New Filing Requirements Under the Corporate Transparency Act

On January 1, 2024, the Beneficial Ownership Reporting Rule (as defined below) under the Corporate Transparency Act (the “CTA”)^[1] goes into effect. The Beneficial Ownership Reporting Rule will require certain non-exempt entities to disclose previously unrequired information or face potential civil and criminal penalties. We discuss several key requirements and legal considerations below.

Overview

In September 2022, the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (“FinCEN”) issued a final rule (the “Beneficial Ownership Reporting Rule”)[2] implementing Section 6403 of the CTA. The Beneficial Ownership Reporting Rule will require Reporting Companies—generally legal entities formed or registered to do business in the United States that do not fall into one of the CTA’s enumerated exemptions—to file Beneficial Ownership Information with FinCEN. “Beneficial Ownership Information” includes basic information about the legal entity (e.g., address) and information about the entity’s Company Applicants and/or Beneficial Owners (each as defined below).

When does the Beneficial Ownership Reporting Rule go into effect?

Reporting Companies registered before January 1, 2024 have until January 1, 2025 to file their initial Beneficial Ownership Information reports. Reporting Companies registered on or after January 1, 2024 must file their reports within 30 days after receiving notice of their creation or registration. After filing, Reporting Companies have 30 days to report changes, updates or corrections to previously submitted information regarding the Reporting Company or its Beneficial Owners. Reporting Companies may not get a jumpstart on filing as FinCEN has stated that it is not accepting any Beneficial Ownership Information reports before January 1, 2024.

FinCEN and members of Congress have made certain regulatory and legislative proposals that, if adopted, would adjust the Beneficial Ownership Reporting Rule timelines. However, as of the date of this memorandum, such proposals have not been adopted. In September 2023, FinCEN issued a Notice of Proposed Rulemaking to extend the initial Beneficial Ownership Information report filing deadline from 30 days to 90 days for Reporting Companies registered on or after January 1, 2024 but before January 1, 2025.^[3] FinCEN’s Notice of Proposed Rulemaking does not include any other proposed changes to the timelines under the Beneficial Ownership Reporting Rule. Reporting Companies registered on or after January 1, 2025 would still have 30 days to file.

In addition, in June 2023, the Protecting Small Business Information Act was introduced, which, if enacted, would indefinitely delay the effectiveness of the Beneficial Ownership Reporting Rule until FinCEN finalizes certain other rules that must be implemented pursuant to the CTA, such as FinCEN’s December 2022 proposed rulemaking (the “Access Rule”) regarding the circumstances under which certain governmental entities will have access to Beneficial Ownership Information collected pursuant to the Beneficial Ownership Reporting Rule.[4] If adopted, the Access Rule would (i) limit access to Beneficial Ownership Information to Federal agencies engaged in national security, intelligence or law enforcement activities; state, local and Tribal law enforcement agencies with court authorization; financial institutions with customer due diligence requirements (and regulators supervising them for compliance with such requirements); foreign law enforcement agencies, prosecutors, judges and other agencies that meet specific criteria; and Treasury officers and employees under certain circumstances, and (ii) set security and confidentiality standards for protecting Beneficial Ownership Information consistent with the goals and requirements of the CTA.^[5]

What are “Reporting Companies” under the CTA?

A “Reporting Company,” as defined by the CTA, is any domestic or foreign entity that is a corporation, limited liability company or “similar entity” that is created by the filing of a document with a secretary of state or similar office. A key factor in determining whether a company will be a Reporting Company is whether it had to file a document with its secretary of state, or a similar office, in order to create the company or, for foreign companies, register to do business in the United States.

Are there any exemptions to the definition of Reporting Company?

Yes, the CTA exempts 23 types of entities from the Reporting Company definition,[6] including:

• Securities Reporting Issuers – Public companies.
• Large operating companies – Companies that:
  • have more than 20 full-time employees in the United States;
  • have an operating presence at a physical office in the United States; and
  • filed a U.S. federal income tax or information return for the previous year demonstrating more than $5.0 million in gross receipts or sales, excluding gross receipts or sales from sources outside the United States.
    • For an entity that is part of an affiliated group of corporations that filed a consolidated return, the test is applied based on the consolidated return for such group.
• Registered Investment Companies and Certain Registered Investment Advisers – Entities that are:
  • investment companies, as defined in Section 3 of the Investment Company Act of 1940 (the “ICA”), that are registered with the Securities and Exchange Commission (the “SEC”) under the ICA; or
  • investment advisers, as defined in Section 202 of the Investment Advisers Act of 1940 (the “IAA”), that are registered with the SEC under the IAA (“RIAs”).
    • While RIAs are exempt from the reporting requirements, neither the CTA nor the Beneficial Ownership Reporting Rule expressly exempt private fund advisers (i.e., investment advisers relying on the IAA exemption from registration for advisers who solely advise private funds that have a total of less than $150 million in assets under management in the United States), foreign private advisers (i.e., investment advisers relying on the IAA exemption from registration for advisers who have no place of business in the United States, among other criteria) and family offices (i.e., companies that are excluded from the “investment adviser” definition under the IAA because they provide investment advice about securities only to “family clients,” as defined under the IAA, among other criteria).
• Venture Capital Fund Advisers (“VCFAs”) – Entities that:
  • are investment advisers, as described in Section 203(l) of the IAA; and
  • have filed Item 10, Schedule A, and Schedule B of Part 1A of Form ADV, or any successor thereto, with the SEC.
• Certain pooled investment vehicles (“PIVs”) – Generally, PIVs that are operated or advised by a bank, a credit union, a broker-dealer, a registered investment company, an RIA or a VCFA, as each entity is defined by the CTA and the Beneficial Ownership Reporting Rule.
  • The CTA exempts two kinds of PIVs from the reporting obligation (“Exempt PIVs”):
    • any investment company, as defined by Section 3(a) of the ICA (e.g., registered funds or funds investing primarily in securities); and
    • any company that (a) relies on the Section 3(c)(1) or 3(c)(7) exclusions from the “investment company” definition under the ICA (e.g., a private fund) and (b) is (or will be) identified by its legal name on an investment adviser’s Form ADV filed with the SEC.
  • The criteria for Exempt PIVs could be interpreted to also cover any funds-of-one or other single-investor vehicles.
  • Neither the CTA nor the Beneficial Ownership Reporting Rule expressly exempt other PIVs (including real estate funds relying on the Section 3(c)(5)(C) exemption under the ICA and certain foreign pooled investment vehicles) from the Reporting Company definition, even if those entities are operated or advised by RIAs. Accordingly, those entities would be subject to the reporting obligations under the Beneficial Ownership Reporting Rule unless another exemption applies. As discussed further below, subsidiaries of Exempt PIVs are required to independently meet the criteria of an applicable exemption from the definition of Reporting Company.
• Certain tax-exempt entities and entities that assist tax-exempt entities.
• Subsidiaries of Certain Exempt Companies – Any entity whose ownership interests are controlled or wholly owned, directly or indirectly, by one or more entities that are exempted under certain of the 23 categories, including securities reporting issuers, large operating companies, registered investment companies, RIAs, VCFAs and certain tax-exempt entities, but, notably, excluding Exempt PIVs.
  • Therefore, general partners or managing members of Exempt PIVs could be exempt if they (i) independently meet the criteria of an exemption or (ii) are controlled or wholly owned, directly or indirectly, by an entity that qualifies to have its subsidiaries exempt (e.g., an RIA). Notably, general partners or managing members that are under common control with an RIA are not expressly exempted under the CTA.
  • Note that the Beneficial Ownership Reporting Rule does not expressly define what it would mean for an entity to be “controlled” by an exempt company.

What happens to a subsidiary of an Exempt PIV?

The subsidiaries of an Exempt PIV are not included in the subsidiary protection provided by the Beneficial Ownership Reporting Rule. Thus, even if the private fund entity is exempt under the PIV protection, its subsidiaries are subject to CTA reporting obligations if they are not themselves otherwise eligible for a Reporting Company exemption (e.g., as a large operating company or as the wholly owned subsidiary of an Exempt PIV that is solely controlled by a registered investment adviser). This could include holding companies, tax blockers, equity aggregator vehicles or any other special purpose vehicles that sit below a private fund and above an operating company.

If a company is not exempt, what type of information must it file?

Each Reporting Company must submit its full legal entity name (as well as any trade or d/b/a names), address of its principal place of business, jurisdiction of formation (or, for foreign Reporting Companies, the jurisdiction where such Company first registers) and a unique identifying number (generally, the employer identification number or other taxpayer identification number issued by the IRS (“TIN”) or in the case of foreign Reporting Companies, a foreign tax identification number).

Reporting Companies must also identify and file basic information such as the full legal name, date of birth, business street address or current residential street address (as applicable) and a unique identifying number from an acceptable identification document (together with an image of the identifying document) for Beneficial Owners and Company Applicants.

• “Beneficial Owner” is a broadly defined category and includes individuals who directly or indirectly (i) exercise substantial control or (ii) own or control at least 25% of the ownership interests of a Reporting Company.
  • Exercising substantial control includes serving as a senior officer of the company and having substantial influence over important decisions such as compensation schemes, business lines and major transactions such as mergers.
  • “Ownership interest” is defined broadly and includes direct and indirect interests.
• For a domestic Reporting Company, a “Company Applicant” is any individual who files the document that creates the entity or is primarily responsible for directing or controlling such filing. For a foreign Reporting Company, a “Company Applicant” is any individual who files the document that first registers the entity to do business in the United States.
  • Only Reporting Companies created after January 1, 2024 must report Company Applicant information.
  • There can be up to two individuals who qualify as Company Applicants: (i) the individual who directly files the document that creates or first registers the Reporting Company; and (ii) the individual who is primarily responsible for directing or controlling the filing of the relevant document.

Is there a way to make this filing requirement less burdensome?

Yes, FinCEN is currently creating a process for individuals and companies to obtain a unique FinCEN identifying number, separate from already existing unique identifiers such as the TIN, which, for individuals, can be used in lieu of filing the above information for the creation of new entities and any future filings or updates.

An individual may obtain a FinCEN identifier by submitting an application to FinCEN containing the information that the individual would otherwise have to provide if the individual were a Beneficial Owner or Company Applicant of the Reporting Company.

What are the penalties for noncompliance?

Willful reporting violations of the Beneficial Ownership Reporting Rule can result in civil and criminal penalties, including fines of $500 per day (up to a maximum of $10,000) and imprisonment for not more than two years. There are also civil and criminal penalties for the unauthorized disclosure or access of Beneficial Ownership Information.

How will FinCEN protect Beneficial Ownership Information provided by Reporting Companies?

FinCEN is currently developing procedures to govern the access and protection of Beneficial Ownership Information. FinCEN has assured prospective Reporting Companies that the system will comply with federal data privacy laws and is also developing a new IT system to protect the information.

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[1]       In January 2021, Congress enacted the CTA to combat the funding of illicit activities. The CTA was passed as Title LXIV (§§ 6401–03) of the William M. (Mac) Thornberry National Defense Authorization Act for Fiscal Year 2021, Public Law 116–283 (Jan. 1, 2021).  

[2]       See Beneficial Ownership Information Reporting Requirements, available here.

[3]       See Beneficial Ownership Information Reporting Deadline Extension for Reporting Companies Created or Registered in 2024, available here.

[4]       See Beneficial Ownership Information Access and Safeguards, and Use of FinCEN Identifiers for Entities, available here. In addition to the Access Rule, the CTA also requires that FinCEN revise certain portions of its Customer Due Diligence (the “CDD”) Rule within one year after the effective date of the Beneficial Ownership Reporting Rule. The CDD Rule was finalized in 2016 and requires certain types of financial institutions to collect and verify Beneficial Ownership Information of legal entity customers. FinCEN intends to implement changes to the CDD Rule via a future rulemaking.

[5]       For more information about the Access Rule proposal, please see https://www.fincen.gov/news/news-releases/fincen-issues-notice-proposed-rulemaking-regarding-access-beneficial-ownership.

[6]       For the full list of exemptions and other Beneficial Ownership Reporting Rule information, please see https://www.fincen.gov/boi-faqs. For FinCEN’s “Small Entity Compliance Guide,” please see https://www.fincen.gov/news/news-releases/fincen-issues-compliance-guide-help-small-businesses-report-beneficial-ownership.