Corporate Transparency Act Imposes Significant New FinCEN Reporting and Disclosure Requirements

On January 1, 2024, the Beneficial Ownership Information (“BOI”) reporting requirements under the federal Corporate Transparency Act (“CTA”) are scheduled to go into effect.  The new rules represent a fundamental shift in the U.S. disclosure regime for privately held companies.

The CTA

A part of Congress’s historic bipartisan National Defense Authorization Act of 2021, the CTA became law on January 1, 2021.  On September 29, 2022, the Secretary of the Treasury issued final regulations addressing certain aspects of the BOI reporting requirements.  Financial Crimes Enforcement Network of the Department of the Treasury (“FinCEN”) subsequently provided additional guidance related to compliance with the reporting requirements.

Under the CTA, many privately held U.S. entities and foreign entities registered to do business in the U.S. will be required to file a report with FinCEN identifying and providing personal information related to: (i) the entity itself; (ii) each individual who, directly or indirectly, exercises “substantial control” over the entity or owns at least 25% of the ownership interests in the entity on a fully consolidated basis (referred to as a “beneficial owner”); and (iii) certain persons involved with the filing of documents creating the entity (or, in the case of foreign entity, registering the entity to do business within the U.S.) with relevant State or Tribal authorities (referred to as the “company applicant”).

The regulations under the CTA address a number of issues regarding what information will need to be reported and by whom, including the following:

• Who Must Report. The CTA reporting requirements apply to privately held U.S. corporations, limited liability companies, and other entities created by filing a document with a secretary of state or similar office under the law of a State or Native American Tribe (referred to as “reporting companies”), as well as similar foreign entities registered to do business in the U.S. under the law of any State or Tribe. Reporting companies include LLCs and limited partnerships and may include general partnerships that are required to establish legal existence by filing a document with a secretary of state or similar office under the law of a State or Native American Tribe.
• Who is Exempt. The CTA reporting requirements do not apply to certain private funds managed by registered investment advisers, a host of government entities and federally regulated entities, or to private trusts that are not required to register with a State or Tribal authority upon formation.  There are also exemptions for:  (i) “large operating companies” that have: (a) 20 or more full-time U.S. employees, (b) more than $5 million in gross receipts or sales, and (c) a physical operating presence in the U.S.; (ii) subsidiaries of certain exempt entities; and (iii) “inactive entities.”  In some cases, well-funded start-ups with large numbers of employees that are “pre-revenue” may be subject to reporting requirements until their gross receipts exceed $5 million per year.
• What Needs to be Provided. Reporting companies must provide FinCEN with each beneficial owner’s and company applicant’s full legal name, date of birth and current residential address (or, in the case of company applicants, business address), as well as a unique identifying number from an acceptable government-issued identification document (for example, a passport or driver’s license).  However, only domestic entities formed (or foreign entities registering to do business in the U.S.) after January 1, 2024, will need to report personal information with respect to the company applicant.
• Alternative Compliance. Individuals who do not want to provide personal information to reporting companies can instead provide their information directly to FinCEN and obtain a unique identifying number (a “FinCEN Identifier”) and provide their FinCEN Identifier to reporting companies to be listed on their FinCEN reports.  Entities that are beneficial owners (“owner-entities”) may obtain a FinCEN Identifier to be listed with the owner‑entity’s full legal name on the reporting company’s FinCEN report if three conditions are met:  (i) the owner-entity has obtained a FinCEN identifier and provided that FinCEN identifier to the reporting company; (ii) an individual is or may be a beneficial owner of the reporting company by virtue of an interest in the reporting company that the individual holds through the owner-entity; and (iii) the beneficial owners of the owner-entity and of the reporting company are the same individuals.
• Deadline for Pre-2024 Entities. Domestic reporting companies formed (or foreign reporting companies registering to do business in the U.S. for the first time) prior to January 1, 2024, will have to provide the required information to FinCEN by January 1, 2025.
• Deadline for 2024 and Future Entities. Domestic reporting companies formed (or foreign reporting companies registering to do business in the U.S. for the first time) during calendar year 2024 will have to provide the required information to FinCEN within 90 days of formation (or registration).  Reporting companies formed after the 2024 calendar year will be required to report within 30 days of formation (or registration).
• Availability of Information. Information reported to FinCEN will not be available to the general public.  It will be kept in a confidential database and permitted to be disclosed only to domestic or foreign law enforcement, courts or similar bodies in connection with investigations or, with the reporting company’s consent, to financial institutions to facilitate compliance with anti‑money laundering laws.

Certain provisions of the new rules that may be of interest to individuals affiliated with companies subject to the new reporting obligations under the CTA are summarized below.

Beneficial Owners and Company Applicants

As noted above, the CTA requires reporting companies to disclose to FinCEN the full legal name, date of birth, address and identification number from a non-expired government-issued ID for each beneficial owner and, with respect to reporting companies formed after January 1, 2024, company applicants. The company applicant is the individual who directly files the document required to create the reporting company or, in the case of a foreign reporting company, to register the company to do business in the U.S.  If more than one individual is involved in the filing, the individual who is primarily responsible for directing or controlling such filing is also a company applicant.  FinCEN intends to limit the definition of company applicant to only one or two individuals.

“Beneficial owner” is defined as each individual who, directly or indirectly, either:  (i) exercises substantial control (as described below) over the entity; or (ii) owns or controls at least 25% of the entity’s ownership interests (measured by vote or by value).  When determining the 25% ownership threshold, all options or similar interests are treated as exercised.  For reporting entities that issue capital or profits interests, an individual’s ownership interest is the percentage of total outstanding capital or profits interests owned by the individual.  For reporting companies that issue shares of stock, an individual’s ownership interest is the greater of:  (i) the percentage of total outstanding voting power of all classes of voting interests; and (ii) the percentage of total value of all outstanding classes of ownership interests owned by the individual.  In cases in which there is uncertainty regarding how beneficial ownership is measured, any individual who owns or controls 25% or more of any class or type of ownership interest of a reporting company will be deemed to own or control 25% or more of the ownership interests of the reporting company.

Beneficial owners do not include employees who are not senior officers; certain individuals acting as nominees, intermediaries, custodians or agents on behalf of others; creditors; or individuals whose sole interest is through a right of inheritance.  In the case of a minor child who is a beneficial owner, the company must report the required information with respect to the minor’s parent or legal guardian.

A person has “substantial control” if one of the following indicators is present:  (i) service as a senior officer of a reporting company; (ii) authority to appoint or remove any senior officer or a majority of the board of directors (or a similar body); and (iii) directing, determining or having substantial influence over important decisions (such as disposition of principal assets; reorganization, dissolution or merger of the reporting company; major expenditures; compensation of senior officers; or amending governing documents).  The rules define “senior officer” as President, Chief Financial Officer, General Counsel, Chief Executive Officer, Chief Operating Officer, or any officer who performs a similar function.  The accompanying guidance makes clear that a treasurer, corporate secretary or other officer who tends to perform only ministerial functions will not be considered a “senior officer.”  Substantial control may be exercised directly or indirectly through board representation, ownership or control of a majority of the voting rights, control over intermediary entities, or any other contractual arrangement or understanding.

The concept of beneficial ownership and substantial control may apply to trusts as well.  If a trustee or other individual has authority to control or dispose of trust assets, then that trustee or individual is considered to own or control any ownership interests in a reporting company held in the trust.  If a beneficiary of a trust is the sole permissible recipient of income and principal from the trust, or if a beneficiary has the right to demand a distribution, or withdraw substantially all, of the trust assets, then the ownership interests held in trust will be considered as owned or controlled by that beneficiary.  Trust assets will be considered as owned or controlled by a grantor or settlor who has the right to revoke the trust or withdraw its assets.  Therefore, depending on the specifics of the trust arrangement, ownership or control interests held in trust could be considered owned or controlled by multiple parties.

As noted above, reporting companies formed (or registering to do business in the U.S.) after January 1, 2024, must disclose personal information with respect to the “company applicant.”

Reporting Requirements and Timing

Each reporting company will be required to file an initial report containing:  (i) the full name of the reporting company and any trade name or “d/b/a” name used by the company; (ii) the street address of its principal place of business (if within the U.S.) or of the primary location in the U.S. where it does business; (iii) for foreign reporting companies, the State or Tribal jurisdiction where the company first registered to do business in the U.S.; (iv) the company’s U.S. tax ID number (or, in the case of a foreign reporting company without a U.S. tax ID number, its tax ID number issued by a foreign jurisdiction and the name of the jurisdiction); and (v) any required information related to the beneficial owners and company applicant(s).

Companies created before January 1, 2024, have until January 1, 2025, to complete their initial filings under the CTA.  Newly formed entities, however, will be required to make the disclosures within 30 days (90 days for those formed or registered during the 2024 calendar year) after receiving notice of their creation or registration.  FinCEN has advised that entities that were exempt from filing as of January 1, 2024, but cease to be exempt during the 2024 calendar year will receive the benefit of the longer of the two applicable timeframes.

Reporting companies are required to file an updated report within 30 calendar days after the date on which there is any change with respect to information previously submitted to FinCEN (other than changes with respect to a company applicant).  The final rules do not adopt a good faith or other standard; reporting companies have strict liability with respect to accurate reporting.  Further, reporting companies will be required to certify that reported information is “true, correct and complete.”

Penalties for willful failure to provide complete or updated beneficial ownership information or willfully providing (or attempting to provide) false or fraudulent beneficial ownership information can include up to two years in prison and up to $10,000 in fines.  The penalties may apply to a reporting company, its senior officers or any individual or other entity who directly or indirectly causes a violation.  The language of the final rules and accompanying guidance indicate that this would include anyone who willfully provides false or fraudulent information to a reporting company for the purposes of filing a report under the CTA.  Therefore, it appears that in some cases, there may be multiple parties subject to potential liability for failing to meet CTA reporting requirements.  The CTA does not provide specific penalties for negligent or unintentional violations.  There is, however, a safe harbor for persons who become aware that inaccurate information has been submitted, and who then re-submit corrected information within 90 days of submitting the inaccurate report (so long as the inaccuracy was not done with the intent of evading the reporting requirements).

Exempt Entities

The CTA and the final regulations provide that at least 23 categories of entities are entirely exempt from the disclosure requirements, including many entities already subject to close regulation, such as banks, investment companies, registered investment advisers, insurance companies, certain utilities, public companies, certain pooled investment vehicles managed by registered investment advisers, certain dormant companies and subsidiaries of exempt companies.  Tax-exempt organizations and charitable trusts also are exempt from CTA reporting requirements.  Notably, if an individual is a beneficial owner of a reporting company exclusively by virtue of ownership of an interest in an exempt entity, then the reporting company can list the name of the exempt entity in its FinCEN reports in lieu of information related to the individual beneficial owner.  However, many private entities formed to hold passive investments (such as securities or real estate) for business, estate planning or other purposes are not exempt and must comply with the CTA reporting requirements.

Trusts that are not created by filing a document with a government agency are not considered reporting companies and are not required to report beneficial ownership under the CTA.  As noted above, trusts that are beneficial owners of reporting companies may be obligated to provide the reporting company with information regarding trustees, other fiduciaries and, in some cases, the settlor and/or beneficiaries to be included in the company’s FinCEN reporting under the CTA.  Most trusts used for estate planning purposes do not file formation documents with government authorities and are exempt from CTA reporting, but certain trusts more commonly used for business purposes that are created by registering with state authorities (for example, Delaware statutory trusts and Massachusetts business trusts) may be subject to the CTA reporting requirements.

The final rules do not include any exemptions beyond the 23 specifically set out in the regulations, but they do clarify the special rules for the information required to be reported regarding ownership interests held by exempt entities, minor children, foreign pooled investment vehicles, and deceased company applicants.

Use of Disclosed Information

Information disclosed under the CTA will not be publicly available.  FinCEN will be required to store the information securely and authorized to make disclosures within specific parameters:  (i) to national security, intelligence and law enforcement agencies at the Federal, State, Tribal and local levels; and (ii) if the reporting company has consented, to financial institutions to facilitate their compliance with anti-money laundering laws. Federal agencies receiving the information may provide it to foreign courts and similar bodies in the context of an investigation.  The Department of the Treasury also will have access to disclosed information for tax administration purposes.

Kleinberg Kaplan’s attorneys will continue to monitor further updates related to the FinCEN reporting requirements under the CTA.  Concerned companies and investors should contact their regular Kleinberg Kaplan contact or the authors of this client alert to discuss the potential impact of the final regulations on them and their businesses.