March 21, 2023
Client Alert
By: Bradley Kulman, Karen Scanna
Under the Corporate Transparency Act (the “CTA”)[1] and the related reporting rule (the “Rule”),[2] reporting companies (as discussed below) will be required to file reports containing beneficial ownership information (“BOI”) with the Financial Crimes Enforcement Network (“FinCEN”),[3] commencing January 1, 2024 for reporting companies formed on or after such date and January 1, 2025 for reporting companies in existence before January 1, 2024. The scope of the CTA and the Rule and the contents of the required reports has been widely discussed elsewhere, including in Stroock’s past Client Alert dated October 18, 2022.
Many organizations such as real estate developers/owners/managers, private fund sponsors, family offices and other private businesses will be required to make numerous filings. This Client Alert discusses certain practical steps that should be considered in preparation for the effectiveness of the CTA and the Rule, so that the responsible persons for reporting companies will be in a position to file reports with FinCEN when required.
While the content of the reports under the CTA is not particularly complicated, in many cases the challenge for those who are tasked with preparing the filings will be determining whose BOI needs to be filed for each reporting company (i.e., the “beneficial owners” of the reporting company as determined under the Rule), and in some cases the sheer number of reporting companies for which BOI will need to be filed. In all cases, reporting companies will need to ensure that they are informed of any changes to the BOI on a real time basis so that they can comply with the update and amendment requirements under the Rule.[4] In addition, as a result of privacy and data protection laws in the U.S. and abroad, consideration should be given to obtaining consents from the individuals identified in reports, as such reports and information may end up being furnished to third parties, including lenders to reporting companies and their affiliates.[5]
Is an Exemption Applicable?
One of the first steps that can be taken now is reviewing entire organizational structures to determine on an entity-by-entity basis whether an entity that would otherwise be a reporting company will be exempt from filing BOI with FinCEN. Although the definition of reporting companies under the Rule is quite broad,[6] there are 23 potential exemptions to the definition of reporting companies and an entity which satisfies an exemption is not required to file reports under the CTA. While we expect FinCEN to interpret these exemptions narrowly, many entities will be able to take advantage of one or more of these exemptions and not be required to file reports. Exempt entities include public companies, banks, broker-dealers, SEC-registered investment companies and advisers, certain pooled investment vehicles, certain larger operating companies, wholly-owned subsidiaries of certain exempt entities and inactive entities (discussed below).[7] It should be noted that wholly-owned subsidiaries of pooled investment vehicles are not considered automatically exempt and would need to qualify for another exemption to be considered exempt from the reporting requirements of the CTA.
Information on Reporting Companies
Once it is determined that an existing entity is a reporting company, the information on the entity itself can be identified in preparation for the applicable report. This would include:
Identifying Beneficial Owners
Under the Rule, “beneficial owner” is defined as any individual who directly or indirectly either exercises substantial control over a reporting company (the “Substantial Control Test”), or owns or controls at least 25% of the ownership interests of such reporting company (the “Ownership Test”).[8]
In the case of complex ownership structures, it may be appropriate to bifurcate the analysis in accordance with the two tests. In any event, a complete organizational chart is typically the best starting point.
The Rule contains a somewhat detailed discussion of how the Substantial Control Test[9] should be applied and determined. For the Substantial Control Test, first an understanding of the overall structure and how it is governed is essential. In addition, a review of the applicable organizational documents, stockholders agreements, operating agreements and other relevant documents and agreements of the entity, and its parent entities, should be undertaken to determine the individuals who, directly or indirectly, exercise substantial control over the reporting company.
Starting with the reporting company itself, any individual who serves as a president, CEO, COO, CFO or general counsel is automatically considered to be a senior officer who has substantial control over the reporting company. Any other officer (regardless of title) who performs a similar function is also considered to have substantial control. Corporate secretaries and treasurers who function solely in such capacities are not considered senior officers under the Rule.
Beyond senior officers, the Rule lists the factors that determine whether an individual exercises substantial control over a reporting company. These include, among others:
With respect to the Ownership Test, the Rule defines “ownership interest” broadly[11] and provides detail as to how to calculate whether an individual owns or controls 25% or more of the ownership interest.[12] Similar to the Substantial Control Test, responsible persons can analyze the existing structure charts, organizational documents, stock certificates and ledgers, capitalization tables, options, stockholders agreements and other relevant documents and agreements of the reporting company and its parent entities to trace through the ownership percentages of the ultimate individual beneficial owners. In making this determination, responsible persons should keep the following in mind:
Information on Beneficial Owners
Once the individuals who will be treated as beneficial owners of a reporting company for purposes of the Rule are identified, the information concerning such individuals can be gathered in preparation for the actual report. This would include:
The individual’s FinCEN identifier (discussed below) can be provided in lieu of the foregoing.
Consents
Given the personal identification information that may be included in BOI reports and the scope of privacy laws that may be applicable to the use and disclosure of such information, consideration should be given to obtaining individual consent from each person named in the BOI reports. Such consents would need to comply with all applicable privacy laws, which in certain circumstances could include foreign privacy laws.
FinCEN Identifiers
The Rule provides that individuals and reporting companies may obtain their own FinCEN identifier upon submission to FinCEN of the applicable information about them that would be included in a report. As a general matter, it may make sense for individuals and reporting companies to obtain FinCEN identifiers as soon as they are able, so that the use and disclosure of sensitive and personal information in the reporting process can be minimized.[13]
Building in Appropriate Contractual Provisions
When putting together agreements and documentation for ownership structures for new entities that are likely to be reporting companies, consideration should be given to building in appropriate provisions so that the applicable beneficial owners (or, in some cases, the organizations designating or representing such persons) are obligated to provide (and update) the necessary BOI so that the reporting company can fulfill its obligations to file and update reports under the Rule. With respect to existing reporting companies, the process undoubtedly will be more complex and appropriate solutions will need to be achieved, given that many reporting companies will not have an existing contractual right to obtain BOI from their beneficial owners. In an ideal world, these beneficial owners would agree to enter into similar contractual arrangements which would obligate them to provide (and update) the necessary BOI so that the reporting companies can file the required reports and avoid any penalties under the BOI.
Corporate Housekeeping
Given the specific reporting requirements of the Rule, consideration should be given to ensuring that reporting companies’ books and records are up-to-date. In addition, although the Rule does provide an exemption for inactive entities from being treated as reporting companies,[14] such exemption is limited to, among other things, entities in existence on or prior to January 1, 2020, entities that have not experienced a change of ownership in the preceding 12 months and entities that hold no assets. If a dormant entity does not satisfy the applicable exemption and can be liquidated without resulting in any other issues (including tax and other liability exposure), it may make sense to begin the dissolution process for such entity so that it can be liquidated prior to the filing deadline.
Updates on the Rule
We anticipate that later this year as the initial reporting deadline under the Rule draws near, FinCEN will provide clarification on interpretative issues relating to the Rule (either by FAQ or otherwise). Responsible persons for reporting companies should make sure that they review such updates so that appropriate adjustments can be made in the process of making the necessary determinations and preparing the reports required under the Rule. We will continue to monitor developments on the CTA and the Rule and will provide updates when appropriate.
[1] 31 U.S.C. § 5336
[2] 31 CFR § 1010.380
[3] FinCEN is a bureau of the U.S. Department of the Treasury.
[4] Updates are generally required to be filed within 30 days. See 31 CFR § 1010.380(a)(2).
[5] Practice in this area is still evolving. We have noticed that some lenders are updating their forms to require that copies of the BOI reports be provided (even though financial institutions should have access to the reports through FinCEN). Potential acquirers may also request copies of the BOI reports in due diligence. In addition, reporting companies may need to provide BOI of their beneficial owners to other reporting companies if it is required to be included in such other reporting companies' reports as a result of an ownership interest or other relationship.
[6] Domestic reporting companies are defined as 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. Foreign reporting companies are defined as 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. See 31 CFR § 1010.380(c)(1).
[7] The exemptions are set forth in 31 CFR § 1010.380(c)(2).
[8] See 31 CFR § 1010.380(d).
[9] See 31 CFR § 1010.380(d)(1).
[10] The Rule sets forth a list of these major decisions, which include among other things, directing, determining or having substantial influence over the sale of principal assets, major expenditures and compensation schemes and incentive programs. See 31 CFR § 1010.380(d)(1)(C).
[11] See 31 CFR §1010.380(d)(2).
[12] See 31 CFR § 1010.380(d)(2)(ii)-(iii).
[13] On January 17, 2023 FinCEN released a proposed rule on obtaining FinCEN Identifiers. See https://www.federalregister.gov/documents/2023/01/17/2023-00708/agency-information-collection-activities-proposed-collection-comment-request-individual-fincen
[14] Sec 13 CFR 1010.380 (c)(2)(xxiii).
March 21, 2023
Client Alert
By: Bradley Kulman, Karen Scanna
Under the Corporate Transparency Act (the “CTA”)[1] and the related reporting rule (the “Rule”),[2] reporting companies (as discussed below) will be required to file reports containing beneficial ownership information (“BOI”) with the Financial Crimes Enforcement Network (“FinCEN”),[3] commencing January 1, 2024 for reporting companies formed on or after such date and January 1, 2025 for reporting companies in existence before January 1, 2024. The scope of the CTA and the Rule and the contents of the required reports has been widely discussed elsewhere, including in Stroock’s past Client Alert dated October 18, 2022.
Many organizations such as real estate developers/owners/managers, private fund sponsors, family offices and other private businesses will be required to make numerous filings. This Client Alert discusses certain practical steps that should be considered in preparation for the effectiveness of the CTA and the Rule, so that the responsible persons for reporting companies will be in a position to file reports with FinCEN when required.
While the content of the reports under the CTA is not particularly complicated, in many cases the challenge for those who are tasked with preparing the filings will be determining whose BOI needs to be filed for each reporting company (i.e., the “beneficial owners” of the reporting company as determined under the Rule), and in some cases the sheer number of reporting companies for which BOI will need to be filed. In all cases, reporting companies will need to ensure that they are informed of any changes to the BOI on a real time basis so that they can comply with the update and amendment requirements under the Rule.[4] In addition, as a result of privacy and data protection laws in the U.S. and abroad, consideration should be given to obtaining consents from the individuals identified in reports, as such reports and information may end up being furnished to third parties, including lenders to reporting companies and their affiliates.[5]
Is an Exemption Applicable?
One of the first steps that can be taken now is reviewing entire organizational structures to determine on an entity-by-entity basis whether an entity that would otherwise be a reporting company will be exempt from filing BOI with FinCEN. Although the definition of reporting companies under the Rule is quite broad,[6] there are 23 potential exemptions to the definition of reporting companies and an entity which satisfies an exemption is not required to file reports under the CTA. While we expect FinCEN to interpret these exemptions narrowly, many entities will be able to take advantage of one or more of these exemptions and not be required to file reports. Exempt entities include public companies, banks, broker-dealers, SEC-registered investment companies and advisers, certain pooled investment vehicles, certain larger operating companies, wholly-owned subsidiaries of certain exempt entities and inactive entities (discussed below).[7] It should be noted that wholly-owned subsidiaries of pooled investment vehicles are not considered automatically exempt and would need to qualify for another exemption to be considered exempt from the reporting requirements of the CTA.
Information on Reporting Companies
Once it is determined that an existing entity is a reporting company, the information on the entity itself can be identified in preparation for the applicable report. This would include:
Identifying Beneficial Owners
Under the Rule, “beneficial owner” is defined as any individual who directly or indirectly either exercises substantial control over a reporting company (the “Substantial Control Test”), or owns or controls at least 25% of the ownership interests of such reporting company (the “Ownership Test”).[8]
In the case of complex ownership structures, it may be appropriate to bifurcate the analysis in accordance with the two tests. In any event, a complete organizational chart is typically the best starting point.
The Rule contains a somewhat detailed discussion of how the Substantial Control Test[9] should be applied and determined. For the Substantial Control Test, first an understanding of the overall structure and how it is governed is essential. In addition, a review of the applicable organizational documents, stockholders agreements, operating agreements and other relevant documents and agreements of the entity, and its parent entities, should be undertaken to determine the individuals who, directly or indirectly, exercise substantial control over the reporting company.
Starting with the reporting company itself, any individual who serves as a president, CEO, COO, CFO or general counsel is automatically considered to be a senior officer who has substantial control over the reporting company. Any other officer (regardless of title) who performs a similar function is also considered to have substantial control. Corporate secretaries and treasurers who function solely in such capacities are not considered senior officers under the Rule.
Beyond senior officers, the Rule lists the factors that determine whether an individual exercises substantial control over a reporting company. These include, among others:
With respect to the Ownership Test, the Rule defines “ownership interest” broadly[11] and provides detail as to how to calculate whether an individual owns or controls 25% or more of the ownership interest.[12] Similar to the Substantial Control Test, responsible persons can analyze the existing structure charts, organizational documents, stock certificates and ledgers, capitalization tables, options, stockholders agreements and other relevant documents and agreements of the reporting company and its parent entities to trace through the ownership percentages of the ultimate individual beneficial owners. In making this determination, responsible persons should keep the following in mind:
Information on Beneficial Owners
Once the individuals who will be treated as beneficial owners of a reporting company for purposes of the Rule are identified, the information concerning such individuals can be gathered in preparation for the actual report. This would include:
The individual’s FinCEN identifier (discussed below) can be provided in lieu of the foregoing.
Consents
Given the personal identification information that may be included in BOI reports and the scope of privacy laws that may be applicable to the use and disclosure of such information, consideration should be given to obtaining individual consent from each person named in the BOI reports. Such consents would need to comply with all applicable privacy laws, which in certain circumstances could include foreign privacy laws.
FinCEN Identifiers
The Rule provides that individuals and reporting companies may obtain their own FinCEN identifier upon submission to FinCEN of the applicable information about them that would be included in a report. As a general matter, it may make sense for individuals and reporting companies to obtain FinCEN identifiers as soon as they are able, so that the use and disclosure of sensitive and personal information in the reporting process can be minimized.[13]
Building in Appropriate Contractual Provisions
When putting together agreements and documentation for ownership structures for new entities that are likely to be reporting companies, consideration should be given to building in appropriate provisions so that the applicable beneficial owners (or, in some cases, the organizations designating or representing such persons) are obligated to provide (and update) the necessary BOI so that the reporting company can fulfill its obligations to file and update reports under the Rule. With respect to existing reporting companies, the process undoubtedly will be more complex and appropriate solutions will need to be achieved, given that many reporting companies will not have an existing contractual right to obtain BOI from their beneficial owners. In an ideal world, these beneficial owners would agree to enter into similar contractual arrangements which would obligate them to provide (and update) the necessary BOI so that the reporting companies can file the required reports and avoid any penalties under the BOI.
Corporate Housekeeping
Given the specific reporting requirements of the Rule, consideration should be given to ensuring that reporting companies’ books and records are up-to-date. In addition, although the Rule does provide an exemption for inactive entities from being treated as reporting companies,[14] such exemption is limited to, among other things, entities in existence on or prior to January 1, 2020, entities that have not experienced a change of ownership in the preceding 12 months and entities that hold no assets. If a dormant entity does not satisfy the applicable exemption and can be liquidated without resulting in any other issues (including tax and other liability exposure), it may make sense to begin the dissolution process for such entity so that it can be liquidated prior to the filing deadline.
Updates on the Rule
We anticipate that later this year as the initial reporting deadline under the Rule draws near, FinCEN will provide clarification on interpretative issues relating to the Rule (either by FAQ or otherwise). Responsible persons for reporting companies should make sure that they review such updates so that appropriate adjustments can be made in the process of making the necessary determinations and preparing the reports required under the Rule. We will continue to monitor developments on the CTA and the Rule and will provide updates when appropriate.
[1] 31 U.S.C. § 5336
[2] 31 CFR § 1010.380
[3] FinCEN is a bureau of the U.S. Department of the Treasury.
[4] Updates are generally required to be filed within 30 days. See 31 CFR § 1010.380(a)(2).
[5] Practice in this area is still evolving. We have noticed that some lenders are updating their forms to require that copies of the BOI reports be provided (even though financial institutions should have access to the reports through FinCEN). Potential acquirers may also request copies of the BOI reports in due diligence. In addition, reporting companies may need to provide BOI of their beneficial owners to other reporting companies if it is required to be included in such other reporting companies' reports as a result of an ownership interest or other relationship.
[6] Domestic reporting companies are defined as 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. Foreign reporting companies are defined as 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. See 31 CFR § 1010.380(c)(1).
[7] The exemptions are set forth in 31 CFR § 1010.380(c)(2).
[8] See 31 CFR § 1010.380(d).
[9] See 31 CFR § 1010.380(d)(1).
[10] The Rule sets forth a list of these major decisions, which include among other things, directing, determining or having substantial influence over the sale of principal assets, major expenditures and compensation schemes and incentive programs. See 31 CFR § 1010.380(d)(1)(C).
[11] See 31 CFR §1010.380(d)(2).
[12] See 31 CFR § 1010.380(d)(2)(ii)-(iii).
[13] On January 17, 2023 FinCEN released a proposed rule on obtaining FinCEN Identifiers. See https://www.federalregister.gov/documents/2023/01/17/2023-00708/agency-information-collection-activities-proposed-collection-comment-request-individual-fincen
[14] Sec 13 CFR 1010.380 (c)(2)(xxiii).
