On January 1, 2024, the Beneficial Ownership Reporting Rule (as defined below) under the Corporate Transparency Act (the “CTA”) 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.
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”) 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. 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. 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.
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, including:
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.
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.