Private partnership matching platform avoids public trading status

Plain-English summary

A broker-dealer proposed two private services for matching buyers and sellers of nonpublic limited partnership interests. One service was designed to satisfy the qualified matching service safe harbor, while the other intentionally omitted one or more safe-harbor requirements. The IRS ruled that neither service was an established securities market and that the qualifying service met the regulatory safe harbor. Partnerships would not become publicly traded solely because their interests were offered or sold through the services, provided applicable limits and operating conditions were met. The nonqualifying service could also list nonfirm prices and unpriced indications of interest for other qualified matching services without disqualifying those services, although each service and partnership remained responsible for its own compliance.

Ruling snapshot

• Question: Would the two private matching services cause listed partnerships to be treated as publicly traded under section 7704?
• Outcome: approved, subject to the represented operating conditions and safe-harbor limits
• Key authorities: IRC § 7704; Treas. Reg. § 1.7704-1

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201710019 Third Party Communication: None
Release Date: 3/10/2017 Date of Communication: Not Applicable
Index Number: 7704.00-00
Person To Contact:
------------------------------- -----------------------, ID No. -------------------
------------------------- ---------------------------------------------------
------------------------------------ Telephone Number:
---------------------------------- ----------------------
Refer Reply To:
CC:PSI:1
PLR-127280-16
Date:
October 28, 2016

Legend

X= ---------------------------

State = --------------

Dear -----------------:

This letter responds to a letter dated August 31, 2016, and subsequent correspondence,
submitted on behalf of X by X's authorized representative, requesting rulings under
§ 7704 of the Internal Revenue Code.

                                             FACTS

According to the information submitted, X is a State limited liability company. X is a
registered broker-dealer which proposes to operate two separate matching services –
the Qualifying Service and the Non-Qualifying Service (collectively "Services") – that
facilitate the buying and selling of nonpublicly traded limited partnership interests.
Listings on the Qualifying Service are separate from listings on the Non-Qualifying
Service. The same interests in a partnership will not be simultaneously listed on both
the Qualifying Service and the Non-Qualifying Service. The Qualifying Service operates
in a manner designed to satisfy the qualified matching service requirements set forth in
§ 1.7704-1(g) of the Income Tax Regulations. The Non-Qualifying Service fails to satisfy
one or more of the requirements in § 1.7704-1(g)(2).

The Services are not available to the public. Prospective buyers and sellers must
complete a New Account Application and, if approved, execute a Subscriber
Agreement. As required under applicable FINRA rules and the U.S.A. Patriot Act, X will
perform a background check to ensure that a prospective subscriber is qualified to do
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business with X, that the interest being listed is a valid limited partnership, and that the
potential buyer is an accredited investor (as defined under Rule 501 of Regulation D of
the Securities Act of 1933), an entity regulated by a Federal functional regulatory
authority, or an entity regulated by a comparable foreign financial regulatory authority.
X will operate both Services through a password protected website and software
application (Platform). X's clients will use third party software to connect to X's Services
in order to see the limited partnership interests listed by X.

X represents that neither of the Services is: (1) a national securities exchange
registered under section 6 of the Securities Exchange Act of 1934 (15 U.S.C. 78f) (the
'34 Act); (2) a national securities exchange exempt from registration under section 6 of
the '34 Act because of the limited volume of transactions; (3) a foreign securities
exchange that, under the law of the jurisdiction where it is organized, satisfies regulatory
requirements that are analogous to the regulatory requirements under the '34 Act; (4) a
regional or local exchange; or (5) an interdealer quotation system that regularly
disseminates firm buy or sell quotations by identified brokers or dealers by electronic
means or otherwise.

DESCRIPTION OF THE QUALIFYING SERVICE

A partner of a partnership may request that the Qualifying Service serve as a qualified
matching service under § 1.7704-1(g) for transfers of partnership interests. The seller
may list the interest on X's Qualifying Service via the Platform. X verifies interests are
eligible for sale prior to listing them.

The Qualifying Service displays only quotes that do not commit any person to buy or
sell an interest at a quoted price (nonfirm price quotes) or quotes that express an
indication of interest in an interest without an accompanying price (nonbinding
indications of interest), and does not display quotes at which any person is committed to
buy or sell a partnership interest at the quoted price (firm quotes). No binding contract
may be entered into until after the 15th calendar day after the date information
regarding an offering of a partnership interest is made available to potential buyers (the
"15-day period"). For listings on the Qualifying Service, X also enters into its records the
45th day after the date of the initial entry, which is the earliest date that the closing for
the sale of interests through the Qualifying Service will occur.

During the 15-day period, members of X have the opportunity to view the interests on
the Qualifying Service, together with a nonbinding "asking price," through X's website.
Interested buyers can post an Indication of Interest (IOI) in purchasing a partnership
interest with or without specifying a purchase price for the interest. In addition, during
this 15-day period, sellers may view buyers' non-binding IOI. Following the 15-day
period, if any non-binding IOIs have been received, the highest IOI will become binding
provided that such IOI is equal or greater than the minimum non-firm price initially listed
by the seller. If the seller does not receive any non-binding IOIs during the 15-day
PLR-127280-16 3

period that are equal to or greater than the minimum non-firm price, then sellers may
contact any persons that submitted an IOI to negotiate a price for the sale of the
partnership interest. In no case will parties be permitted to enter into a binding
agreement until after the 15-day period.

If a buyer and seller are matched, X will provide the parties with a buyer and seller
agreement in addition to an assignment agreement so that the parties may complete the
transfer of the limited partnership interest.

If no match is found for a listing on the Qualifying Service, the Qualifying Service will
remove such interest on the 120th day after the listing date of the interest.

X will notify the partners of the partnership selling limited partnership interests so that
those partners can ensure that, in the aggregate, no more than 10% of the limited
partnership interests are sold within the selling partnership's taxable year. This 10%
includes interests sold both through the Qualifying Service and any other venues the
partnership uses to sell limited partnership interests.

DESCRIPTION OF THE NONQUALIFYING SERVICE

The Non-Qualifying Service will execute transactions that do not satisfy the
requirements set forth in § 1.7704-1(g). The Non-Qualifying Service will not display firm
bids or offers, but may display IOIs to buy and sell positions in partnerships. At no time
will interests be listed on both the Qualifying Service and the Non-Qualifying Service.

RULINGS REQUESTED

1. The Qualifying Service and the NonQualifying Service are not established securities
   markets for the purpose of § 7704 and § 1.7704-1(b).

2. The Qualifying Service meets the requirements to be a qualified matching service
   under § 1.7704-1(g).

3. A partnership whose interests are displayed or offered for purchase or sale on the
   Services will not be considered to be publicly traded for purposes of § 7704(b) solely by
   reason of being offered for purchase or sale and/or sold through the Services.

4. Other matching services which otherwise qualify as qualified matching services will
   not be disqualified as qualified matching services solely by listing interests on the Non-
   Qualifying Service as long as all of the requirements for a qualified matching service
   continue to be satisfied by and through that qualified matching service.

                              LAW AND ANALYSIS
   

   PLR-127280-16 4

Section 7704(a) provides that a publicly traded partnership shall be treated as a
corporation.

Section 7704(b) provides that for purposes of § 7704, the term "publicly traded
partnership" means any partnership if – (1) interests in such partnership are traded on
an established securities market, or (2) interests in such partnerships are readily
tradable on a secondary market (or the substantial equivalent thereof).

Section 1.7704-1(b) provides, in part, that for purposes of § 7704(b) and § 1.7704-1, an
established securities market includes – (1) A national securities exchange registered
under section 6 of the '34 Act; (2) A national securities exchange exempt from
registration under section 6 of the '34 Act because of the limited volume of transactions;
(3) A foreign securities exchange that, under the law of the jurisdiction where it is
organized, satisfies regulatory requirements that are analogous to the regulatory
requirements under the '34 Act; (4) A regional or local exchange; (5) An interdealer
quotation system that regularly disseminates firm buy or sell quotations by identified
brokers or dealers by electronic means or otherwise.

Section 1.7704-1(c)(1) provides that for purposes of § 7704(b) and § 1.7704-1, interests
in a partnership that are not traded on an established securities market (within the
meaning of § 7704(b) and § 1.7704-1(b)) are readily tradable on a secondary market or
the substantial equivalent thereof if, taking into account all of the facts and
circumstances, the partners are readily able to buy, sell, or exchange their partnership
interests in a manner that is comparable, economically, to trading on an established
securities market.

Section 1.7704-1(c)(2) further clarifies that, for purposes of § 1.7704-1(c)(1), interests in
a partnership are readily tradable on a secondary market or the substantial equivalent
thereof if – (i) Interests in the partnership are regularly quoted by any person, such as a
broker or dealer, making a market in the interests; (ii) Any person regularly makes
available to the public (including customers or subscribers) bid or offer quotes with
respect to interests in the partnership and stands ready to effect buy or sell transactions
at the quoted prices for itself or on behalf of others; (iii) The holder of an interest in the
partnership has a readily available, regular, and ongoing opportunity to sell or exchange
the interest through a public means of obtaining or providing information of offers to buy,
sell, or exchange the interests in the partnership; or (iv) Prospective buyers and sellers
otherwise have the opportunity to buy, sell, or exchange interests in the partnership in a
time frame and with the regularity and continuity that is comparable to that described in
the other provisions of § 1.7704-1(c)(2).

Section 1.7704-1 allows certain types of transfers of partnership interests to be
disregarded in determining whether interests in the partnership are readily tradable on a
secondary market or the substantial equivalent thereof. However, these safe harbors do
PLR-127280-16 5

not apply to any transfers of partnership interests on an established securities market.
One of these safe harbors is a qualified matching service under § 1.7704-1(g).

Section 1.7704-1(g)(1) provides that for purposes of § 7704(b) and § 1.7704-1, the
transfer of an interest in a partnership through a qualified matching service is
disregarded in determining whether interests in the partnership are readily tradable on a
secondary market or the substantial equivalent thereof.

Section 1.7704-1(g)(2) provides that a matching service is a qualified matching service
only if – (i) The matching service consists of a computerized or printed listing system
that lists customers' bid and/or ask quotes in order to match partners who want to sell
their interests in a partnership (the selling partner) with persons who want to buy those
interests; (ii) Matching occurs either by matching the list of interested buyers with the list
of interested sellers or through a bid and ask process that allows interested buyers to
bid on the listed interest; (iii) The selling partner cannot enter into a binding agreement
to sell the interest until the 15th calendar day after the date information regarding the
offering of the interest for sale is made available to potential buyers and such time
period is evidenced by contemporaneous records ordinarily maintained by the operator
at a central location; (iv) The closing of the sale effected by virtue of the matching
service does not occur prior to the 45th calendar day after the date information
regarding the offering of the interest for sale is made available to potential buyers and
such time period is evidenced by contemporaneous records ordinarily maintained by the
operator at a central location; (v) The matching service displays only quotes that do not
commit any person to buy or sell a partnership interest at the quoted price (nonfirm
price quotes) or quotes that express interest in partnership interest without an
accompanying price (nonbinding indications of interest) and does not display quotes at
which any person is committed to buy or sell a partnership interest at the quoted price
(firm quotes); (vi) The selling partner's information is removed from the matching service
within 120 calendar days after the date information regarding the offering of the interest
for sale is made available to potential buyers and, following any removal (other than
removal by reason of a sale of any part of such interest) of the selling partner's
information from the matching service, no offer to sell an interest in the partnership is
entered into the matching service by the selling partner for at least 60 calendar days;
and (vii) The sum of the percentage interests in partnership capital or profits transferred
during the taxable year of the partnership (other than in private transfers described in §
1.7704-1(e)) does not exceed 10 percent of the total interests in partnership capital or
profits.

Section 1.7704-1(g)(4) provides that a qualified matching service may be sponsored or
operated by a partner of the partnership (either formally or informally), the underwriter
that handled the issuance of the partnership interests, or an unrelated third party. In
addition, a qualified matching service may offer the following features – (i) The matching
service may provide prior pricing information, including information regarding resales of
interests and actual prices paid for interests; a description of the business of the
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partnership; financial and reporting information from the partnership's financial
statements and reports; and information regarding material events involving the
partnership, including special distributions, capital distributions, and refinancings or
sales of significant portions of partnership assets; (ii) The operator may assist with the
transfer documentation necessary to transfer the partnership interest; (iii) The operator
may receive and deliver funds for completed transactions; and (iv) The operator's fee
may consist of a flat fee for use of the service, a fee or commission based on completed
transactions, or any combination thereof.

                                  CONCLUSION

Based solely on the facts submitted and the representations made, we conclude as
follows:

1. The Qualifying Service and the Non-Qualifying Service are not established securities
   markets under § 1.7704-1(b).

2. The Qualifying Service meets the requirements to be a qualified matching service
   under § 1.7704-1(g).

3. A partnership whose interests are displayed or offered for purchase or sale on the
   Services will not be considered to be publicly traded solely by reason of being offered
   for purchase or sale and/or sold through the Services and may rely on this ruling
   provided (a) it is not revoked, (b) with respect to the Qualifying Service, that the sum of
   the partnership interests transferred during the taxable year of the partnership (other
   than through private transfers described in § 1.7704-1(e)) does not exceed 10 percent
   of the total interests in partnership capital or profits determined as provided in § 1.7704-
   1(k), and (c) the Services continue to operate in a manner consistent with the facts as
   represented. Maintenance of information required to permit a partnership to make the
   calculations, and the actual making of the calculations, relating to qualification for any
   applicable safe harbor in § 1.7704-1 will be the sole responsibility of the partnerships
   whose interests are traded and not the responsibility of X.

4. Although the Non-Qualifying Service does not meet the requirements to be a
   qualified matching service under § 1.7704-1(g), other matching services eligible for
   participation in the Non-Qualifying Service may utilize it to list nonfirm prices and
   unpriced indications of interest without disqualifying themselves as a qualified matching
   service, provided they otherwise meet all requirements for a qualified matching service
   under § 1.7704-1(g). Compliance with the requirements for a qualified matching service
   will be the sole responsibility of the matching service.

Except as specifically ruled upon above, we express or imply no opinion concerning the
federal tax consequences of this transaction under any other provisions of the Code.
PLR-127280-16 7

This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of the Code
provides that it may not be used or cited as precedent.

In accordance with the Power of Attorney on file with this office, a copy of this letter is
being sent to your authorized representative.

                                   Sincerely,


                                   Laura C. Fields
                                   Laura C. Fields
                                   Senior Technician Reviewer, Branch 1
                                   Office of the Associate Chief Counsel
                                   (Passthroughs & Special Industries)

Enclosures (2)
Copy of this letter
Copy for § 6110 purposes