeability would seem to be inconsistent with assertion of jurisdiction based on conduct that, at best, was wholly unrelated to the conduct giving rise to the litigation.”  Although the defendant did cause tortious acts out of state that caused harm in Connecticut, he was able to evade liability because defendant’s employer, and not defendant himself, was involved in interstate commerce, and the substantial revenue from the theft of IP benefitted the employer financially not defendant.[1]


[1] The defendant’s employer in this action had previously settled with the plaintiff, and was thus was not subject to suit.


Recent Landmark Decision in Cryptocurrency Law

A recent decision in the United States District Court for the Southern District of New York has sent shockwaves through the world of cryptocurrency investing.  In re Bibox Group Holdings Ltd. Securities Litigation, the Court ruled that a plaintiff did not have standing to assert class claims on cryptocurrency assets he did not own.  However, it was what the court didn’t rule on that made this a landmark case in the legal field developing around cryptocurrency, as the Court took no issue with the fact that the Plaintiff brought a case alleging securities violations against a cryptocurrency issuer and exchange.

The background on this matter is as follows.  In October 2017, Bibox Group Holdings Ltd. and their affiliates funded the launch of their new crypto exchange by launching a new ERC-20 cryptocurrency called BIX.  In this offering of BIX, Bibox raised approximately $19 million in funding.  Bibox told investors that they could exchange BIX for tokens on their exchange, and Bibox would use a portion of the funds raised in the offering to buy back some of the BIX that was issued.  BIX was one of six ERC-20 tokens on the exchange, with the others being EOS, TRX, OMG, LEND, and ELF.

The Plaintiff, Mr. Alexander Clifford, was one of the initial investors who bought BIX.  Mr. Clifford ended up exchanging his BIX for Bitcoin in December 2018.  Mr. Clifford never purchased or owned any of the other tokens.  On April 3, 2020, Mr. Clifford then filed an action in the Southern District of New York against Bibox and their affiliates.  In his complaint, Mr. Clifford alleged that Bibox had violated federal securities law and state Blue Sky law in connection with the trading activities of the six tokens.  Defendants moved for a motion to dismiss, arguing that Mr. Clifford lacked standing since he was asserting claims based on the five tokens he did not purchase, and that his claims pertaining to the one token he owned were time-barred.

Judge Denise Cote of the Southern District of New York granted the motion to dismiss as to all claims, ruling that Plaintiff lacked standing to assert claims based on the five tokens he had never purchased.  This was for two reasons.  First, the Plaintiff did not suffer any injury from the unpurchased tokens.  Second, the Court precluded standing on the grounds that “such conduct implicates the same set of concerns as the conduct alleged to have caused injury to other members of the putative class[1]” because all the tokens were made by different entities and had distinct characteristics and advertising history, meaning the injuries could not be proven in a similar enough way to allege standing.

The Court also dismissed the remainder of claims Plaintiff asserted on the token he did purchase, BIX.  In doing so, the Court rejected the argument that the one-year statute of limitations began to run when the cryptocurrency Plaintiff discovered the token could qualify as a security.  This is because the SEC had previously issued a publication on April 3, 2019 stating that cryptocurrencies may be qualified as securities under the Howey test in the right circumstances.  Rather, the Court held that the statute of limitations began to run when Plaintiff became aware of his injury, which was his last transaction in April 2018.

The main takeaway here is that the Court did not rule that securities laws did not apply to crypto, but rather took issue with the Plaintiff’s standing.  It makes it clear that cryptocurrency issuers and exchanges could be held liable under securities law for their actions.  In addition, while the Court precluded the “same set of concerns is implicated” argument, it is possible another court could find otherwise.  This is due to the fact that the six tokens were on the same exchange, used the same blockchain and were based on the same technological standard.  In conclusion, the rapidly developing field of law around cryptocurrency is one that continues to require close monitoring because of major developments such as this.

[1] Ret. Bd. of the Policemen’s Annuity & Ben. Fund of the City of Chicago v. Bank of N.Y. Mellon, 775 F.3d 154, 161 (2d Cir. 2014)

Regulatory Assets Under Management Are Not Always All Assets Under Management

A daunting question that Registered Investment Advisers face in formulating their amended and annual form ADV 1 and ADV 2 (Brochure) submissions as required under the Investment Advisors act of 1940 is determining what the components of regulatory assets under management (“RAUM”) are, and providing adequate disclosure to the Securities and Exchange Commission (“SEC”) as to how and why the RAUM of some investment advisors is much less than the actual value of monies or investment vehicles managed.

Assets under management, or AUM, is a general term used throughout the financial industry that can be defined by many standards. AUM represents “investors’ equity” (like shareholders’ equity) and is an accurate representation of investors’ capital at risk (i.e., the amount of money that investors have invested in a manager’s fund(s))[1].  RAUM specifically refers to Regulatory AUM, which the SEC’s standard form of AUM[2].  The SEC developed this metric to have a consistent internal measurement, implementing a mandatory tiered registration of private investment advisers[3].  RAUM is the sum of the market value for all the investments managed by a fund or family of funds that a venture capital firm, brokerage company, or an individual registered investment advisor or portfolio manager manages on behalf of its clients[4].

In determining RAUM, the SEC specifically states that “In determining the amount of your regulatory assets under management, include the securities portfolios for which you provide continuous and regular supervisory or management services as of the date of filing the Form ADV[5].”  An account that a client maintains with a registered investment advisor is considered a securities portfolio if at least 50% of the total value of the assets held in the account consists of securities[6]. For purposes of this test, an investment advisor may treat cash and cash equivalents (i.e., bank deposits, certificates of deposit, bankers’ acceptances, and similar instruments) as securities[7].  The SEC also requires that you must include securities portfolios that are family or proprietary accounts, accounts for which no compensation for services is received, and accounts of clients who are not United States persons[8].

The SEC notes that “[f]or purposes of this definition, treat all of the assets of a private fund as a securities portfolio, regardless of the nature of such assets[9].”  The SEC does advise, however, that assets either the under management by another person or entity or assets that consists of real estate or businesses whose operations you “manage” on behalf of a client but not as an investment are excluded from the RAUM calculation[10].

RAUM also requires that supervision of these accounts be “continuous and regular.”  This term is defined by the SEC in two ways.  The advisor must have either discretionary authority over investments and provide on-going supervisory or management services, or, if they do not have discretionary authority over the account, they must have on-going responsibility to select or make recommendations based upon the needs of the client, as to specific securities or other investments the account may purchase and sell[11].  If such recommendations are accepted by the client, then the adviser is responsible for arranging or effecting the purchase or sale and satisfies the definition of “continuous and regular[12]”.

The SEC also uses three separate factors to determine whether supervision of assets is “continuous and regular.” The first factor is whether there was an advisory contract in place between the parties.   If the investment advisor agrees in an advisory contract to provide ongoing management services, this suggests that you provide these services for the account[13]. Other provisions in the contract, or the actual management practices, however, may suggest otherwise.  The second factor is the form of compensation received[14]. If the advisor is compensated based on the average value of the client’s assets managed over a specified period, this suggests that the advisor provides continuous and regular supervisory or management services for the account[15].  The third factor is the extent to which the assets are actively managed or whether advice is regularly provided to the client[16]. Note that no single factor is determinative, and the specific circumstances should be viewed in their entirety[17].

In summation, AUM is a method used to compute the total market value of investments that are managed by registered investment advisors on behalf of clients. RAUM is the SEC’s regulatory from of AUM. RAUM consists of the accounts that are made up of 50% or more of securities that are continuously and regularly managed by the registered investment advisor overseeing the facilitation and management of the client’s accounts.

[1] “Assets Under Management,” Investopedia,, accessed February 5, 2021.
[2] Form ADV Instructions,, accessed February 5, 2021.
[3] Id.
[4] “Assets Under Management,” Investopedia, accessed February 5, 2021.
[5] Form ADV Instructions, accessed February 5, 2021.
[6] Id.
[7] Id.
[8] Id.
[9] Id.
[10] Id.
[11] Calculating Regulatory Assets Under Management – Wagner Law Group,, accessed February 5, 2021.
[12] Id.
[13] Form ADV Instructions, accessed February 5, 2021.
[14] Id.
[15] Id.
[16] Id.
[17] Id.

Charitable Donations for Non-itemizers Still Available for 2020

Charitable organizations and their donors should be aware that the $300 deduction made available under the CARES Act expires at the end of 2020.  Because this addition to the standard deduction has had such an appreciable and positive effect on charitable donations so far this year, eligible organizations might timely remind potential donors of this opportunity to support their missions.

The data suggest that many donors, particularly smaller donors, have increased giving in 2020 because of the provision in the CARES Act, P.L. 116-136,1 which provides a $300 above the line charitable deduction to taxpayers who use the standard deduction and do not itemize. 2  While first quarter donations of less than $250 were up 5.8% year on year in the first quarter of 2020, they rose 19.2% at the end of the first half of the year, strongly indicating that the CARES Act, which went into effect on March 27, incented smaller donors substantially more than larger donors. Figure 1 illustrates the first quarter and first half donor data.

< $250 $250-$999 ≥$1,000
Q1 2020 + 5.8% -2.2% -7.4%
Q1 & Q2  2020 +19.2% +8.1% +6.4%


These data further suggest that small donors would increase their giving were the ceiling for qualified charitable contributions to be raised.

Nearly nine out of ten taxpayers now take the standard deduction and no longer itemize since the Tax Cuts and Jobs Act, P.L. 115-97 increased the standard deduction, nearly doubled the standard deduction, and eliminated or restricted many itemized deductions for years 2018 through 2025.

The deductibility of qualified charitable contributions may be further limited by each donor’s circumstances and they should be advised to consult with their professional advisors. Organizations which receive donations of $250 or more from any donor in a calendar year are obliged to provide that donor timely written acknowledgment of the donation that complies with Reg. §§  1.170A-16(b).

These notes are provided to illustrate general principles only. They are not legal or tax advice. The reader is cautioned to discuss his or her specific circumstances with a qualified professional before taking any action.


1. Fundraising Report January 1, 2020- June 30, 2020, Association of Fundraising Professionals Foundation for Philanthropy [downloadable from my server here until December 20, 2020]
2. See, §2204 of the CARES Act, referring to donations made under this provision as “qualified charitable contributions.” §2205(a)(3)(A)(i) of the Act further limits the deduction to  contributions “paid in cash during calendar year 2020 to an organization described in section 170(b)(1)(A) of such Code.”

Business Interruption Insurance Update

In the legal battle over whether business interruption insurance policies cover business losses due to the COVID-19 pandemic, a pair of recent cases have sided with the policyholders. This is positive news for theatres, restaurants, hotels, sporting teams, and other businesses that purchased business interruption insurance with the expectation that a pandemic such as COVID-19 would be covered under the policy. Business interruption insurance generally covers revenue lost while the property is out of commission due to some physical damage or loss to the business premises.

In North State Deli, LLC v. Cincinnati Insurance Co., No. 20-CVS-02569 (N.C. Sup. Ct. Oct. 7, 2020), the court granted the plaintiffs motion for a declaratory judgment and concluded that the business interruption insurance policies provide coverage for COVID-19 related losses. The court ordered the insurance providers to provide coverage for the increased expenses policyholders had to incur as a result of the pandemic, and for the loss of income to the policyholders due to being forced to close their premises during the pandemic.

The legal disputes over business interruption insurance frequently turn on the court’s evaluation of whether being mandated to temporarily close a business because of the pandemic constitutes a “physical loss.” In North State Deli, LLC, the North Carolina superior court stated that “the ordinary meaning of the phrase ‘direct physical loss’ includes the inability to utilize or possess … the full range of rights and advantages of using or accessing their business property.” No. 20-CVS-02569, slip op. at *6. As the businesses in this case were “expressly forbidden” by a government order to access their properties and use their business premises to generate income, the court concluded that this was a “direct physical loss” that the defendant insurance companies must provide coverage for. While the court determined that the businesses did not suffer any “physical damage,” the court determined that the plaintiffs suffered a “physical loss.” The court stated that the government orders “resulted in the immediate loss of use and access without any intervening conditions,” which constituted a “direct physical loss.”

Additionally, in Urogynecology Specialist of Fla. LLC v. Sentinel Ins. Co., No. 6:20-cv-1174-Orl-22EJK, 2020 U.S. Dist. LEXIS 184774 (M.D. Fla. Sept. 24, 2020), the court denied the insurance providers’ motion to dismiss plaintiff gynecologist’s claim to demand coverage under his business interruption insurance policy. Even though the insurance policy stated that any loss or damage regarding the “presence, growth, proliferation, spread, or any activity of … [a] virus” is excluded, the court stated that denying coverage for “losses stemming from COVID-19 … does not logically align” with the exclusions listed in the provision, such as “fungi, wet rot, dry rot, [and] bacteria.” The court also emphasized that COVID-19 has had a dire effect on our society, and therefore is distinguishable from prior cases that have analyzed exclusions to business interruption insurance.

The primary factor in these cases is the interpretation of “physical loss” and “physical damage.” Some states have determined that “physical loss” can exist “even in the absence of structural damage,” while other states have adopted narrower interpretations. David Yaffe-Bellany, U.S. Businesses Are Fighting Insurers in the Biggest Legal Battle of the Pandemic, Bloomberg Businessweek (Nov. 2, 2020). If the court determines that the business suffered “physical loss,” the court will then analyze whether the insurance provider intended to exclude a virus such as COVID-19 from the policy.

The fight over business interruption insurance providing coverage for COVID-19 related losses is still in the early stages. As of October 5, 2020, there are 1,288 lawsuits in the United States alleging that the plaintiff businesses should be provided coverage for COVID-19 related losses. Covid Coverage Litigation Tracker, U. Penn. L. Sch. (last updated Oct. 5, 2020). While 71.6% of the 60 cases that have entered the motion to dismiss stage have been dismissed, courts have sided with the policyholders on multiple occasions.

SPACs Have Grown Up

In 2010, only $500 million of the IPO market was generated through special-purpose acquisition company (“SPAC”). SPACs have evolved from being an ignored strategy in reaching the public markets to becoming an attractive method to take a company public, pursue merger opportunities, and to create liquidity for existing shareholders.

As of October 16, 2020, there have been 143 SPAC IPO transactions in 2020. According to Dealogic, SPAC IPOs have raised $53 billion this year. SPACs have raised more money in 2020 than in the last ten years combined. Melissa Karsh & Crystal Tse, SPACs Have Raised More in 2020 Than the Last 10 Years Combined, Bloomberg (Sept. 24, 2020),

Historically, Pastore & Dailey LLC has worked on SPAC offerings, litigation, and regulatory proceedings. SPACs have become popular in comparison to a traditional IPO because SPACs are cost-efficient and less time-consuming, and they face fewer amounts of due diligence and disclosure requirements than a traditional IPO. In the past, SPACs were generally used by small companies, but now small, mid-size, and large companies are using SPACs to become a public company and raise capital. While historically SPACs had a connotation of a back door method of taking a less than pristine company public, this is no longer the case.

A SPAC is a publicly traded company that raises capital with the intention of using that capital to acquire a private company. Through the acquisition, the SPAC takes the private company public. Many well-known companies have entered the public markets through a SPAC IPO, such as: DraftKings; Virgin Galactic; Nikola; and Opendoor, a real estate technology company.

Until a SPAC acquires a private company, the SPAC is just a company that holds cash. The cash is generally held in an escrow account until the SPAC acquires a private company. SPACs typically have a deadline of two years to acquire a private company. Andrew Ross Sorkin et al., SPACs Are Just Getting Started, N.Y. Times (Sept. 16, 2020), If the SPAC does not acquire a private company in the two-year deadline, the SPAC is required to return the cash to its shareholders.

While SPACs are gaining a lot of momentum, they have historically had less success then traditional IPOs. From the start of 2015 through July 2020, 223 SPAC IPOs had been conducted; but 89 of the 223 SPACs have managed to take a company public. Ciara Linnane, 2020 Is the Year of the SPAC – Yet Traditional IPOs Offer Better Returns, Report Finds, MarketWatch (Sept. 16, 2020), Just 26 of those 89 companies that went public through a SPAC acquisition generated positive returns, and the shares of those companies had an average loss of 18.8%.

This current year, however, has proved to be a different story. SPACs in 2020 have generated a rate of return of 35%, significantly higher than the S&P 500’s year-to-date return of approximately 6%. Many of the large banks are starting to work on SPACs, as Goldman Sachs, Morgan Stanley, Citigroup, Credit Suisse, and Deutsche Bank have all conducted underwriting for SPAC IPOs. Richard Henderson et al., The Spac Race: Wall St Banks Jostle to Get In On Hot New Trend, Financial Times (Aug. 11, 2020),

Over the past ten years, the IPO market has significantly diversified. Direct listings gained a lot of momentum, and now SPACs are adding another strategic option in the IPO market.

Business Interruption Insurance Update

On August 13, 2020, the Superior Court of New Jersey denied defendant’s argument that business interruption insurance does not cover financial losses due to the COVID-19 pandemic. Optical Servs. USA/JCI v. Franklin Mut. Ins. Co., No. BER-L-3681-20, (N.J. Super. Ct. Aug. 13, 2020). Defendant’s made two primary arguments. Its first argument was that the COVID-19 pandemic did not create a “physical alteration or change” plaintiffs’ premises, rather the pandemic created only a risk for retail businesses with no physical alteration to the premises. Defendant’s Motion to Dismiss, Optical Servs. USA/JCI, No. BER-L-3681-20, at *3. The second argument was that defendant’s business interruption insurance policy only covers businesses physically unable to access the premises due to events such as a “fire, collapse, or other loss to an adjacent premises,” and the pandemic did not prohibit people from accessing the premises. Id. at *9.

Plaintiffs in Optical Services are one of many businesses looking to have their losses from the pandemic covered by its business interruption insurance policy. Although the court in Optical Services denied defendant’s arguments, most courts so far have agreed with insurers’ legal arguments in concluding that losses from the pandemic are not covered under business interruption insurance policies. As of September 1, 2020, insurers have had policyholders’ claims dismissed in “state courts in California, Michigan, and the District of Columbia, and in federal courts in Texas and California.” Leslie Scism, Insurance Firms Gain Early Lead in Coronavirus Legal Fight With Businesses, Wall. St. J. (Sept. 1, 2020).

According to University of Pennsylvanian Carey Law School’s Covid Coverage Litigation Tracker, business across the United States have filed 1,230 cases seeking coverage from their business interruption insurance. Ten of these cases have been dismissed and decided in favor of insurance companies, while four of these cases have denied an insurance company’s motion to dismiss. Large quantities of insurance policies explicitly exclude coverage of claims arising from viruses, and many policies state that coverage under business interruption insurance require “direct physical loss or damage.” The courts have generally interpreted “direct physical loss or damage” to explicitly require “some form of actual, physical damage to the insured premises to trigger loss of business income and extra expense coverage.” Newman Myers Kreines Gross Harris, P.C. v. Great Northern Ins. Co., 17 F. Supp. 3d 323, 331 (S.D.N.Y. 2014).

Many businesses are attempting to work around the physical-damage requirement by arguing that COVID-19 particles “stick to surfaces and renders workplaces unsafe.” Leslie Scism, Companies Hit by Covid-19 Want Insurance Payouts. Insurers Say No., Wall St. J. (June 30, 2020). A federal court in Missouri agreed with this argument when the court asserted that the plaintiffs “plausibly alleged that COVID-19 particles attached to and damaged their property, which made their premises unsafe and unusable.” Studio 417, Inc. v. The Cincinnati Ins. Co., No. 20-CV-03127-SRB, at *12 (W.D. Mo. Aug. 12, 2020).

While courts have leaned towards insurers on this issue, the court in Optical Services illustrated that coverage of business losses and additional expenses from the pandemic is still an open issue, with many states and federal courts yet to have decided on the issue.

A Brief Review of Some, and Only Some, of the Nondiscrimination Tax Tests Applicable to Qualified Plans Under Section 401 of the Internal Revenue Code

The mathematics of the annual testing for compliance with the rules requiring qualified plans to demonstrate nondiscrimination are spread though several sections of the tax law, rendering the calculations needed somewhat opaque. This note attempts to summarize some of the calculations so that plan sponsors might feel better empowered to assess the effect on compliance of both current and anticipated plan features.

Among the many compliance tests that qualified plans must meet in order to retain their qualified status are nondiscrimination tests which assure that the benefits of tax-deferred compensation do not accrue disproportionately to highly compensated employees (HCEs). There are several tests within this regime, but two of the more important tests, for our purposes, are the annual Actual Deferred Percentage (ADP) and Actual Contribution Percentage (ACP) calculations. While ADP considers only employee deferrals, ACP also includes employer contributions. Plan sponsors of non-exempt plans must conduct both tests, whether or not their results match.

The purpose of 401(k) nondiscrimination tests is to ensure that all employees are benefitting from plan participation. Otherwise, those who own the company and Highly Compensated Employees (HCEs) would stand to benefit disproportionately from being able to defer their income for tax purposes over Non-Highly Compensated Employees (NHCEs).  Because, for example, a plan to increase the share of compensation that only HCEs may defer could cause a non-exempt plan to fail one or more nondiscrimination tests, thereby exposing the plan sponsor to penalties and possible loss of the qualified status of the plan, it is worth considering the calculations used in the ADP and ACP tests and how those calculations might be affected by adding the feature of increased deferral rights for HCEs.

For purposes of this testing, an HCE is an individual who either:

  • Owned more than 5% of the interest in the business at any time during the year or the preceding year, regardless of how much compensation that person earned or received, or
  • For the preceding year, received compensation from the business of more than$125,000 (if the preceding year is 2019 and $130,000 if the preceding year is 2020), and, if the employer so chooses, was in the top 20% of employees when ranked by compensation.

One of the qualifications a plan must meet to be or remain a “qualified plan” within the meaning of Code Section 401 is that it not discriminate in favor of highly compensated employees. This condition is described at §401(a)(4):[[

(4) if the contributions or benefits provided under the plan do not discriminate in favor of highly compensated employees (within the meaning of section 414(q)). For purposes of this paragraph, there shall be excluded from consideration employees described in section 410(b)(3)(A) and (C) [providing definitions for, respectively, the “year of service” and “hours of service” generally allowed as conditions for vesting]

Actual Deferral Percentage – 26 C.F.R. §1.401(k) -2

The ADP test calls for employers to compare the average annual deferral rates of HCEs and NHCEs. This test excludes employer matching and measures only employee deferrals. See, Reg. §1.401(k)-2. The ADP test also measures employee compensation only in cash and stocks. Health insurance and other fringe benefits are excluded. The employer (usually the plan administrator handles this tax, but the employer is responsible). This equation is used, separately, for both HCEs and NHCEs:



n= total number of either HCEs or NHCEs

D= total employee deferrals, both pretax and Roth, for each employee

C=each employee’s total annual compensation


Actual Contribution Percentage – 26 C.F.R. §1.401(m) -2

The ACP test follows a similar patter but uses different variables. This test also measures HCE and NHCE results separately:



n=total number of either HCE or NHCEs

T=total of each employee’s deferrals, after tax contributions, and employer matching

C=each employee’s total annual compensation


The largest difference between the two is that the ADP test compares relative deferrals among HCEs and NHCEs but the ACP test compares the contributions of both groups that include employer matching.

The employer then compares the test outcomes to this table:

Data table

A plan must pass both tests or the employer must take prescribed corrective action. That corrective action is not within the scope of this memo.

Using these equations, an employer can calculate its plan’s compliance at given HCE deferral rates and evaluate the effect on compliance with the nondiscrimination rules.

To be sure, the compliance tests for qualified plans are numerous, and these notes do not address the many nuances and exceptions to nondiscrimination testing. Rather, I seek here to pull back the curtain on but two often baffling, and always important, tests for qualified plans.

These notes discuss general principles only and are not intended as tax or legal advice.  The reader is encouraged to discuss his or her specific circumstances with a qualified practitioner before taking any action.