The Corporate Transparency Act

Background

The Corporate Transparency Act (the “CTA”), a new federal law, went into effect on January 1, 2024.  The CTA requires that certain entities file Beneficial Ownership Information Reports (“BOI Reports”) with the Financial Crimes Enforcement Network (“FinCEN”) of the U.S. Department of Treasury. BOI Reports provide identifying information about the entity and its beneficial owners, including persons with “substantial control” (such as senior officers). The CTA is intended to aid the U.S. Government in preventing money laundering, fraud and other illicit activities conducted through previously anonymous entities. Legislation has been proposed that would defer and extend reporting deadlines discussed below, but it is currently unclear if and when it will become law.

A V&E task force is monitoring developments and providing support on CTA matters. Please contact your relationship attorney at V&E for assistance with CTA questions. They can coordinate with V&E’s CTA task force for support as needed.

Key Requirements

Who is required to report? Any entity formed under the laws of any U.S. state or tribal jurisdiction, and any foreign entity registered to do business in any U.S. state or tribal jurisdiction, unless an exemption applies. Companies that must report under the CTA are called “Reporting Companies.”

What entities are exempt? The CTA includes 23 exemptions from the reporting obligations, including, among others, publicly traded companies, nonprofits, and certain large operating companies. See the list of the exemptions below. FinCEN has authority to adopt additional exemptions, but declined to do so in its final implementing regulations.

Does the CTA change the mechanics for forming a new entity? No. New entities will be formed in the same manner as prior to the implementation of the CTA (i.e. by filing a formation document through the applicable jurisdiction’s entity formation office, such as the Delaware Secretary of State). The CTA simply imposes an additional obligation following the formation of a new entity (unless the entity is exempt from CTA reporting obligations).

What information is reported? Reporting requirements include providing information about the Reporting Company, its senior officers, its Beneficial Owners (as described below) and, for entities formed after January 1, 2024, information about the individuals involved in the formation of the Reporting Company (“Company Applicants”).

Individual Beneficial Owners, senior officers or Company Applicants must provide their name, date of birth, address and a copy of an ID document issued by a state or federal government (e.g., a state driver’s license). Alternatively, the BOI Reports can list the FinCEN ID Number for such individuals (see below for information on FinCEN ID Numbers and how to apply for one).

Who is a Beneficial Owner? A Beneficial Owner is an individual (natural person) who (1) exercises “substantial control” over the Reporting Company or (2) owns or controls not less than 25% of the ownership interests in a Reporting Company. “Substantial control” is broadly defined, and includes a Reporting Company’s senior officers and individuals who have authority to appoint or remove any senior officer or a majority of the board of directors, and individuals who have substantial influence over other important Reporting Company matters.

What is a FinCEN ID number and how can I obtain one? A FinCEN ID Number is a unique identifying number issued to an individual by FinCEN. Although there is no requirement to obtain a FinCEN ID, doing so can simplify the reporting process. An individual beneficial owner or Company Applicant’s FinCEN ID Number can be reported instead of required information about that individual on the Reporting Company’s BOI Report submitted to FinCEN. A FinCEN ID Number can be obtained at https://fincenid.fincen.gov.

How are BOI Reports filed? BOI Reports must be filed electronically through FinCEN’s website at www.fincen.gov/boi.  

What are deadlines for filing BOI Reports? Entities formed during 2024 will have 90 days to file their initial BOI Reports. Entities formed prior to January 1, 2024 will have until January 1, 2025 to file their initial BOI Reports. Beginning in 2025, new entities must file initial BOI Reports within 30 days. (As noted above, legislation has been proposed that would defer and extend reporting deadlines, but it is currently unclear if and when it will become law.)

What is required if information in a BOI Report changes? Reporting Companies have 30 days to report changes or inaccuracies to information in BOI Reports. Note that ownership percentages are not included in the form for BOI Reports published by FinCEN as of January 4, 2024, suggesting that changes in ownership that do not change the identified Beneficial Owners will not require an amendment.

What are the penalties for non-compliance with the CTA? Willful failure to report or update beneficial owner information (or fraud) may result in civil penalties (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).

Other Key Information

Private Equity Entities: Registered investment advisers and venture capital fund advisers under the Investment Advisers Act, as well as the “pooled investment vehicles” (“PIVs”) that they advise, are not subject to reporting. Otherwise, investment advisers not registered with the SEC and their PIVs are not exempt from reporting requirements unless they satisfy another CTA exemption. Subsidiaries of PIVs, including intermediate investment entities, Special Purpose Vehicles and portfolio companies, are excluded from using the subsidiary exemption (see exemption number (xxii) in the list below, referred to as the “subsidiary exemption”) based on their status as a subsidiary of an exempted PIV. Thus, these entities and their subsidiaries are generally subject to reporting unless they independently satisfy another CTA exemption.

Public Companies: Public companies are generally exempt from the CTA. However, public companies should review any non-wholly owned subsidiaries (e.g., joint ventures) for possible reporting requirements.

Joint Ventures:  There is a general view, subject to further FinCEN guidance, that a joint venture (“JV”) entity should be exempt if its ownership interests are controlled or wholly owned by multiple exempt entities as to which the subsidiary exemption applies. However, if a JV entity has a beneficial owner that is not an exempt entity, the JV entity would need to file a BOI Report identifying its beneficial owners.

Real Estate: Real estate transactions generally involve forming one or more new entities to purchase, lease or develop a property. There is no blanket exemption for real estate companies, and therefore each entity in a real estate holding structure must be analyzed to determine whether reporting is required under the CTA or if an exemption applies. In addition, updated reporting may be required as the ownership of entities changes (for example, if there are 25%+ new beneficial owners of an entity, the entity would need to file an updated BOI Report).

Exemptions

The CTA exempts the following entities from beneficial ownership reporting requirements (exemption numbers correspond to the FinCEN final regulations):

1. Securities Reporting Issuers
2. Governmental Authorities
3. Banks
4. Credit Unions
5. Depository Institution Holding Companies
6. Money Service Businesses
7. Brokers or Dealers
8. Securities Exchanges or Clearing Agencies
9. Other entities required to register under the Exchange Act
10. Registered Investment Companies and Registered Investment Advisers
11. Venture Capital Fund Advisers
12. Insurance Companies
13. U.S. State Licensed Insurance Producers
14. Commodity Exchange Act Registered Entities
15. Registered Public Accounting Firms
16. Regulated Public Utilities
17. Financial Market Utilities
18. Pooled Investment Vehicles*
19. Certain Tax-Exempt Entities under the Internal Revenue Code
20. U.S. Entities Assisting a Tax-Exempt Entity
21. Certain Large Operating Companies**
22. Subsidiaries of Certain Exempt Entities***
23. Certain Inactive Entities

* PIVs, which are generally private equity investor partnerships exempt from the Investment Company Act, but only if operated or advised by exempt entities in the following categories: (iii) banks, (iv) credit unions, (vii) broker-dealers, (x) registered investment companies or registered investment advisers, or (xi) venture capital fund advisers.

** Large operating companies are entities with more than 20 full-time employees in the U.S., an operating presence at a physical address in the U.S., and more than $5 million of gross revenue (from the U.S.) on the consolidated tax return as to which the entity is treated as a “filer”. The general view is that it is unclear that disregarded entities (as distinguished from taxpayers within a consolidated group) can be treated as filers for this purpose (FinCEN has been asked to clarify this point). Note that employees cannot be aggregated across entities, meaning that if all of a company’s employees are at a subsidiary, only that subsidiary (and its subsidiaries) could claim the large operating company exemption.

*** Only subsidiaries of exempt entities listed in (i), (ii), (iii), (iv), (v), (vii), (viii), (ix), (x), (xi), (xii), (xiii), (xiv), (xv), (xvi), (xvii), (xix), or (xxi) set forth above are exempt (exemption numbers correspond to the FinCEN final regulations).

V&E CTA Task Force

Disclaimer: This summary was prepared as of January 11, 2024, and is subject to change as further guidance on the CTA develops. This is only a summary of a complex regulatory system and is not legal advice. Specific questions regarding the CTA should be directed toward your V&E relationship attorney.