New FinCEN Ownership Reporting Requirement for Legal Entities

United States legal entities and foreign legal entities that do business in the United States will need to comply with a new ownership reporting requirement (the “BOI Rule”) from the US Financial Crimes Enforcement Network (“FinCEN”). While effectively all private companies are the focus of the rule, many partially owned subsidiaries and joint ventures of public companies and investment funds are implicated by the rule as well.

The BOI Rule takes effect on January 1, 2024, but pre-existing legal entities will have an additional year (i.e., until January 1, 2025) to become compliant. Below, we provide background regarding the BOI Rule and how it will be applied to public and private companies.

Background

The BOI Rule implements registration and reporting requirements of the Corporate Transparency Act (“CTA”), which was enacted into law as part of the National Defense Authorization Act (“NDAA”) on January 1, 2021. The CTA and FinCEN’s implementing regulations fit within a broader Biden Administration strategy to combat financial crimes, which we discussed in greater detail in our Legal Update, “First-Ever US Strategy on Countering Corruption Globally: Key Takeaways for Corporations to Match Enforcement’s Increasingly Global, Integrated and Holistic Approach”. The CTA requires a broad array of legal entities, both domestic and foreign, to register with FinCEN and disclose their ultimate beneficial owners. On April 5, 2021, FinCEN published an Advanced Notice of Proposed Rulemaking (“ANPRM”), the first step in the rulemaking process. On December 8, 2021, FinCEN published the Notice of Proposed Rulemaking (“NPRM” or “Proposed Rule”) as the next step toward the implementation of the CTA. On September 30, 2022, FinCEN released the BOI Rule. For further detail on the ANPRM and the NPRM, see our Legal Updates “FinCEN Moves to Implement the Corporate Transparency Act” and “FinCEN Issues Proposed Rules Requiring Certain US and Non-US Legal Entities to Report Beneficial Ownership Information”, respectively.

Key Elements of the BOI Rule

What Is a “Reporting Company”?

The CTA’s filing requirements apply to “reporting companies,” which include both domestic and foreign companies. Under the BOI Rule, a domestic reporting company includes a corporation, limited liability company or any other entity created by the filing of a document with a secretary of state or similar office, including, in certain circumstances, limited partnerships and business trusts. A foreign reporting company includes a corporation, limited liability company or other entity formed under the law of a foreign country that is registered to do business in any jurisdiction within the United States.

What Are “Exempt Entities”?

The CTA sets forth exemptions from the reporting requirements for certain US and foreign legal entities. The BOI Rule does not significantly diverge from the language of the CTA regarding exemptions. Generally, the categories of exempt entities cover entities that are heavily regulated and, therefore, have beneficial ownership information that is more readily available to US regulators, such as US banks, SEC-registered broker-dealers, SEC-registered investment companies and advisers, FinCEN-registered money services businesses, and insurance companies, among many others. All US public companies should also be excluded through the exemption for SEC reporting issuers (i.e., Section 12 or 15(d) filers). We discuss below the exemptions most relevant to corporate clients.

Large Operating Company Exemption

Under the BOI Rule, an entity is exempt from the reporting requirements if it is a large operating company, which is defined as an entity that (1) employs more than 20 employees on a full-time basis in the United States; (2) filed in the previous year federal income tax returns in the United States demonstrating more than $5 million in gross receipts or sales in the aggregate, including the receipts or sales of other entities owned by the entity and through which the entity operates; and (3) has an operating presence at a physical office within the United States. The BOI Rule clarifies what it means to employ someone on a full-time basis by referencing the US Internal Revenue Service’s (“IRS”) definition of a “full-time employee.” For the tax filing prong, the relevant filing may be a US federal income tax or information return, including a parent company’s consolidated return.

Subsidiary Exemption

With respect to the “subsidiary exemption,” the BOI Rule states that entities (usually subsidiaries) that are owned or controlled by other exempt entities (which include most, but not all, exempt entities under the CTA) will themselves be exempt from the filing requirement. Notably, FinCEN interprets the statutory text as requiring an entity to be owned entirely by one or more specified exempt entities in order to qualify for this exemption, which may preclude joint ventures and entities subject to director qualifying share requirements from qualifying. Therefore, even if an entity is a subsidiary of a public company for certain purposes (e.g., accounting consolidation), it may not be a subsidiary for purposes of the BOI Rule and would need to comply with the rule’s ownership reporting requirements.

Whose Information Must Be Reported?

The CTA requires the reporting company to submit to FinCEN information relating to each of its “beneficial owner(s)” and “company applicant(s).”

Beneficial Owner: The CTA defines a “beneficial owner” as “an individual who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise—(i) exercises substantial control over the entity; or (ii) owns or controls not less than 25 percent of the ownership interests of the entity.” As described below, the BOI Rule expands on the meaning of these terms.

Substantial Control

In order to clarify what it means to exercise “substantial control” over an entity, FinCEN identifies three indicia of substantial control in the NPRM: (1) service as a senior officer of a reporting company; (2) authority over the appointment or removal of any senior officer or dominant majority of the board of directors (or similar body) of a reporting company; and (3) direction, determination or decision of, or substantial influence over, important matters of a reporting company.

This interpretation greatly expands the universe of persons who must be reported to include many executives who may have no financial interest in the performance or assets of the reporting company. It also may be particularly burdensome for foreign companies subject to comprehensive privacy laws (e.g., EU General Data Protection Regulation or GDPR), which could be required to disclose the foreign residential addresses of executives.

Ownership or Control of Ownership Interests

The BOI Rule also clarifies what it means to “[own] or control not less than 25 percent of the ownership interests of the entity’’ by defining ownership interests (which may be held through trusts or similar arrangements), providing guidance on how to determine a 25 percent ownership interest (done by aggregating all of the individual’s ownership interests in comparison to the undiluted ownership interests of the company) and explaining how an individual can “own or control” interests (which can be done directly or indirectly). Notably, “ownership interests” include all instruments that represent a capital interest in the reporting company or a right or interest in the value of the reporting company or its profits. This would include equity kickers and potentially could include other instruments with equity-like attributes, such as preferred shares.

Company Applicant: In addition to beneficial owners, a reporting company is required to submit information regarding the “company applicant.” For domestic reporting companies, the proposed rule defines a company applicant as an individual who files the document that forms the entity. For foreign reporting companies, a company applicant is the individual who files the document that first registers the entity to do business in the United States.

In both cases, anyone who directs or controls the person who files the relevant document would also be a company applicant. However, the BOI Rule provides that if an entity was formed prior to the effective date of the rule, then it has no requirement to report company applicants.

What Information Must Be Reported?

FinCEN requires the reporting company to provide its name, any alternative names through which it engages in business, its business street address, the jurisdiction of formation or registration and a unique identification number. With respect to beneficial owner and company applicant information (“BOI”), the reporting company must provide an individual’s name, birthdate, residential or business address (depending on whether the person is a beneficial owner or certain kind of company applicant) and a unique identifying number from an “acceptable identification document” (and the image of such document).

FinCEN recognized in the NPRM that commenters urged it to collect information with respect to the reporting company’s relationships with intermediate legal entities, its parents, subsidiaries, affiliates and beneficial owners. However, commenters did not identify the statutory authority for collection of such information. Therefore, while FinCEN welcomes further comments on this topic, it remains to be seen if FinCEN will add any additional reporting requirements in the final rule regarding a reporting company’s relationship to its closely connected entities and individuals.

When Must Reports and Updates Be Filed By?

The effective date of the rule is January 1, 2024. For domestic and foreign reporting companies created or registered on or after the final regulation, the reporting company must file with FinCEN 30 calendar days after formation or registration. An entity formed or registered before the effective date of the final regulations is required to file its initial report no later than one year after the effective date of the regulation—January 1, 2025. The BOI Rule also aligns the reporting of updates or reporting of inaccuracies with the 30-calendar-day timeframe.