October 18, 2022

Client Alert

By: Bradley Kulman, Karen Scanna, Paul Lisbon

On September 29, 2022, the Financial Crimes Enforcement Network (“FinCEN”), a bureau of the U.S. Department of the Treasury, issued its final rule (the “Rule”)^[1] implementing the beneficial ownership information (“BOI”) reporting requirements of the Corporate Transparency Act (the “CTA”).^[2] The effective date of the Rule is January 1, 2024.

Under the Rule, many U.S. and certain foreign entities designated as reporting companies will be required to report BOI to FinCEN. Reporting companies formed on or after January 1, 2024 will have 30 days after formation to file their initial report. Reporting companies in existence before January 1, 2024 are required to file their initial reports no later than January 1, 2025. Although there are exceptions to the reporting requirements for certain specified types of entities (particularly for larger operating entities and regulated entities), the scope of reporting companies that will be required to file reports is quite wide and it is expected that tens of millions of entities will be required to file BOI reports with FinCEN. The filing requirements will affect a broad range of entities, including:

• Entities that own real estate assets;
• Entities established by private fund managers that do not qualify for the exemptions in the Rule for investment advisers and pooled investment vehicles discussed below;
• Investment vehicles set up by family offices and individuals; and
• Smaller private companies and joint ventures.

Reporting Companies – U.S. and Non-U.S.^[3]

Subject to the exemptions discussed below, domestic reporting companies are any corporation, limited liability company or other entity that is created by the filing of a document with the secretary of state or a similar office of a state or Indian tribe. Although not specifically listed, domestic reporting companies would include, for example, limited partnerships and statutory trusts.

Also, subject to the same exemptions, foreign reporting companies are any corporation, limited liability company or other entity formed under the laws of a non-U.S. country and registered to do business in the United States by the filing of a document with a secretary of state or similar office under the laws of a state or Indian tribe.

There are 23 exemptions to the definition of reporting companies.^[4] Based on FinCEN’s discussion of the Rule contained in the release preceding the Rule, we expect FinCEN to interpret these exemptions narrowly and an entity that does not fit squarely within an exemption will be treated as a reporting company and required to file reports.

The exemptions include the following:

1. Public companies that have a class of securities registered under Section 12 of the Securities Exchange Act of 1934 (the “Exchange Act”) and are required to make periodic filings under Section 15(d) of the Exchange Act;
2. Banks;
3. Credit unions;
4. Bank holding companies;
5. Broker-dealers;
6. Investment companies and investment advisers registered with the SEC (“Investment Advisers”);
7. Venture capital advisers filing with the SEC as an exempt reporting adviser (“Venture Capital Advisers”);
8. Insurance companies;
9. Commodity Exchange Act registered companies;
10. Public utilities;
11. Pooled investment vehicles^[5] that are advised by Investment Advisers or Venture Capital Advisers (or certain other specified entities);
12. Operating companies that employ more than 20 full-time employees in the U.S., have an operating presence at a physical office in the U.S. and have filed a U.S. tax return for the previous year reporting more than $5 million in gross receipts or sales (excluding receipts or sales outside of the U.S.); and
13. Any entity that is wholly-owned or controlled by one or more exempt entities (with certain exclusions, including wholly-owned subsidiaries of pooled investment vehicles, which will have to qualify for another exemption in order to be exempt).

Contents of Reports^[6]

Reporting companies that do not qualify for an exemption will be required to file a report that includes certain basic information about themselves (name, street address, state of jurisdiction and taxpayer identification number). Reporting companies will also be required to include in their reports information on their Beneficial Owners (as defined below) and Company Applicants (as defined below). This information includes the name, date of birth, residential street address for Beneficial Owners, business street address for Company Applicants and an identifying number for each Beneficial Owner and Company Applicant (e.g., passport or driver’s license number (and a copy of the applicable document) or a FinCEN Identifier).

Definitions^[7]

The defined terms Beneficial Owner, Substantial Control and Company Applicant in the Rule are crucial to understanding the information that will be required to be contained in a report.

Beneficial Owner is defined as any individual who, directly or indirectly, either exercises Substantial Control over the reporting company or owns or controls at least 25% of the ownership interests of the reporting company. It should be noted that if an entity that is exempt from being a reporting company is a Beneficial Owner of a reporting company, information on the owners of the exempt entity need not be included in the report of the reporting company, unless such owners otherwise possess Substantial Control over the reporting company. Instead, the name of the exempt entity will be included in the report of the reporting company.

The Rule sets forth three specific indicators of when an individual possesses “Substantial Control”:

• Serves as a senior officer of the reporting company (e.g., president, chief financial officer, general counsel, chief executive officer, chief operating officer or person performing a similar function);
• Has authority over the appointment or removal of any senior officer or a majority of the board of directors (or equivalent);
• Directs or has substantial influence, directly or indirectly, over important decisions made by the reporting company. The Rule includes a broad list of what are considered to be important decisions, which includes sales of principal assets, major expenditures, issuance of equity, incurrence of debt and approval of budgets. The Rule also provides that Substantial Control can be exercised through a variety of manners, including through board representation, ownership of a majority of the voting rights, contractual arrangements and rights associated with any financing arrangement or interest in a company.

Company Applicant is defined as any individual who directly files the document that creates the reporting company, and any individual who is primarily responsible for direction or controlling such filing.^[8] In our view, this definition will require further clarification by FinCEN in FAQ’s.

FinCEN Identifier is a number assigned by FinCEN upon request by an individual who has provided FinCEN with relevant information pertaining to the individual, or by an entity that has reported its beneficial ownership information to FinCEN.

Timing and Filing of Reports; Updates^[9]

For reporting companies created on or after January 1, 2024, the report is due within 30 days of formation (for U.S. entities) or registration (for non-U.S. entities).

For reporting companies formed before January 1, 2024, the initial report is due no later than January 1, 2025.

To the extent there are changes or inaccuracies in a report (other than changes in Company Applicant information), an updated report is required to be filed within 30 days of such change or the date that the reporting company has become aware of such inaccuracy.

Reports will need to be filed with FinCEN in a manner that will be set forth in a subsequent rule.

Penalties

Failure to comply with the reporting requirements of the CTA can lead to significant civil and criminal penalties, including a minimum civil penalty of $500 per day (up to $10,000) and imprisonment for up to two years.

Confidentiality

FinCEN is required to maintain the information in these reports in a confidential, secure, and non-public database.

However, FinCEN is authorized to disclose the collected information to certain government agencies, domestic and foreign, and to financial institutions, with reporting company consent, to assist them in meeting their due diligence requirements. All disclosures of information are subject to protocols that are to be developed by FinCEN to protect the information’s security and confidentiality.

Under the CTA, beneficial ownership information is neither publicly accessible nor subject to being queried under the Freedom of Information Act.

The rules on protection and confidentiality of information included in the reports have yet to be issued (even in proposed form).

Key Takeaways

• Although many entities will qualify for exemptions, responsible personnel for any existing entity that does not clearly qualify for an exemption should be reviewing their applicable organizational structure and determining the identities of their Beneficial Owners and Company Applicants as soon as practicable.
• Many reporting companies will not have appropriate contractual rights to obtain the necessary information about their Beneficial Owners. These situations need to be evaluated closely with appropriate counsel and efforts made to obtain such information should be commenced.
• For entities in the process of being formed or that will be formed in the future, counsel should consider whether provisions for providing and updating BOI information should be included in subscription agreements, limited partnership agreements, LLC agreements and/or other applicable documents.
• Before forming new entities, owners or other responsible personnel and their counsel should take into consideration the BOI reporting requirements of the Rule and make sure they have, or have access to, the applicable information necessary to file the reports and updates in a timely manner.
• Once the Rule is in effect, counsel for acquirers and lenders should consider how to address compliance with these reporting obligations in due diligence and in contractual representations and warranties.

[1] 87 Fed. Reg. 59498-59596 (Sep. 30, 2022).

[2] Pub. L. No. 116-283 (Jan. 1, 2021) #6403; 31 USC #5336.

[3] 31 CFR #1010.380(c).

[4] 31 CFR #1010.380(c)(2).

[5] Pooled investment vehicles are: (i) entities that qualify as investment companies under Section 3(a) of the Investment Company Act of 1940 (e.g., registered funds) or (ii) 3(c)1 and 3(c)(7) funds/vehicles that are or will be identified by name in the applicable Investment Adviser’s Form ADV. 31 CFR #1010.380(f)(7). Foreign pooled investment vehicles that are registered to do business in the U.S. will be required to file a report identifying a single individual that exercises “Substantial Control.” 31 CFR #1010.380(b)(2)(ii).

[6] 31 CFR #1010.380(b).

[7] 31 CFR #1010.380(d).

[8] 31 CFR #1010.380(e).

[9] 31 CFR #1010.380(a).

• Corporate
• Employment Compliance Law
• Family Office
• Mergers, Acquisitions and Joint Ventures
• Private Equity / Venture Capital
• Private Funds and Asset Management
• Real Estate
• Tax Compliance & Controversy