This topic has been sitting on my list since the Department of the Treasury’s Financial Crimes Enforcement Network (“FinCEN”) proposed beneficial ownership reporting requirements for private companies back in December 2021. The final rules were adopted in October 2022 and I’m finally unpacking this doozy. The new FinCEN rules implement provisions of the Corporate Transparency Act which, in turn, has been law since October 2019. The regulations create new federal filing requirements applicable to a wide range of entities, including operating companies, holding companies, LLCs and others. The goal of the rule is to enhance FinCEN’s ability to protect national security and the financial system, by providing information that can be used by national security, intelligence, and law enforcement agencies.
Corporate Transparency Act of 2019
The Corporate Transparency Act requires small corporations and limited liability companies to disclose information about their beneficial owners. Under the Act, a beneficial owner is an individual who (i) exercises substantial control over a corporation or limited liability company, (ii) owns 25% or more of the interest in a corporation or limited liability company, or (iii) receives substantial economic benefits from the assets of a corporation or limited liability company.
The Act specifically requires entities that apply to form a corporation or limited liability company to file beneficial ownership information with FinCEN. The Act has teeth – the failure to provide complete or updated information, or providing false or fraudulent information can result in a fine and up to three years in prison.
The beneficial ownership reporting will become part of a national database on corporate ownership. Implementation of the Act will also require rules on who may access the database, for what purposes and the safeguards that will be required to ensure the information is secured and protected.
FinCEN Beneficial Ownership Reporting Rules
FinCEN’s Beneficial Ownership Information Reporting Requirements rule release (“BOI Rule”) is a meaty 330 pages. As mentioned, the rule seeks to enhance FinCEN’s and other agencies’ ability to protect U.S. national security and the financial system as well as to provide essential information to national security, intelligence, and law enforcement agencies, state, local, and tribal officials, and financial institutions to help prevent illicit financing activities. In that regard, the rule release starts with a dissertation on the use of corporate entities to hide beneficial owners and perpetuate illegal activity, including money laundering, tax fraud and terrorist financing. I will not summarize that part of the release, but it is a decent read for those that are interested.
Entities Required to Report Under the BOI
The rule is very broad, applying to any entity, domestic or foreign, including corporations, limited liability companies, and any entity formed with (or registered to do business with) any secretary of state or similar office of a state or Native American tribe. A domestic BOI reporting company would include any entity that is created by the filing of a document with a secretary of state or similar office of a jurisdiction within the US. A foreign reporting company would be any entity created under the law of a foreign jurisdiction that is registered to do business within the U.S.
Twenty-three types of entities are exempt from the requirements as they are deemed to already subject to substantial federal or state regulation. Among those exempted entities are SEC reporting companies, insurance companies, banks and subsidiaries of exempt entities provided that no other non-exempt individual falls within the general definition of a beneficial owner. In addition, there is an exemption for “large operating entities” defined as a company that: (i) has more than 20 full-time employees in the U.S.; (ii) filed a tax return in the previous year showing more than $5 million in gross receipts; and (iii) has a physical operating presence in the U.S.
Information to be Reported
BOI companies must report the information about the company itself, beneficial owners of an entity and the name of the individual or individuals who files the application to form the entity or register it to conduct business in a particular state or jurisdiction. In the case of a foreign reporting company, a company applicant would be the individual who files the document that first registers the entity to do business in the U.S. Entities formed prior to the January 1, 2024, effective date will not be required to provide information on the company applicant – i.e., the individual or individuals that formed the company or registered it to conduct business in the U.S. The rule also requires the identification of any individual who directs or controls the filing of the relevant documents by another person (such as an attorney overseeing a paralegal).
Information to be reported on the company includes: (i) the full name of the company; (ii) any trade name or “doing business as” name of the company; (iii) business street address; (iv) the state or tribal jurisdiction of formation or in the case of a foreign entity, where such company first registers to conduct business; and (v) an IRS tax ID number or if not issued at the time of reporting, either a Dun & Bradstreet Data Universal Numbering System (DUNS) Number or a Legal Entity Identifier (LEI) (for more on LEIs, see HERE).
Information to be reported related to beneficial owners includes: (i) the individual’s full legal name; (ii) date of birth; (iii) current residential or business street address; and (iv) a unique identifying number from an acceptable identification document (e.g., a passport).
Individuals may also be issued a FinCEN identifying number upon request and subject to certain conditions. All BOI companies will be issued a FinCEN identifying number upon filing their initial report.
Reports are required to be certified as to their accuracy and completeness. While an individual may file a report on behalf of a company, the company is ultimately responsible for the filing. The same is true of the certification. The company will be required to make the certification, and any individual who files the report as an agent of the company will certify on the reporting company’s behalf.
Under the rule, a “beneficial owner” is defined to include any individual who: (i) exercises direct or indirect substantial control over a company; or (ii) owns or controls at least 25% of the ownership interests in a company.
Substantial control is defined as: (i) a senior officer (excluding a corporate secretary or treasurer who perform ministerial functions only); (ii) having authority over the appointment or removal of a senior officer; (iii) direction, determination or decision of, or substantial influence over important decisions made by the company. The final rule contains a list of non-excusive indictors of substantial control. The final rule is meant to be broad, encompassing all types of control persons, either direct or indirect and to envelop complex arrangements.
Likewise, “ownership interests” is meant to be broad and all encompassing – including, for example, profit sharing, convertible equity instruments, privileges analogous to ownership, convertible debt, etc. FinCEN acknowledges that the calculation can be extremely difficult, such as with a SAFE or other convertible instrument that is based on and valued on future events. To provide clarity, FinCEN has sought to identify specific scenarios in which individuals can be considered to own or control ownership interests of a reporting company held in different manners such as trusts or convertible instruments.
The formula is very different that for federal securities law purposes, with the calculation always being on a fully diluted basis. The present value of a contingent interest is irrelevant to the calculation of percentage of ownership interests. For example, if the exercise of an option or similar interest at the present time would result in an individual holding 26% of the profit interests in an entity, the individual would be deemed to own or control 25% or more of the ownership interests in the reporting company even if the value of those profit interests is indeterminate or negligible at the present time. Also, once it is determined that ownership is over the threshold 25%, the owner must be reported, but the actual percentage ownership need not be disclosed.
There are five exemptions to the definition of a beneficial owner, including: (i) minors provided that a parent or guardian’s information is reported; (ii) nominees and intermediaries (where the actual control person would be reported); (iii) an individual whose only interest in a company is a future interest through a right of inheritance; (iv) employees (though same may still be a control person); and (v) creditors (though same may be an owner if the debt is convertible).
Access to Information
Given the sensitivity of the reportable information, the CTA imposes strict confidentiality, security, and access restrictions on the data FinCEN collects. FinCEN is authorized to disclose reported BOI in limited circumstances to a statutorily defined group of governmental authorities and financial institutions. For example, federal agencies may only obtain access to BOI when it will be used in furtherance of a national security, intelligence, or law enforcement activity. For state, local, and tribal law enforcement agencies, a court of competent jurisdiction must authorize the agency to seek BOI as part of a criminal or civil investigation similar to a search warrant. Foreign government access is limited to requests made by foreign law enforcement agencies, prosecutors, and judges in specified circumstances.
With the consent of the reporting company, FinCEN may also disclose BOI to financial institutions to help them comply with customer due diligence requirements under applicable law. Finally, a financial institution’s regulator can obtain BOI that has been provided to a financial institution it regulates for the purpose of performing regulatory oversight that is specific to that financial institution.
The CTA directs the Secretary of the Treasury to maintain BOI “in a secure, nonpublic database, using information security methods and techniques that are appropriate to protect non-classified information security systems at the highest security level.” To implement this requirement, FinCEN has been developing the Beneficial Ownership Secure System (BOSS) to receive, store, and maintain BOI. However, FinCEN will need to implement rules, controls and procedures to further ensure the protection and confidentiality of the information and that access is only obtained as statutorily directed.
Timing of Reports/Compliance
The compliance effective date for the new rule is January 1, 2024, although entities subject to its provisions which were created before January 1, 2024, will have one year (until January 1, 2025) to file their initial reports. Entities created after January 1, 2024, will have 30 days after receiving confirmation of creation from their respective secretary of state or similar office, to file.
FinCEN has not yet published the reporting forms but will seek comment on same prior to effectiveness.
Updated or corrected reports must be filed within 30 calendar days after the date on which there is any change with respect to any information previously submitted to FinCEN, including any change with respect to who is a beneficial owner of a reporting company, as well as any change with respect to information reported for any particular beneficial owner or applicant. In addition to the obvious changes, practitioners should keep in mind the duty to update when a beneficial owner is deceased, new ownership transfers to heirs and descendants, or when a previous minor child beneficial owner reaches the age of majority.
In addition, the final rule does not adopt a good faith or other standard regarding the requirements to update or correct reports. The CTA places the reporting responsibility on reporting companies, and this responsibility includes the obligation to report accurately. The CTA also requires reporting companies to update information when it changes.
Laura Anthony, Esq.
Anthony L.G., PLLC
A Corporate Law Firm
Securities attorney Laura Anthony and her experienced legal team provide ongoing corporate counsel to small and mid-size private companies, OTC and exchange traded public companies as well as private companies going public on the Nasdaq, NYSE American or over-the-counter market, such as the OTCQB and OTCQX. For more than two decades Anthony L.G., PLLC has served clients providing fast, personalized, cutting-edge legal service. The firm’s reputation and relationships provide invaluable resources to clients including introductions to investment bankers, broker-dealers, institutional investors and other strategic alliances. The firm’s focus includes, but is not limited to, compliance with the Securities Act of 1933 offer sale and registration requirements, including private placement transactions under Regulation D and Regulation S and PIPE Transactions, securities token offerings and initial coin offerings, Regulation A/A+ offerings, as well as registration statements on Forms S-1, S-3, S-8 and merger registrations on Form S-4; compliance with the Securities Exchange Act of 1934, including registration on Form 10, reporting on Forms 10-Q, 10-K and 8-K, and 14C Information and 14A Proxy Statements; all forms of going public transactions; mergers and acquisitions including both reverse mergers and forward mergers; applications to and compliance with the corporate governance requirements of securities exchanges including Nasdaq and NYSE American; general corporate; and general contract and business transactions. Ms. Anthony and her firm represent both target and acquiring companies in merger and acquisition transactions, including the preparation of transaction documents such as merger agreements, share exchange agreements, stock purchase agreements, asset purchase agreements and reorganization agreements. The ALG legal team assists Pubcos in complying with the requirements of federal and state securities laws and SROs such as FINRA for 15c2-11 applications, corporate name changes, reverse and forward splits and changes of domicile. Ms. Anthony is also the author of SecuritiesLawBlog.com, the small-cap and middle market’s top source for industry news, and the producer and host of LawCast.com, Corporate Finance in Focus. In addition to many other major metropolitan areas, the firm currently represents clients in New York, Los Angeles, Miami, Boca Raton, West Palm Beach, Atlanta, Phoenix, Scottsdale, Charlotte, Cincinnati, Cleveland, Washington, D.C., Denver, Tampa, Detroit and Dallas.
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Ms. Anthony is an honors graduate from Florida State University College of Law and has been practicing law since 1993.
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