PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGE / ATTORNEY WORK PRODUCT
TAX STRUCTURE MEMORANDUM
Analysis of the Business Combination Between Pinnacle Growth Acquisition Corp. and Skybridge Fintech Ltd. as a Tax-Free Reorganization Under Section 368(a) of the Internal Revenue Code; Domestication Tax Consequences Under Sections 367(b) and 368(a)(1)(F); Treatment of PIPE Shares, Earnout Shares, and Warrants
Calderwood & Harkness LLP 1301 Avenue of the Americas, 40th Floor New York, New York 10019
TO: Priya Chandrasekaran, Founder & Chief Executive Officer, Skybridge Fintech Ltd.; Marcus Ellingham, Chief Financial Officer, Skybridge Fintech Ltd.; Teresa Okafor, General Counsel, Skybridge Fintech Ltd.
FROM: Leonard Cross, Specialist Partner, Tax, Calderwood & Harkness LLP; with the assistance of James Prentice, Responsible Partner, M&A, and Naomi Petersen, Lead Associate, M&A
DATE: April 2025 (prepared in connection with BCA execution on April 14, 2025, and Form S-4 filing on April 28, 2025)
RE: Tax Structure Memorandum — Analysis of the Business Combination Between Pinnacle Growth Acquisition Corp. and Skybridge Fintech Ltd. as a Tax-Free Reorganization Under Section 368(a) of the Internal Revenue Code; Domestication Tax Consequences Under Sections 367(b) and 368(a)(1)(F); Treatment of PIPE Shares, Earnout Shares, and Warrants
CC: Martin Cho, Partner, Cedarhurst Advisory Group LLC (Tax Advisor to Skybridge)
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I. EXECUTIVE SUMMARY
This memorandum analyzes the U.S. federal income tax consequences of the proposed de-SPAC business combination (the "Transaction") involving Pinnacle Growth Acquisition Corp., a Cayman Islands exempted company ("Pinnacle" or "PGAC"), and Skybridge Fintech Ltd., a Delaware corporation ("Skybridge" or "SBF"), for the benefit of Skybridge and its shareholders. This memorandum is prepared for internal advisory purposes and will inform the draft tax opinion to accompany the effectiveness of the Registration Statement on Form S-4 filed with the U.S. Securities and Exchange Commission (the "SEC") under SEC File No. 333-294817.
A. Transaction Overview
The Transaction involves a forward triangular merger of Pinnacle Merger Sub Inc., a newly formed Delaware corporation and direct, wholly owned subsidiary of Pinnacle ("Merger Sub"), with and into Skybridge, with Skybridge surviving as a wholly owned subsidiary of domesticated Pinnacle. Following the consummation of the Transaction, Pinnacle will be renamed "Skybridge Fintech Holdings, Inc." ("SFH" or the "Combined Company"). The implied enterprise and equity value of Skybridge in the Transaction is $450,000,000, with Skybridge shareholders receiving shares of SFH common stock valued at $10.00 per share.
B. Principal Tax Events
This memorandum analyzes two principal tax events arising from the Transaction:
1. Domestication. Immediately prior to the merger effective time, Pinnacle will re-domicile from the Cayman Islands to the State of Delaware (the "Domestication"). The Domestication is treated as a reorganization under Section 368(a)(1)(F) of the Internal Revenue Code of 1986, as amended (the "Code"), constituting a "mere change in identity, form, or place of organization." The Domestication has significant implications under Section 367(b) of the Code and the Treasury Regulations promulgated thereunder for PGAC shareholders, particularly U.S. holders of PGAC Class A ordinary shares.
2. Merger. Following the Domestication, Merger Sub will merge with and into Skybridge under the Delaware General Corporation Law (the "DGCL"), with Skybridge surviving as a wholly owned subsidiary of SFH (the "Merger"). The Merger is intended to qualify as a tax-free reorganization under Section 368(a)(1)(A) of the Code by reason of Section 368(a)(2)(E) (a forward triangular merger).
C. Additional Topics
In addition to the Domestication and the Merger, this memorandum addresses the following topics:
• The tax treatment of the $150,000,000 PIPE investment (15,000,000 shares at $10.00 per share);
• The tax treatment of the earnout arrangement (up to 5,000,000 additional SFH shares issuable to former Skybridge shareholders upon the achievement of certain stock-price milestones);
• The tax treatment of the 10,000,000 public warrants and 8,000,000 private placement warrants, each with an exercise price of $11.50 per share;
• FIRPTA (Foreign Investment in Real Property Tax Act) considerations applicable to non-U.S. persons;
• Withholding tax considerations in connection with the Domestication, the Merger, and the PIPE closing;
• Section 280G golden parachute considerations;
• Section 409A deferred compensation considerations; and
• Reporting obligations of the parties.
D. Summary Conclusion
Based on the analysis set forth in this memorandum and subject to the customary assumptions and qualifications described in Section XVIII below, we conclude the following:
The Merger is expected to qualify as a tax-free reorganization under Section 368(a)(1)(A) of the Code by reason of Section 368(a)(2)(E). Accordingly, Skybridge shareholders generally will not recognize gain or loss on the exchange of their Skybridge shares for SFH shares (subject to the earnout share treatment discussed in Section IX and any de minimis cash received in lieu of fractional shares).
The Domestication is expected to qualify as a reorganization under Section 368(a)(1)(F) of the Code. However, the Domestication will trigger income inclusion obligations under Section 367(b) and the Treasury Regulations thereunder for certain PGAC shareholders. For U.S. holders, the inclusion amount will be limited to Pinnacle's accumulated earnings and profits (which are expected to be minimal or zero). For holders with respect to whom Pinnacle is treated as a passive foreign investment company (a "PFIC"), additional considerations under Section 1291 may apply.
The treatment of the earnout shares is not entirely free from doubt, and we recommend appropriate risk factor disclosure in the Form S-4 proxy statement/prospectus. We also recommend that Skybridge obtain shareholder approval under Section 280G(b)(5)(B) of the Code prior to closing to mitigate excise tax exposure for disqualified individuals.
This memorandum does not constitute a formal tax opinion. A formal tax opinion will be prepared separately for inclusion as Exhibit 8.1 to the Form S-4 upon effectiveness.
II. FACTUAL BACKGROUND
A. The Parties
1. Skybridge Fintech Ltd. ("Skybridge" or "SBF")
Skybridge Fintech Ltd. is a Delaware corporation (EIN 83-2471560) incorporated on June 15, 2018. Skybridge maintains its principal executive offices at 1200 Market Street, Suite 1400, Wilmington, Delaware 19801, and operates an engineering and product development office at 450 Folsom Street, 7th Floor, San Francisco, California 94105.
Skybridge operates a cloud-based payment orchestration and embedded-finance software-as-a-service ("SaaS") platform. The company provides application programming interfaces ("APIs") and middleware solutions that enable enterprise and mid-market customers to integrate payment processing, treasury management, and compliance monitoring functionalities into their existing systems. As of the date of this memorandum, Skybridge employs approximately 340 full-time employees across its Delaware and California offices.
For the fiscal year ended December 31, 2024, Skybridge reported total revenue of $87.3 million and annualized recurring revenue ("ARR") of $94.6 million, with earnings before interest, taxes, depreciation, and amortization ("EBITDA") of $14.1 million. These figures were audited by Graystone Thornton LLP (engagement partner Helen Marchetti) in accordance with the standards of the Public Company Accounting Oversight Board. For the fiscal year ended December 31, 2023, Skybridge reported total revenue of $61.8 million and EBITDA of $6.2 million, reflecting year-over-year revenue growth of approximately 41.3%.
The key shareholders of Skybridge on a pre-transaction, fully diluted basis are as follows:
Skybridge currently maintains a $25,000,000 revolving credit facility with Velthorn Commerce Bank, N.A., pursuant to a Credit Agreement dated March 22, 2023. As of April 14, 2025 (the date of execution of the Business Combination Agreement), the outstanding balance under this facility was $18,500,000. Pursuant to the terms of the Business Combination Agreement, this facility will be repaid in full from the trust and PIPE proceeds at the closing of the Transaction.
2. Pinnacle Growth Acquisition Corp. ("Pinnacle" or "PGAC")
Pinnacle Growth Acquisition Corp. is a Cayman Islands exempted company (EIN 88-3654921) organized as a blank-check company for the purpose of effecting a merger, share exchange, asset acquisition, stock purchase, reorganization, or similar business combination with one or more businesses. Pinnacle maintains its registered office at c/o Harborstone Corporate Services Ltd., 4th Floor, Windward House, George Town, Grand Cayman KY1-1104, Cayman Islands, and its U.S. executive office at 590 Madison Avenue, 28th Floor, New York, New York 10022.
Pinnacle completed its initial public offering (the "IPO") on October 17, 2023, raising aggregate gross proceeds of $300,000,000 through the sale of 30,000,000 Class A ordinary shares at a public offering price of $10.00 per share. Pinnacle's securities are listed on the Nasdaq Capital Market under the following tickers: PGAC (Class A ordinary shares), PGACU (units), and PGACW (warrants). Pinnacle's SEC Central Index Key ("CIK") is 0001948372.
In connection with the IPO, the gross proceeds were deposited in a trust account (the "Trust Account") held at Glenridge National Bank, N.A. As of March 31, 2025, the Trust Account held approximately $312,600,000, including interest earned on the invested funds. The Trust Account is invested primarily in U.S. government treasury obligations and money market funds that invest exclusively in U.S. government treasury obligations.
Pinnacle's financial statements are audited by Brindoval Tarvick LLP (engagement partner Samuel Norris). The current officers and directors of Pinnacle are:
• Jonathan Mercer, Chief Executive Officer and Chairman of the Board of Directors
• Elaine Stratford, Chief Financial Officer
• Robert Yamamoto, Independent Director
• Catherine Leclaire, Independent Director
• David Nguyễn, Independent Director
3. Ridgeway Capital Holdings LLC ("Sponsor")
Ridgeway Capital Holdings LLC is a Delaware limited liability company (EIN 87-1093847) that serves as the sponsor of Pinnacle. The managing member of the Sponsor is Jonathan Mercer, the Chief Executive Officer and Chairman of Pinnacle. The Sponsor holds 7,500,000 Class B ordinary shares of Pinnacle (the "Founder Shares"), which were issued in connection with the formation of Pinnacle prior to the IPO and are subject to conversion on a one-for-one basis into Class A ordinary shares at the closing of a business combination. In addition, the Sponsor purchased 8,000,000 private placement warrants at a purchase price of $1.50 per warrant (aggregate purchase price of $12,000,000) simultaneously with the consummation of the IPO (the "Private Placement Warrants").
4. Pinnacle Merger Sub Inc. ("Merger Sub")
Pinnacle Merger Sub Inc. is a Delaware corporation that will be formed as a direct, wholly owned subsidiary of Pinnacle in connection with the Domestication. Merger Sub will be organized solely for the purpose of consummating the forward triangular merger with Skybridge and will have no prior operations, assets, or liabilities other than those incident to its formation. An Employer Identification Number will be obtained upon incorporation.
5. Skybridge Fintech Holdings, Inc. ("Combined Company" / "SFH")
Skybridge Fintech Holdings, Inc. is the post-closing name of domesticated Pinnacle. Upon consummation of the Transaction, SFH will be a Delaware corporation and will be the publicly traded parent entity of the combined enterprise. SFH's shares of Class A common stock are expected to trade on the Nasdaq Capital Market under the ticker symbol "SBFT."
B. Transaction Structure
The Transaction consists of the following principal steps, each of which is described in detail below:
1. Step 1 — Domestication
Immediately prior to the merger effective time, Pinnacle will re-domicile from the Cayman Islands to the State of Delaware (the "Domestication") pursuant to Section 388 of the DGCL and the applicable provisions of the Cayman Islands Companies Act (as revised). In connection with the Domestication, a Certificate of Domestication and a Certificate of Incorporation will be filed with the Secretary of State of the State of Delaware. Upon the effectiveness of the Domestication:
• Each issued and outstanding Class A ordinary share of Pinnacle will convert automatically, on a one-for-one basis, into one share of Class A common stock of the domesticated entity (SFH);
• Each issued and outstanding Class B ordinary share of Pinnacle will convert automatically, on a one-for-one basis, into one share of Class A common stock of the domesticated entity (SFH);
• Each outstanding Cayman Islands warrant of Pinnacle (both public warrants and Private Placement Warrants) will convert automatically into a warrant of the domesticated entity (SFH) on substantially the same terms and conditions, including the exercise price of $11.50 per share.
The Domestication is a condition to closing under the Business Combination Agreement and will occur immediately prior to, and on the same date as, the consummation of the Merger.
2. Step 2 — Merger
Following the effectiveness of the Domestication, Merger Sub will merge with and into Skybridge pursuant to Section 251 of the DGCL, with Skybridge surviving the Merger as a wholly owned subsidiary of SFH (the "Merger"). The Certificate of Merger will be filed with the Secretary of State of the State of Delaware. Following the effective time of the Merger, Skybridge will continue to operate its business as a wholly owned subsidiary of SFH.
3. Merger Consideration
In the Merger, each issued and outstanding share of Skybridge common stock (including shares issued upon the exercise or conversion of Skybridge options or other equity awards prior to or at closing) will be converted into the right to receive a number of shares of SFH Class A common stock based on an exchange ratio determined by dividing (a) the merger consideration of $450,000,000 by (b) the total number of fully diluted shares of Skybridge common stock outstanding immediately prior to the effective time of the Merger, with each such share of SFH common stock valued at $10.00 per share. Based on the anticipated fully diluted share count, Skybridge shareholders are expected to receive an aggregate of 45,000,000 shares of SFH common stock ($450,000,000 ÷ $10.00 per share). No cash consideration will be paid to Skybridge shareholders (other than cash in lieu of fractional shares, if any, which is expected to be de minimis).
4. Earnout. In addition to the merger consideration described above, former Skybridge shareholders will be entitled to receive up to an aggregate of 5,000,000 additional shares of SFH Class A common stock (the "Earnout Shares") pursuant to the Earnout Agreement, in the form to be executed at the closing of the Transaction, upon the achievement of the following stock-price milestones:
• Tranche 1: 2,500,000 Earnout Shares will be issued if the volume-weighted average price ("VWAP") of SFH Class A common stock equals or exceeds $12.50 per share for any 20 trading days within a period of 30 consecutive trading days during the 24-month period following the closing date.
• Tranche 2: 2,500,000 Earnout Shares will be issued if the VWAP of SFH Class A common stock equals or exceeds $15.00 per share for any 20 trading days within a period of 30 consecutive trading days during the 36-month period following the closing date.
The Earnout Shares represent contingent additional consideration payable solely in SFH stock and are not subject to service-based vesting conditions (except to the extent that certain management holders may be required to remain employed through the applicable measurement period pursuant to separate employment arrangements).
5. PIPE Investment
Concurrently with the execution of the Business Combination Agreement, SFH entered into subscription agreements with four institutional investors (collectively, the "PIPE Investors") for the purchase of an aggregate of 15,000,000 shares of SFH Class A common stock at a price of $10.00 per share, for total gross proceeds of $150,000,000 (the "PIPE Investment"). The PIPE Investors and their respective commitments are as follows:
The PIPE placement agent is Pemberton Zanthor & Co. The PIPE subscriptions will close simultaneously with the consummation of the Merger on the closing date.
6. Backstop Arrangement
Velthryn Strategic Investments, LP ("Velthryn") has committed, pursuant to a Non-Redemption/Backstop Agreement dated as of April 14, 2025 (the "Backstop Agreement"), to purchase up to 5,000,000 shares of SFH Class A common stock from shareholders of Pinnacle who elect to redeem their shares in connection with the Transaction, at a price of $10.25 per share (for a maximum aggregate commitment of $51,250,000). In exchange for providing the backstop commitment, Velthryn will receive incentive shares equal to 10% of the number of backstop shares actually purchased (i.e., up to 500,000 incentive shares if Velthryn purchases the full 5,000,000 backstop shares).
7. Sponsor Forfeiture
Pursuant to the Sponsor Support Agreement dated as of April 14, 2025 (the "Sponsor Support Agreement"), the Sponsor has agreed to forfeit 500,000 Class B ordinary shares at the closing of the Transaction. The Sponsor has further agreed to forfeit an additional 500,000 Class B ordinary shares if redemptions by public shareholders exceed 75% of the total outstanding Class A ordinary shares (i.e., if more than 22,500,000 of the 30,000,000 public shares are redeemed). Accordingly, the Sponsor's post-closing share count will be either 7,000,000 shares (if redemptions are 75% or less) or 6,500,000 shares (if redemptions exceed 75%).
8. Warrants Outstanding
As of the date of this memorandum, there are 18,000,000 warrants of Pinnacle outstanding, consisting of:
• 10,000,000 public warrants (the "Public Warrants"), issued in connection with the IPO as part of the units, each exercisable for one Class A ordinary share at an exercise price of $11.50 per share; and
• 8,000,000 Private Placement Warrants, held by the Sponsor, each exercisable for one Class A ordinary share at an exercise price of $11.50 per share.
Following the Domestication, each warrant will convert into a warrant to purchase one share of SFH Class A common stock on substantially the same terms.
C. Pro Forma Capitalization (No Redemptions)
The following table sets forth the pro forma capitalization of SFH immediately following the closing of the Transaction, assuming no redemptions by Pinnacle public shareholders:
The foregoing table excludes 18,000,000 warrants (10,000,000 Public Warrants and 8,000,000 Private Placement Warrants) and up to 5,000,000 Earnout Shares. On a fully diluted basis (assuming exercise of all warrants and issuance of all Earnout Shares), the total share count would be approximately 120,000,000 shares.
D. Pro Forma Capitalization (Maximum Redemptions with Backstop)
The following table sets forth the pro forma capitalization of SFH immediately following the closing of the Transaction, assuming maximum redemptions of approximately 83.3% (i.e., 25,000,000 of 30,000,000 public shares redeemed) with full backstop utilization by Velthryn:
In the maximum redemption scenario, the Sponsor forfeits an additional 500,000 shares (for a total forfeiture of 1,000,000 shares), reflecting the additional forfeiture triggered when redemptions exceed 75% of public shares.
E. Key Dates
The anticipated timeline for the Transaction is as follows:
F. Key Financial Data for Tax Analysis
The following financial data points are relevant to the tax analysis set forth in this memorandum:
• Deal value: $450,000,000 (no net debt adjustment; the Velthorn Commerce Bank facility of $18,500,000 will be repaid at closing from trust and PIPE proceeds).
• EV/FY2024 Revenue multiple: Approximately 5.15× ($450,000,000 ÷ $87,300,000).
• EV/FY2024 ARR multiple: Approximately 4.76× ($450,000,000 ÷ $94,600,000).
• Consideration structure: 100% stock consideration; no cash or other boot is paid to Skybridge shareholders.
• Option conversion: Existing Skybridge stock options will be converted into options to purchase SFH Class A common stock, with equitable adjustments to exercise prices and share counts.
• Deferred underwriting fee: $10,500,000 (3.5% of $300,000,000 IPO gross proceeds), payable to Pemberton Zanthor & Co. at the closing of the Transaction.
• Estimated transaction expenses: Approximately $42,000,000 (including deferred underwriting fee, legal fees, accounting fees, printing costs, financial advisory fees, and miscellaneous expenses).
III. TAX ANALYSIS — DOMESTICATION (SECTION 368(a)(1)(F) AND SECTION 367(b))
A. Classification of Pinnacle for U.S. Tax Purposes
1. Foreign Corporation Status
Pinnacle is organized as an exempted company under the laws of the Cayman Islands. As such, Pinnacle is treated as a foreign corporation for U.S. federal income tax purposes. A corporation organized or created under the laws of a jurisdiction other than the United States, a state, or the District of Columbia is classified as a foreign corporation under Section 7701(a)(5) of the Code.
2. Entity Classification
Pinnacle has not made an election on Form 8832 (Entity Classification Election) to be treated as other than a corporation for U.S. federal income tax purposes. Under the default classification rules set forth in Treasury Regulation § 301.7701-2(b)(8)(i) and § 301.7701-3(a), a business entity with more than one member that is organized under the laws of a foreign jurisdiction is classified as a corporation if it has more than one member and, among other things, all members have limited liability, unless the entity elects otherwise. However, the classification analysis is simplified here because Pinnacle is a publicly traded entity whose securities are listed on the Nasdaq Capital Market. Treasury Regulation § 301.7701-2(b)(7) provides that a foreign entity that is publicly traded is treated as a per se corporation for U.S. federal income tax purposes. Accordingly, Pinnacle is classified as a corporation, and more specifically a foreign corporation, for all relevant tax purposes.
3. Passive Foreign Investment Company (PFIC) Analysis
Under Section 1297 of the Code, a foreign corporation is a PFIC if either (a) 75% or more of its gross income for the taxable year is "passive income" (the "income test") or (b) 50% or more of the average value of its assets during the taxable year produce, or are held for the production of, passive income (the "asset test").
Pinnacle's PFIC status is directly relevant to the Section 367(b) analysis set forth below. Since its formation, Pinnacle has held substantially all of its assets in the Trust Account, which is invested in U.S. government treasury obligations and money market funds. The income derived from these investments (interest and money market returns) constitutes passive income for purposes of Section 1297. Pinnacle's only non-trust assets consist of nominal working capital held outside the trust (estimated at less than $1,000,000 as of March 31, 2025).
Accordingly, Pinnacle satisfies both the income test and the asset test for classification as a PFIC. Interest income from trust investments constitutes substantially all of Pinnacle's gross income, and trust investments constitute substantially all of Pinnacle's assets by value. We note that Pinnacle has disclosed its potential PFIC status in its periodic SEC filings, including its Annual Report on Form 10-K for the fiscal year ended December 31, 2024.
The PFIC classification of Pinnacle has important implications for the Section 367(b) analysis applicable to U.S. holders of PGAC Class A ordinary shares in connection with the Domestication, as discussed in Section III.C.2 below.
B. Domestication as a Section 368(a)(1)(F) Reorganization
1. Characterization of the Domestication
The Domestication of Pinnacle from the Cayman Islands to Delaware constitutes a transfer of all assets and liabilities of a foreign corporation (Cayman Islands Pinnacle) to a domestic corporation (Delaware Pinnacle/SFH) in exchange for stock of the domestic corporation, followed by the distribution of such stock to the shareholders of the foreign corporation in cancellation of their shares. For U.S. federal income tax purposes, the Domestication is treated as if Pinnacle transferred all of its assets and liabilities to a newly formed domestic corporation in exchange for all of the stock of that domestic corporation, followed by the distribution of such stock to the Pinnacle shareholders in liquidation of the foreign corporation. See Treasury Regulation § 301.7701-3(g)(1)(ii) (treating a change of classification as a deemed asset transfer).
2. Section 368(a)(1)(F) Qualification
Under Section 368(a)(1)(F) of the Code, a reorganization includes "a mere change in identity, form, or place of organization of one corporation, however effected." The IRS has long recognized that a redomiciliation or continuance of a corporation from one jurisdiction to another qualifies as a reorganization under Section 368(a)(1)(F). See Revenue Ruling 88-25, 1988-1 C.B. 116 (holding that the reincorporation of a state-chartered corporation in a new state qualifies as an F reorganization); see also Revenue Ruling 87-27, 1987-1 C.B. 134 (redomiciliation of a foreign corporation to the United States); Davant v. Commissioner, 366 F.2d 874 (5th Cir. 1966) (discussing the characteristics of an F reorganization).
The requirements for qualification as an F reorganization under Treasury Regulation § 1.368-2(m) are as follows:
(a) Single transferor corporation. There must be only one transferor corporation — here, Cayman Islands Pinnacle is the sole transferor. This requirement is satisfied.
(b) Single transferee corporation. There must be only one transferee corporation — here, domesticated Delaware Pinnacle (SFH) is the sole transferee. This requirement is satisfied.
(c) Same shareholders. The shareholders of the transferor corporation must be the same shareholders of the transferee corporation, holding the same proportionate interests. Here, each shareholder of Cayman Islands Pinnacle receives, on a share-for-share basis, the same number and class of shares of Delaware Pinnacle (SFH) as they held in Cayman Islands Pinnacle. The Class A ordinary shares convert one-for-one into Class A common stock, and the Class B ordinary shares convert one-for-one into Class A common stock (consistent with the pre-existing conversion feature of the Class B shares). This requirement is satisfied.
(d) Mere change in identity, form, or place of organization. The transaction must represent nothing more than a change in the legal form, jurisdiction of organization, or identity of the corporation. Here, Pinnacle continues as the same entity with the same management, operations, and assets, having simply changed its domicile from the Cayman Islands to Delaware. This requirement is satisfied.
3. Conclusion. Based on the foregoing analysis, the Domestication of Pinnacle from the Cayman Islands to Delaware should qualify as a reorganization under Section 368(a)(1)(F) of the Code. As such, the Domestication will be treated as a tax-free transaction at the corporate level, subject to the shareholder-level consequences under Section 367(b) discussed immediately below.
C. Section 367(b) Consequences of the Domestication
1. Overview of Section 367(b)
When a foreign corporation is involved in a transaction that otherwise qualifies as a tax-free reorganization under Section 368, Section 367(b) of the Code and the Treasury Regulations promulgated thereunder may require shareholder-level income inclusions to preserve the U.S. taxing jurisdiction over previously untaxed earnings and profits ("E&P") of the foreign corporation. The policy underlying Section 367(b) is to prevent the conversion of a foreign corporation into a domestic corporation (or the transfer of assets between foreign and domestic corporations) without recognition of the E&P accumulated during the foreign corporation's existence.
Treasury Regulation § 1.367(b)-3 specifically addresses transactions in which a foreign corporation transfers assets to a domestic corporation, including F reorganizations involving a change of domicile from a foreign to a domestic jurisdiction.
2. U.S. Holders of PGAC Class A Ordinary Shares
a. General Rule Under Treasury Regulation § 1.367(b)-3. Under Treasury Regulation § 1.367(b)-3(b), a U.S. person who is a "shareholder" (as defined in Treasury Regulation § 1.367(b)-3(b)(1)) of the foreign corporation (Pinnacle) that transfers its assets to a domestic corporation (SFH) in connection with a Section 368(a)(1)(F) reorganization must include in income as a deemed dividend the "all earnings and profits amount" (as defined in Treasury Regulation § 1.367(b)-2(d)) attributable to such shareholder's stock. A "shareholder" for purposes of this regulation is defined as a person who owns (directly, indirectly, or constructively) 10% or more of the total combined voting power of all classes of stock entitled to vote, or 10% or more of the total value of all shares of all classes of stock.
For purposes of the PGAC public shareholder base (30,000,000 Class A ordinary shares widely held among public investors), it is expected that individual public shareholders will not meet the 10% ownership threshold and therefore will not be "shareholders" within the meaning of Treasury Regulation § 1.367(b)-3(b)(1). For such holders, the alternative rules under Treasury Regulation § 1.367(b)-3(c) apply.
b. Implications of PFIC Status. As discussed in Section III.A.3 above, Pinnacle is likely classified as a PFIC. For U.S. holders of PGAC shares with respect to whom Pinnacle is treated as a PFIC, the deemed exchange of PGAC ordinary shares for SFH common stock in the Domestication raises additional considerations under Section 1291 of the Code and Treasury Regulation § 1.367(b)-3(e).
Under Treasury Regulation § 1.367(b)-3(e), if the foreign corporation is a PFIC and the U.S. holder has not made a valid "qualified electing fund" ("QEF") election under Section 1295 or a mark-to-market election under Section 1296, then the U.S. holder must recognize gain (but not loss) on the deemed exchange of PGAC shares for SFH shares in the Domestication. Such gain is subject to the punitive "excess distribution" rules of Section 1291, which impose an interest charge on the deemed deferral benefit and treat the gain as ordinary income.
Specifically, under Section 1291(a), any gain recognized on the deemed exchange is allocated ratably over the U.S. holder's holding period. The portion allocated to the current taxable year and any taxable year prior to the first year in which Pinnacle was a PFIC is taxed as ordinary income. The portion allocated to each other year in the holding period is subject to tax at the highest marginal rate in effect for such year, plus an interest charge for the deemed deferral period.
For U.S. holders who have made a valid QEF election under Section 1295, the PFIC consequences are mitigated because such holders will have included in income annually their pro rata share of Pinnacle's ordinary earnings and net capital gain. As a result, the QEF shareholder's basis in their PGAC shares will have been increased by the amounts included in income, and the deemed exchange in the Domestication should not give rise to material additional gain. Similarly, holders who have made a mark-to-market election under Section 1296 will have recognized gain or loss annually based on changes in the fair market value of their PGAC shares, resulting in a stepped-up or stepped-down basis.
We note that Pinnacle disclosed in its IPO prospectus and subsequent Annual Reports on Form 10-K the availability of the QEF election and the mark-to-market election, and recommended that U.S. holders consult their own tax advisors regarding the advisability of making such elections. It is unclear how many public shareholders have made protective QEF elections; however, it is common practice among sophisticated investors in SPACs organized in the Cayman Islands to make such elections.
c. Practical Significance of E&P Amount. In practice, Pinnacle's accumulated E&P is expected to be minimal or zero. Pinnacle is a blank-check company whose sole source of income is interest earned on the Trust Account. This interest income is offset, in part, by Pinnacle's operating expenses, including administrative costs, director and officer compensation, insurance premiums, professional fees, and franchise taxes. Based on our preliminary review of Pinnacle's financial statements for the period from inception through March 31, 2025, we estimate that Pinnacle's cumulative net income is approximately $7,200,000, consisting primarily of trust interest income of approximately $19,800,000 reduced by operating expenses of approximately $12,600,000. However, E&P is computed under a distinct set of rules (Section 312 of the Code), and certain items may be treated differently for E&P purposes than for financial accounting or taxable income purposes. We recommend that a definitive E&P computation be obtained from Brindoval Tarvick LLP (Samuel Norris) prior to the Domestication date.
To the extent Pinnacle has positive accumulated E&P at the time of the Domestication, the "all earnings and profits amount" attributable to each U.S. shareholder would be the shareholder's pro rata share of such E&P. Any such inclusion would be treated as a deemed dividend, taxable at ordinary income rates (or, for individuals, at the applicable qualified dividend rate under Section 1(h)(11), to the extent the deemed dividend constitutes a "qualified dividend" from a foreign corporation whose shares are listed on a recognized U.S. exchange — which PGAC shares are, by virtue of their Nasdaq listing). However, the availability of the qualified dividend rate for deemed dividends under Section 367(b) is not entirely settled, and we recommend conservative disclosure in the Form S-4.
3. Non-U.S. Holders of PGAC Class A Ordinary Shares
Non-U.S. holders of PGAC Class A ordinary shares are generally not subject to U.S. federal income tax on the deemed exchange of PGAC ordinary shares for SFH common stock in the Domestication, except in the following circumstances:
(a) Effectively connected income ("ECI"). If the non-U.S. holder holds the PGAC shares in connection with a U.S. trade or business, any gain or deemed dividend arising from the Domestication may constitute ECI, subject to U.S. federal income tax on a net income basis under Section 871(b) or 882(a) of the Code.
(b) FIRPTA. If gain on the deemed exchange were attributable to the disposition of a U.S. real property interest ("USRPI"), FIRPTA would impose U.S. tax. However, Pinnacle's assets consist almost entirely of the Trust Account (cash and government obligations), which are not USRPIs. Accordingly, FIRPTA should not apply.
(c) Deemed dividend withholding. To the extent the Domestication triggers a deemed dividend under Section 367(b), withholding tax at the rate of 30% (or a reduced rate under an applicable income tax treaty) may be imposed under Sections 1441 and 1442 of the Code. As noted above, Pinnacle's accumulated E&P is expected to be minimal or zero, which should limit or eliminate any withholding obligation. Practical withholding considerations are discussed in Section XIII below.
4. Sponsor (Ridgeway Capital Holdings LLC) — Class B Ordinary Shares
Ridgeway Capital Holdings LLC is a Delaware limited liability company and has not elected to be treated as a corporation for U.S. federal income tax purposes. Accordingly, the Sponsor is treated as a partnership (or, if it has only one member, a disregarded entity) for U.S. federal income tax purposes, and its tax consequences flow through to its members.
In the Domestication, the Sponsor's 7,500,000 Class B ordinary shares of Pinnacle convert into 7,500,000 shares of Class A common stock of SFH. The same Section 367(b) analysis applicable to U.S. holders of Class A ordinary shares applies to the Sponsor's Class B ordinary shares. The Sponsor (and, on a look-through basis, its members) must include in income any "all earnings and profits amount" attributable to the Class B shares, subject to the same considerations discussed above regarding Pinnacle's accumulated E&P and PFIC status.
The anti-dilution adjustment waiver contained in the Sponsor Support Agreement (execution version, April 14, 2025), pursuant to which the Sponsor waives certain anti-dilution protections applicable to the Class B ordinary shares in connection with the PIPE Investment and the backstop arrangement, does not affect the Section 367(b) analysis. The waiver relates to the economic adjustment of the conversion ratio and does not constitute an exchange of property or a receipt of consideration for purposes of Section 367(b) or Section 354 of the Code.
5. Private Placement Warrants (Sponsor) and Public Warrants
Warrants to purchase stock of a corporation are not "stock" for purposes of Section 367(b) of the Code. See Treasury Regulation § 1.367(b)-2(a)(1) (defining the scope of Section 367(b) to apply to "exchanging shareholders" who exchange "stock" of the foreign corporation). In the Domestication, each outstanding Cayman Islands warrant of Pinnacle (both Public Warrants and Private Placement Warrants) converts into a warrant of the domesticated SFH on substantially the same terms.
Under Treasury Regulation § 1.367(b)-2(a), the exchange of warrants in connection with a Section 368(a)(1)(F) reorganization is generally not a taxable event, provided the warrants are convertible into stock of the same corporation (which, in the case of an F reorganization, is the continuing entity under a new domicile). The warrants remain warrants to acquire stock of the same corporation (Pinnacle/SFH), merely reflected in a Delaware form rather than a Cayman Islands form. Accordingly, no income inclusion under Section 367(b) is required for holders of warrants (whether Public Warrants or Private Placement Warrants) solely by reason of the Domestication.
D. Basis and Holding Period — Domestication
1. U.S. Holders
For U.S. holders of PGAC ordinary shares, the tax basis in the shares of SFH Class A common stock received in the Domestication generally equals the holder's adjusted tax basis in the Cayman Islands ordinary shares surrendered, increased by any amount included in income under Section 367(b) (whether as a deemed dividend or as gain recognized under the PFIC rules). See Section 358(a)(1) of the Code; Treasury Regulation § 1.367(b)-2(e).
The holding period of the SFH shares received in the Domestication includes the holding period of the PGAC ordinary shares surrendered, provided the PGAC shares were held as capital assets. See Section 1223(1) of the Code.
2. Sponsor. The same basis and holding period carryover rules apply to the Sponsor with respect to its Class B ordinary shares (converted into SFH Class A common stock in the Domestication), adjusted for any Section 367(b) inclusion amount.
IV. TAX ANALYSIS — THE MERGER AS A SECTION 368(a)(1)(A) REORGANIZATION (BY REASON OF SECTION 368(a)(2)(E))
A. Applicable Reorganization Provision
The Merger of Pinnacle Merger Sub Inc. with and into Skybridge Fintech Ltd. is structured as a forward triangular merger, intended to qualify as a tax-free reorganization under Section 368(a)(1)(A) of the Code by reason of Section 368(a)(2)(E). Under this provision, a transaction that qualifies as a statutory merger or consolidation under Section 368(a)(1)(A) will not be disqualified by reason of the fact that the target merges with a subsidiary of the acquiring corporation (rather than the acquiring corporation itself), provided certain additional requirements are met.
Importantly, after the Domestication, all three parties to the Merger are domestic Delaware corporations: SFH (the acquiring parent corporation), Merger Sub (the acquiring subsidiary), and Skybridge (the target). Because all parties are domestic corporations, Section 367(a) and Section 367(b) do not apply to the Merger itself. The cross-border tax analysis is confined to the Domestication step, addressed in Section III above.
B. Requirements Under Section 368(a)(2)(E)
The following requirements must be satisfied for the Merger to qualify as a reorganization under Section 368(a)(1)(A) by reason of Section 368(a)(2)(E):
1. Statutory Merger or Consolidation
The transaction must constitute a "statutory merger or consolidation" under applicable state law. The Merger of Merger Sub with and into Skybridge will be effected pursuant to Section 251 of the DGCL, which governs mergers of domestic corporations. A Certificate of Merger will be filed with the Secretary of State of the State of Delaware, and the Merger will become effective upon such filing (or at such later time as specified in the Certificate of Merger).
Treasury Regulation § 1.368-2(b)(1)(ii) provides that a transaction qualifies as a "statutory merger" for purposes of Section 368(a)(1)(A) if, pursuant to a statute of the relevant jurisdiction, the following events occur simultaneously at the effective time of the merger: (a) all of the assets and liabilities of the target become the assets and liabilities of the acquiring corporation by operation of law; and (b) the target ceases its separate legal existence for all purposes. However, in a forward triangular merger under Section 368(a)(2)(E), the target survives (rather than ceases to exist), and Merger Sub is the entity that ceases to exist.
Under the DGCL and the terms of the Merger Agreement, Merger Sub will merge with and into Skybridge, with Skybridge as the surviving corporation. At the effective time, all assets and liabilities of Merger Sub will become assets and liabilities of Skybridge by operation of law, and Merger Sub will cease to exist as a separate legal entity. This structure is expressly contemplated by Section 368(a)(2)(E) and satisfies the statutory merger requirement.
Conclusion: Satisfied.
2. Target Survives
Under Section 368(a)(2)(E), the acquired corporation (Skybridge) must be the surviving entity in the merger. This is the defining characteristic of a forward triangular merger, as distinguished from a reverse triangular merger under Section 368(a)(2)(D) (in which the subsidiary merges into the target and the target survives). Here, Skybridge will survive the Merger as a wholly owned subsidiary of SFH.
Conclusion: Satisfied.
3. Substantially All of Target's Assets
Section 368(a)(2)(E) requires that the surviving corporation hold "substantially all of its properties" after the merger. Revenue Procedure 77-37, 1977-2 C.B. 568, sets forth the IRS's administrative position that "substantially all" means at least 70% of the fair market value of the gross assets and at least 90% of the fair market value of the net assets of the target. These thresholds were developed in the context of Section 368(a)(1)(C) reorganizations and are applied by analogy to forward triangular mergers.
In the present case, the "substantially all" requirement is satisfied in the most straightforward manner possible: because Skybridge is the surviving corporation in the Merger, all of its assets remain with Skybridge after the Merger. There is no pre-merger distribution or disposition of assets by Skybridge, and Skybridge's full operations — including its SaaS platform, payment orchestration technology, customer contracts, intellectual property portfolio, cash, equipment, and all other tangible and intangible assets — will continue uninterrupted within Skybridge as a wholly owned subsidiary of SFH. Both the 70% gross asset test and the 90% net asset test are satisfied with 100% of assets retained.
Conclusion: Satisfied.
4. Voting Stock Requirement (Section 368(a)(2)(E) / Section 368(c))
Under Section 368(a)(2)(E), the acquiring parent corporation (SFH) must acquire "control" (as defined in Section 368(c)) of the target in the merger. Section 368(c) defines "control" as ownership of stock possessing at least 80% of the total combined voting power of all classes of stock entitled to vote and at least 80% of the total number of shares of all other classes of stock of the corporation.
Critically, Section 368(a)(2)(E) requires that the stock consideration used in the merger consist of "stock of the corporation which before the merger was in control of the merged corporation" (i.e., the stock of SFH, the parent). Unlike a Section 368(a)(1)(B) reorganization (which requires "solely for voting stock"), a forward triangular merger under Section 368(a)(2)(E) permits the payment of some "boot" (non-stock consideration) in addition to voting stock, provided that the transaction would otherwise qualify as a Section 368(a)(1)(A) merger and the parent acquires control of the target.
In the present case, the consideration to be received by Skybridge shareholders consists solely of SFH Class A common stock — 45,000,000 shares valued at $10.00 per share, for total consideration of $450,000,000. No cash consideration is paid to Skybridge shareholders (other than de minimis amounts in lieu of fractional shares). Accordingly, the merger consideration is 100% voting stock of the parent (SFH), which far exceeds the minimum required.
After the Merger, SFH will own 100% of the outstanding shares of Skybridge (Skybridge having survived as a wholly owned subsidiary), thereby satisfying the Section 368(c) control requirement by a wide margin (100% versus the 80% minimum threshold).
Conclusion: Satisfied with significant margin.
5. Control Requirement (Post-Merger Ownership)
As noted above, following the Merger, SFH will own 100% of the total voting power and 100% of the total number of shares of all classes of stock of Skybridge. The Section 368(c) control requirement is therefore satisfied.
Conclusion: Satisfied.
6. No Deemed Exchange of Consideration by Merger Sub
In a forward triangular merger under Section 368(a)(2)(E), all consideration flowing to the target shareholders must be provided by the parent corporation (SFH) rather than by the merging subsidiary (Merger Sub). Here, Merger Sub will not issue any stock to Skybridge shareholders; all SFH shares to be received by Skybridge shareholders in the Merger will be shares of SFH Class A common stock. Merger Sub's sole purpose is to serve as the merging entity, and its stock (held by SFH) will be canceled in the Merger. This is consistent with the standard forward triangular merger mechanics and does not present any concerns under Section 368(a)(2)(E).
Conclusion: Satisfied.
C. Continuity of Interest (COI)
1. Standard. Under Treasury Regulation § 1.368-1(e)(1)(i), the continuity of interest ("COI") requirement is satisfied if a substantial part of the value of the proprietary interest in the target is preserved through the issuance of stock of the acquiring corporation to the target's shareholders. The IRS has historically applied a threshold of approximately 40% of the total consideration for the target's shares (based on the target shareholders' historic interest) as the minimum required for COI purposes. See Revenue Procedure 77-37 (requiring at least 50% equity consideration for favorable rulings, but case law has accepted lower percentages); see also John A. Nelson Co. v. Helvering, 296 U.S. 374 (1935) (38% equity held sufficient); Kass v. Commissioner, 60 T.C. 218 (1973) (50% equity held sufficient).
2. Application. In the present case, the COI requirement is satisfied by a wide margin. One hundred percent (100%) of the merger consideration payable to Skybridge shareholders consists of SFH Class A common stock. No cash, debt instruments, or other non-equity consideration is being paid to Skybridge shareholders. The sole exception is de minimis cash paid in lieu of fractional shares, which does not materially affect the COI analysis. Accordingly, the COI requirement is clearly satisfied.
3. Post-Signing/Pre-Closing Dispositions
The COI analysis may be affected if target shareholders dispose of their target shares (or the acquiring corporation's shares received as merger consideration) prior to the effective time of the Merger. See Treasury Regulation § 1.368-1(e)(1)(ii) (providing that COI is tested by reference to the consideration issued in the merger, but that pre-merger dispositions by target shareholders may be relevant if they indicate a plan to dispose of the acquiring corporation's stock).
To mitigate this risk, the Company Stockholder Support Agreement executed in connection with the Business Combination Agreement imposes binding no-transfer covenants on the major Skybridge shareholders — specifically, Harborview Partners, Atlas Horizon Ventures Fund II, LP, and Priya Chandrasekaran — restricting their ability to transfer, sell, or otherwise dispose of their Skybridge shares during the period between the date of the Business Combination Agreement and the closing or earlier termination of the Transaction. These transfer restrictions substantially mitigate the risk that pre-closing dispositions could dilute COI below the requisite threshold.
4. PGAC Redemptions
We note that redemptions by PGAC public shareholders do not affect the COI analysis as applied to the Merger. COI is tested from the perspective of the target (Skybridge) shareholders, not the acquiring corporation's shareholders. The fact that PGAC shareholders may redeem their shares for cash from the Trust Account is a separate event relating to the acquiring corporation's capital structure and does not reduce the equity consideration received by Skybridge shareholders. See Treasury Regulation § 1.368-1(e)(1)(i); see also Notice 2020-17 (discussing COI in the context of de-SPAC transactions).
D. Continuity of Business Enterprise (COBE)
1. Standard. Under Treasury Regulation § 1.368-1(d)(1), the continuity of business enterprise ("COBE") requirement is satisfied if the acquiring corporation (or, in the case of a triangular merger, the acquired subsidiary) either (a) continues the target's historic business (the "business continuity test") or (b) uses a significant portion of the target's historic business assets in a business (the "asset continuity test"). The IRS requires that at least one of these alternative tests be satisfied.
2. Application. The COBE requirement is clearly satisfied in the present case. Following the Merger, Skybridge will continue to operate as a wholly owned subsidiary of SFH, conducting the same cloud-based payment orchestration and embedded-finance SaaS business that it has conducted since its inception. Skybridge's technology platform, customer contracts, intellectual property, workforce, office locations, and operational processes will continue without material change. There is no plan to dispose of, discontinue, or materially restructure Skybridge's business operations in connection with or following the Merger.
Specifically, SFH (as the parent corporation) satisfies the business continuity test because it will, through its wholly owned subsidiary Skybridge, continue the target's historic business. SFH also satisfies the asset continuity test because Skybridge will continue to use all of its historic business assets (including its proprietary software platform, customer relationships, and intellectual property) in the conduct of its ongoing SaaS business.
Conclusion: COBE is satisfied.
E. Business Purpose and Step Transaction Doctrine