A major deadline set by The U.S. Department of the Treasury’s Financial Crimes Enforcement Network (“FinCEN”) for entities that are required to file beneficial ownership reporting under the Corporate Transparency Act (the “CTA”), is quickly approaching on January 1, 2025. While FinCEN’s rule setting out the reporting requirements with respect to “Reporting Companies,” including the information required to be reported to FinCEN and the due dates (the “Reporting Rule”), went into effect at the beginning of 2024 for newly formed companies, the bulk of reports have not been required to be filed until now. Companies that have not considered their filing requirements under the CTA and Reporting Rule should therefore act now.
Who is required to file under the Reporting Rule?
Under the Reporting Rule, Reporting Companies include (1) any corporation, limited liability company, or entity created by the filing of a document with an secretary of state in any state of the United States or any Indian tribe or similar office and (2) any corporation, limited liability company or other entity formed under the law of a foreign country that is registered to do business in any U.S. state or tribal jurisdiction by the filing of a document with the secretary of state or any similar office under the law of a U.S. state or Indian tribe.
When are the initial filings due?
Specifically, the deadlines for Reporting Companies to file their initial beneficial ownership reports are:
- Reporting Companies formed (or who became Reporting Companies, such as in the case of a foreign entity that files to do business in the U.S.) before January 1, 2024, must file by January 1, 2025.
- Reporting Companies formed (or who became Reporting Companies) on or after January 1, 2024, but before January 1, 2025, have been required to file within 90 days of such formation.
- Reporting Companies formed (or who become Reporting Companies) on or after January 1, 2025, must file their initial beneficial ownership reports within 30 days of such formation.
What information is required to be filed?
The report requires the Reporting Company to provide identifying information, such as the Reporting Company’s name (and any DBAs), address and where the entity is registered, as well as a taxpayer identification number (“TIN”) issued by the IRS. All Reporting Companies will be required to file for and receive a TIN number from the IRS before they can file a beneficial owner report.
Each Reporting Company is required to identify and report its Company Applicant (s) as well as its Beneficial Owners, as discussed below.
The Reporting Rule identifies two types of Company Applicants. The first type is that existing Reporting Companies must identify the natural person that formed a domestic Reporting Company or that registered a foreign Reporting Company, as applicable (the “Direct Filer”) as a Company Applicant. The second category of Company Applicant is only applicable to a new Reporting Company when a natural person other than the Direct Filer is primarily responsible for directing or controlling the formation or registration, as applicable, of the new Reporting Company. All Company Applicants must be natural persons.
A “Beneficial Owner” is any natural person who either, directly, or indirectly, exercises substantial control over a Reporting Company or who owns or controls at least 25 percent of the ownership interests of a Reporting Company. Those exercising “substantial control” of a Reporting Company include those who serve as senior officers of the Reporting Company, or who have the authority to appoint or remove senior officers or a majority of the board of directors (or similar body) of a Reporting Company, as well as any who directs, determines, or has substantial influence over decisions of the Reporting Company.
There may be more than one Company Applicant (although there is typically only one) and there is often more than one Beneficial Owner.
Reporting Companies will need to include each Beneficial Owner’s and Company Applicant’s name, date of birth, residential address (for Beneficial Owners) or in the case of a Company Applicant that forms or registers any New Reporting Company as a part of a business of doing so, their business address. They also must include an identifying number for the Beneficial Owner or Company Applicant from an official document such as a passport or U.S. driver’s license and the name of the issuing State or jurisdiction, as well as upload an image of that identification.
Are there any exemptions to the Reporting Rule?
In addition to filing an initial beneficial owner report, Reporting Companies must also update and correct information in their previously filed reports within specified time limits on a going forward basis. Aside from the initial filing requirement, because there is a responsibility to prepare and file ongoing updates to the reports, all companies should consider with their counsel or advisers whether one or more of the exemptions apply. FinCEN provided extensive guidance on these exemptions and published it in multiple languages.
The Reporting Rule provides twenty-three types of entities that are exempt from beneficial ownership information reporting requirements, including publicly traded companies, banks, registered broker dealers, nonprofits, and entities formed or operated as part of a government structure (such as Indian tribes or States and municipalities). In many cases, subsidiaries of these entities may also be exempt. Among the twenty-three exemptions from the Reporting Rule, some are likely to be commonly applicable. Additional exempt entities include those who are registered pursuant to the Commodity Exchange Act, large operating companies with significant revenues and employees, tax-exempt entities, and subsidiaries of certain exempt entities. The gist of the exemptions is to provide relief to entities that already provide beneficial ownership information to the government.
Investment Adviser Exemptions
One such example, investment advisers registered with the SEC and their affiliated general partners, and private funds (which are funds relying on exemptions from the requirement to register as an investment company pursuant to Section 3(c)(1) or 3(c)(7) under the Investment Company Act), that are managed by investment advisers who are registered with the SEC, and that are identified by name on the adviser’s Form ADV, are exempt from the requirement to file. Subsidiaries of exempt pooled investment vehicles are not automatically exempt from the Reporting Rule and must be examined individually to see if another exemption is available for them.
Another is for venture capital fund advisers (advisers relying on the venture capital adviser exemption under the Investment Advisers Act and filing as an Exempt Reporting Adviser (ERA)). Still another is for registered investment companies (whether they are open or closed end, or an ETF). It should be noted that investment advisers that are not registered with the SEC (or that are exempt reporting advisers, other than venture capital fund advisers) and the funds they advise, are not expressly exempt from the definition of Reporting Company.
What happens if a Reporting Company fails to report?
It remains to be seen what level of enforcement activity that FinCEN will engage in, but the CTA does provide for penalties for con-compliance. Any willful failure to report complete or updated beneficial ownership information to FinCEN, or the willful provision of or attempt to provide false or fraudulent beneficial ownership information may result in civil penalties of up to $500 for each day that the violation continues, or criminal penalties including imprisonment for up to two years and/or a fine of up to $10,000. Senior officers of an entity that fails to file a required BOI report may be held accountable for that failure.
Is the CTA here to stay?
On March 1, 2024, a federal district court in the Northern District of Alabama ruled that the CTA exceeds the Constitution’s limits on Congress’s power and enjoined FinCEN from enforcing the CTA against the plaintiffs, who were a small business industry group. [FN 1] The government has appealed. Other than the individuals and entities that enjoy the court’s enforcement injunction against FinCEN, all other Reporting Companies are still required to comply with the law and file beneficial ownership reports as provided in the Reporting Rule. It remains to be seen whether the government will succeed in that appeal, or whether other litigants will seek to challenge the Reporting Rule and CTA. It also remains to be seen whether the Reporting Rule will remain in effect after the inauguration of Donald Trump. In theory, his administration, once in place at FinCEN, could revise the Reporting Rule, or take a hands-off approach on enforcement, or a Republican controlled Congress could act to repeal or change the CTA. Until then, compliance with the Reporting Rule is the law and Reporting Companies must continue to comply.
Conclusion
Understanding how the Reporting Rule will apply to a particular company, and what information about what people associated with them will need to be included, will require analysis. If you haven’t already, Macaluso LLP is ready to assist you in determining whether your entities are Reporting Companies and, if so, what information about its Company Applicants and Beneficial Owners will be required to be included in the filing. If you require such advice or would like assistance with filing, please reach out to your Macaluso LLP contact.
- National Small Business United v. Yellen, No. 5:22-cv-01448 (N.D. Ala.)
Written by: Thomas G. Kennedy, Esq.
A Partner in Macaluso, LLP’s Investment Management Regulation and Compliance Practice, Tom serves as counselor to asset management firms and institutional investors as well as service providers on regulatory and compliance legal matters including preparations for upcoming SEC rules, review and drafting of investment advisory and other contracts, disclosures, consents and no-action letter requests for various transactions, and advice concerning management and prevention of enforcement liability.
Tom also serves as a Managing Director, and Head of Institutional Asset Management for AltPilot Group, which offers asset management firms and institutional investors, as well as service providers consulting on compliance risk management from designing and implementing compliance programs, to managing a wide range of compliance related functions like compliance program management, regulatory filings, mock exams, testing and assisting with examinations and audits.