EP-129 THE FAMILY OFFICE Q&A with DENTONS’ EDWARD MARSHALL

The FAMILY OFFICE – a term that is surrounded by mystique. It conjures notions of massive wealth, mahogany infused offices, private jets and money that has reached escape velocity. When one probes deeper, it connotes secrecy, exotic opportunities and risks, mixed with rigid control and discretion. But what is the reality behind the term “family office”?  At what level of wealth do families bring it all in house?  What functions do they actually perform?  How much do they cost? For families that are intrigued, what questions should they ask before going down that process and what should they focus on?  We’re going to speak with EDWARD MARSHALL, Head of the Global Family Office at Dentons, the international law firm.  Ed has deep experience in the space and is a terrific starting point for families looking to engage the process of developing their own structure. Ed and his white papers and research can be found at DENTONS' site here: ED MARSHALL and his twitter account is here: ED MARSHALL TWITTER. A link is here for his informative book (with Bill Woodson): FAMILY OFFICES: A COMPREHENSIVE GUIDE FOR ADVISORS, PRACTITIONERS, AND STUDENTS Here are some of the areas we hit on: When a client comes to you looking for a family office, what problems are they trying to solve? What is your process for helping them define what they need? Why not outsource everything? How do you make this a digestible process? Build, Buy, or Partner? Cost Talent Confidentiality Regulation Scope Creep The Rule of 3: It's could take 3 years to build It could costs $3 Million You will probably want to shut it down 3 times before it's up and running Below is a brief summary of the question and answer process from Dentons to help families get their bearings around the family office process: Focus areas Getting started General Investing Investing and owning real estate Venture capital and private equity The Lender Management strategy (US-based family offices) Taxes Litigation Operations and governance Employment Impact investing and philanthropy Trusts, estates and wealth preservation Public policy Risks and threats Specialty areas Getting started What experience do you have working with family offices and family businesses? Is your experience local, national or global? What are the legal services that you typically provide to family offices that look like ours? Does your experience with different family offices provide you with best practices that you can share with us? What are the key legal issues to consider before, during and after a liquidity event? Are all of your legal services billed hourly or can you deliver work on a flat-fee-per-project basis? How would you build a team to handle the legal and non-legal matters relating to my family office? Do you (or your firm) have access to a network of family office general counsels? Are the business entities currently affiliated with our family office optimally structured across all areas that we should consider, such as income tax, estate tax, securities regulation, privacy, etc.? What legal considerations and potential pitfalls exist with respect to embedded family offices (i.e., where employees of the family business perform the same function as a single-family office)? If members of the family are investing together and/or separately, what legal structuring should we consider? Would our family office benefit from a holding-company structure? Should one or more trusts own the family office legal entity? What is a family office management company? Should we consider using a holding company for our investments? What are the advantages and disadvantages of using a family limited liability company (FLLC) or a family limited partnership (FLP) in our family office or family business? How can we exercise optimal control of a family office or family business through the use of legal entities and strategies? How can we build governance strategies into our family office to ensure alignment of family interests, values, goals and succession plans? What is the regulatory environment in the jurisdiction where our family office will be located? If the family office provides services to family members who are located in multiple jurisdictions, does that raise any regulatory issues? What are the local jurisdiction requirements for advisors to the family office? What would be the best jurisdiction for all concerned? Have we titled all assets owned by the family effectively and efficiently? What are the legal issues to consider when (a) outsourcing or (b) bringing family office services in-house? What shareholder and operating agreements should we create to support the family office operations? How will such agreements define the relationship between the family office and related entities? In what jurisdiction should we form the family office, and why? General Investing If we are considering direct investment strategies, what specialized entities should we create and why? What are the legal considerations if we participate in club deals with other family offices? Can you provide legal and non-legal due diligence prior to an acquisition or disposition? How can we properly structure profits interest structures? What are the decision points around creating special purpose vehicles (SPVs) for individual investments? Should the SPVs be owned by a trust or a holding company, and why? How do we evaluate all of our investment activities to ensure we are following applicable securities laws? Based on our current and/or planned activities, does the family need to register or make other filings with relevant securities regulators (e.g., in the US, the Securities and Exchange Commission (SEC) or in Singapore, the Monetary Authority of Singapore (MAS))? What are the legal considerations to insourcing rather than outsourcing our investing activities? If our SFO wants to transition to an MFO or RIA (registered investment advisor) model, what are the legal and non-legal considerations to keep in mind? What legal considerations are there for family offices that invest in cryptocurrency or blockchain-related assets (e.g., NFTs)? How do we properly structure cross-border investments? What do we do if we have family members investing together and they have different citizenships and/or places of residence? How can we conduct a red-flag review of illiquid investments (e.g., private equity, hedge funds, direct investments, etc.)? How can we use investment policy statements (IPSs) to help guide and interact with the family's investment advisors (in-house or outsourced)? If we invest successfully, does the family office team get compensated? How are such arrangements designed to align the family office team with the family? What securities regulations should one be mindful of when considering a family office?  Investing and owning real estate What is your shared family capital vision? What structuring considerations are there with respect to personal real estate owned by individual family members? What structuring considerations are there with respect to real estate owned by the family business or the family office? What are the structuring considerations if the family office wants to invest in real estate, or to finance (or refinance) its existing real estate investments? What if only some members of a family want to invest or participate in a real estate financing? What special considerations exist for specialty real estate asset classes, such as multi-family housing, hotels and hospitality assets? Venture capital and private equity Should we have a standard form of side letter ready to provide to the manager of any fund into which we are investing? How do we ensure that our interests and those of other investors are aligned with those of the fund manager? Do we need any specific reports prepared for our investment e.g., on the ESG status of underlying investments made by the fund? How much legal due diligence should we undertake as an investor or co-investor in an early-stage investment? What are the risks associated with SAFEs (simple agreements for future equity) and similar convertible instruments? Which warranties should we give and which should we avoid when making direct investments? What minimum rights should we seek to negotiate as a minority investor, and why? How can we take advantage of double taxation treaties when structuring our investments? How does one mitigate one's risks when serving on the board of a portfolio company? How can we use insurance to address these risks? How do our rights differ when investing in a club deal as opposed to a fund? What co-investment and other rights should we negotiate when investing into a fund? What are the pros and cons of investing in secondaries? Where are the legal risks of paying finders fees for deals? What are registration rights and why do we need them? The Lender Management strategy (US-based family offices) What are the facts and circumstances of the 2017 case of Lender Management, LLC v. Commissioner of Internal Revenue, and are they relevant to my family office? What is the difference between Internal Revenue Code Sections 212 and 162, and is this relevant to my family office? What are the factual differences between the Lender case and Hellmann v. Commissioner of Internal Revenue, and are they relevant to my family office? If my family office is organized in a Lender Management-type fashion, do we need to or can we manage investments for non-related other families? Taxes Have we optimized our family office entities and investment strategies to minimize adverse tax consequences?