Effective January 1, 2024, virtually every legal entity incorporated, organized, or registered to do business in a state must disclose information relating to its owners, officers, and controlling persons with the Financial Crimes Enforcement Network (FinCEN) pursuant to the newly enacted Corporate Transparency Act (CTA).
The CTA received bipartisan support as it aims to reduce terrorist financing, money laundering, and other illicit activities. The sweeping law, however, is likely to open a pandora’s box for private funds, family offices, and angel investors that historically prefer for their private investments to be insulated from public disclosure. Businesses that fit the criteria of a “reporting company” under the CTA will have either 30 days or 1 year to comply, depending upon the reporting company’s date of formation.
The CTA establishes criminal and civil penalties for individuals who knowingly provide false or fraudulent information in connection with the beneficial ownership report and entities that fail to comply with reporting requirements.
What is a reporting company?
Reporting companies include domestic and foreign privately held entities. A domestic privately held entity is a corporation, limited liability company, or other entity created by filing a document with the secretary of state or similar office under the laws of that state. A foreign entity includes any private entity formed under the laws of a foreign country that is registered to do business in a state of the US by filing a document with the secretary of state or similar office under the laws of that state.
Israeli companies with US operations should familiarize themselves with these new reporting requirements in order to remain compliant.
The CTA identifies 23 entity types that are exempt from the definition of reporting companies (eg, SEC-reporting companies, insurance companies, tax-exempt entities, subsidiaries of exempt entities). Importantly, a “large operating company” is also exempt if the entity employs more than 20 employees on a full-time basis in the US, has filed a federal US income tax return for the year prior showing more than $5 million in gross receipts or sales (not including receipts and sales from sources outside of the US), and operates from physical office premises in the US.
This exemption will only benefit well-established businesses, as startup entities will be unable to satisfy the requirements associated with prior year tax filings. An entity that initially qualifies for the large operating company exemption but subsequently fails to meet the criteria for such exemption will need to file a beneficial owner report. Conversely, if an entity is initially determined to be a reporting company but then qualifies for the large operating company exemption, that entity must file an updated report noting such change.
What is a beneficial owner?
The CTA forces reporting companies to provide identifying information for the beneficial owners of the reporting company. The CTA states that a beneficial owner is an individual who, directly or indirectly, either (i) exercises “substantial control” over a reporting company or (ii) owns or controls at least 25 percent of the ownership interests of a reporting company. An individual exercises “substantial control” if they satisfy any of the following factors:
- they serve as a senior officer of the company
- they have authority over the senior officers or majority of the board of a company
- they have substantial influence over the company’s important decisions, or
- they have any other type of substantial control over the company.
Although the criteria for being classified as a beneficial owner may appear to relate to individuals that are directly related to the company, individuals indirectly related to the company will also be considered beneficial owners if they satisfy any of the requirements for substantial control. Specifically, individuals may indirectly exercise substantial control over a reporting company by controlling one or more intermediary entities that in turn exercise substantial control over the reporting entity. More information regarding the precise applicability of these provisions to private equity funds and other investment vehicles will become available upon the CTA becoming effective and enforced.
The following types of individuals cannot be considered beneficial owners of a reporting company:
- minor children (however, the reporting company must report information regarding the minor child’s parent or legal guardian)
- an individual acting as a nominee, intermediary, custodian, or agent on behalf of another individual (in which case that individual would be the beneficial owner)
- an employee of the reporting company, acting solely as an employee, whose substantial control over or economic benefits from the entity are derived solely from the employment status (provided that the person is not a senior officer of the entity)
- an individual whose only interest in a reporting company is a future interest through a right of inheritance, and
- a creditor of the reporting company (unless they exercise substantial control or have a 25-percent ownership interest in the reporting company).
What is a company applicant?
The CTA obligates reporting companies to provide identifying information for the “company applicants” of the reporting company. The CTA states that a company applicant is one of two people: (a) the individual who is responsible for filing the documents that create the entity or, in the case of a foreign entity qualified to do business in the US, the individual who directly files the document that first registers the foreign reporting company to conduct business in a state; or (b) the individual who is primarily responsible for directing or controlling the filing of the relevant formation or registration document by another.
Note that legal counsel can be considered a company applicant if they meet this criterion. Additionally, reporting companies that existed prior to the effective date (January 1, 2024) need not identify and report company applicants.
What is included in the report?
A reporting company must include the following information when filing the report with FinCEN:
- the full legal name of the entity
- any trade or d/b/a name
- the address of the entity
- the jurisdiction of formation of the entity, and
- the federal taxpayer ID number.
Additionally, a reporting company must include the following information when filing the beneficial owner report with FinCEN for each beneficial owner of company applicant:
- date of birth
- home address
- a unique identifying number and issuing jurisdiction (eg, US passport or driver’s license), and
- an image of the document that contains the identifying number. Alternatively, an individual or entity can obtain a FinCEN identifier which can be included on subsequent filings in lieu of this information.
After an initial filing, reporting companies have 30 days to file an updated report after any change with respect to information previously reported. Further, reporting companies must correct inaccurate information in previously filed reports within 30 days after the date the reporting company becomes aware of the error.
When should the information be provided?
Once the CTA takes effect, reporting companies will have either 30 days or one year from the January 1, 2024 effective date to comply with the reporting requirements. Beneficial ownership information will not be accepted by FinCEN until the effective date.
To determine whether a reporting company has 30 days or 1 year to comply, one must look to the formation of the reporting company at issue. Reporting companies created or registered prior to January 1, 2024 will have one year to comply with the CTA by filing initial reports. Reporting companies created or registered January 1, 2024 will have 30 days upon receipt of their creation or registration documents to file initial reports. FinCEN is currently designing and building a new IT system called the Beneficial Ownership Secure System to collect and store CTA reports, but this system is not yet available.
It should be noted that the reports filed with FinCEN will not be accessible to the public and are not subject to requests under the Freedom of Information Act. However, the following government agencies will have access to the information:
- federal agencies engaged in national security, intelligence, and civil and criminal law enforcement
- the Department of the Treasury in connection with its official duties, including tax administration, and
- state and local law enforcement agencies in connection with criminal or civil investigations. FinCEN may also disclose information to financial institutions to assist in their anti-money laundering compliance activities.
Failure to comply or the provision of false or fraudulent reports may result in civil fines of $500 a day for as long as the reports remain inaccurate. Failure to comply may also subject the violators to the criminal penalties of a $10,000 fine or 2 years in jail.
In anticipation of the CTA’s implementation, entities that will qualify as reporting companies are encouraged to evaluate their compliance plan. For instance, they should consider beginning the process of compiling reporting information, updating internal policies to effectively report information, and creating a system by which all changes to reporting information are tracked and updated.
Following the effectiveness of the CTA, prospective acquirers in M&A transactions should consider confirming whether the target is a reporting company and, if so, whether it is in compliance with the CTA.
Due to the increased reporting requirements the CTA places on small businesses, those businesses are encouraged to analyze whether they fall under the definition of a reporting company and what they must do to remain in compliance with the CTA. Additionally, in light of the broadly drafted CTA provisions, it may prove difficult for companies to make the required reporting determinations prospectively. With this, ongoing attention is necessary to ensure that appropriate disclosures are made in a timely manner.
If you have any questions about the CTA or related matters, please contact your DLA Piper relationship partner, the authors of this alert, or any member of our Private Equity practice group.
 FinCEN uses the IRS definition of full-time employee which is an employee that works 30 hours or more per week and more than 130 hours per month (note that employees at subsidiary companies do not count towards this total).