Since the January 1, 2024 compliance effective date for the Corporate Transparency Act, I have been inundated with compliance inquiries. Here is what you need to know.
Background
On January 1, 2021, Congress passed the Corporate Transparency Act (“CTA”). The CTA requires all business entities, subject to certain exceptions, to disclose information about the entity and the individual(s) who own such entity and/or have substantial control. The CTA was created to help the United States government combat money laundering, tax fraud and illegal foreign ownership of U.S. businesses. On September 30, 2022, the Treasury’s Financial Crimes Enforcement Network (“FinCEN”) issued a Final Rule on the CTA, explaining what information needs to be disclosed in the form of a Beneficial Ownership Information Report (referred to as a “BOI Report”). For a review of the rule release, see HERE. The BOI Report will become part of a national database on corporate ownership.
The CTA specifically requires entities to file BOI Reports 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.
Entities Required to File BOI Reports
First, SEC reporting companies are exempt from filing BOI Reports. As the majority of my clients are SEC reporting, I want to be clear about this upfront.
In general 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 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 than 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).
How to Report
FinCEN launched a BOI e-filing website for the purpose of filing BOI Reports (https://boiefiling.fincen.gov). The BOI Reports are in downloadable, fillable pdf format and submitted directly online through the website. FinCEN has also created a system to system API for the filing of reports, presumably to be used by frequent filers such as attorneys and corporate formation services.
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 to 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
All covered entities that are formed or 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. Entities formed or created prior to January 1, 2024, have until January 1, 2025, to file their initial reports.
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 standards 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.
The Author
Laura Anthony, Esq.
Founding Partner
Anthony, Linder & Cacomanolis, 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, 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, Linder & Cacomanolis, 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 Anthony, Linder & Cacomanolis 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.
Ms. Anthony is a member of various professional organizations including the Crowdfunding Professional Association (CfPA), Palm Beach County Bar Association, the Florida Bar Association, the American Bar Association and the ABA committees on Federal Securities Regulations and Private Equity and Venture Capital. She is a supporter of several community charities including the American Red Cross for Palm Beach and Martin Counties, Susan Komen Foundation, Opportunity, Inc., New Hope Charities, the Society of the Four Arts, the Norton Museum of Art, Palm Beach County Zoo Society, the Kravis Center for the Performing Arts and several others.
Ms. Anthony is an honors graduate from Florida State University College of Law and has been practicing law since 1993.
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