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Limited investor base
Although there is a growing base of institutions investing in MLP
units, the market for MLP units is largely comprised of individuals
residing in the United States. Tax-exempt investors avoid investing
in MLP units because the distributions generate unrelated business
taxable income, or UBTI, which is subject to tax in the hands of
such entities. Regulated investment companies, or RICs, find investing in MLP units less attractive because of the strict regulatory
limitations on the size of the RIC’s investment in MLP units.
Adverse tax consequences for foreign investors has substantially
limited the MLP investor base to US residents. A foreign person
investing in a MLP doing business in the US is himself deemed to
be engaged in the business in which the MLP is engaged – consequently, the foreign investor would be required to file a return in
the US to report and pay taxes on cash distributions received from
the MLP. What is more, the MLP is required by law to withhold
taxes at the maximum rate from the foreign investor’s cash distributions, forcing the investor to file a US tax return to request what
would likely be a significant refund.
Federal securities laws
Preparing for and completing an initial public offering is no small
undertaking and requires a significant amount of time and resources
from the sponsor and the management team. Upon completion
of the IPO, the MLP will be a “reporting company.” As a reporting
company, the MLP will be required to make periodic filings with
the United States Securities and Exchange Commission – annual,
quarterly, and current reports.
Companies are wise to plan ahead and increase staff to ensure
they are able to satisfy the new regulatory obligations. Allocating
resources to meet the burdens and challenges of running a public
company will cost a lot of money, failure to do so may cost a lot
Cash flow. Cash flow. Cash flow. Understanding the cash-flow
profile associated with a set of assets or a segment of the energy
sector is a prerequisite to selecting a distribution policy. Once you
have identified the appropriate policy, the rest is belts and suspenders. That is, the other economic considerations are available
to “support” the selected policy.
ABOUT THE AUTHOR
Jeff Malonson is a partner in King & Spalding’s corporate practice group based in the firm’s Houston
office. He focuses his practice on capital markets,
mergers and acquisitions, and governance matters.
His capital markets practice includes representing
public and private corporations, master limited partnerships (MLPs), investment banking firms, and private equity
firms in initial public offerings (IPOs) primarily in the energy