Alert 06.12.23
Alert
Alert
10.06.23
As has been widely reported, the Corporate Transparency Act (CTA) will become effective January 1, 2024, creating new obligations for millions of public and even the smallest private companies to report beneficial ownership information (BOI reports) with the Treasury Department’s Financial Crimes Enforcement Network (FinCEN). Companies that are not exempt from CTA reporting (Reporting Companies), that are created or registered on or after the effective date, will have 30 days after they are formed, under current rules, to comply with the CTA reporting obligations. Non-exempt companies created before the effective date will have until December 31, 2024. For more information on the exemptions from the CTA, please refer to the Pillsbury Client Alert published on June 12, 2023.
FinCEN has now proposed amending its reporting rules, to allow entities more time to prepare for the new reporting regime. FinCEN proposes that Reporting Companies created or registered between January 1, 2024, and January 1, 2025, will have 90 days (instead of 30 days) after their creation or registration to file their BOI reports. FinCEN describes this as a one-time-only relaxation of the BOI reporting rules.
What to Do before December 31
The proposed rules might not be adopted, or might be adopted in revised form. Even if the proposed rules are adopted, there is much to be done before the end of 2023 to lessen the impact of the BOI reporting requirements. We recommend that all companies take the following steps before December 31, 2023, to prepare for the CTA:
Many companies, including public reporting companies, some tax exempt organizations and companies already included within a Federal reporting system, such as banks or broker-dealers, may be exempt from the CTA, although partially owned subsidiaries or affiliates of a public reporting company may not be exempt even if their parent is exempt. If it is determined that some entities do not have an exemption from the CTA, we suggest that non-exempt companies take the following steps:
Reporting Companies will need to disclose specific information about themselves, their beneficial owners and their company applicants. As noted above, however, even exempt companies may have non-exempt entities, such as partially owned subsidiaries, that may need to report.
Because even large, exempt companies may have affiliated entities that are not exempt, we recommend that all companies establish record keeping and CTA compliance processes, which should involve the following:
- A representation by each shareholder, member or partner, as applicable, that it is compliant with, or exempt from, the CTA;
- A covenant by each shareholder, member or partner, as applicable, requiring continued compliance with and appropriate disclosures under the CTA, or to provide evidence of exemption from its requirements;
- Indemnification agreements by each shareholder, member or partner, as applicable, of the company and its shareholders, members or partners, for any failure to comply with the CTA or for providing false information; and
- A consent by each beneficial owner or controlling person for the company to disclose identifying information to FinCEN, to the extent required by law.
Compliance with the CTA will require continuous attention going forward. We suggest that you form an internal working group to manage your internal record-keeping for CTA filings.
[1] Depending on the structure of the entity, changes to subscription documents, shareholders agreements, fund documents, indemnification agreements and other entity documents that are creating beneficial ownership reporting obligations may also be required to ensure compliance with the CTA.
[2] Investment funds should consider adding similar representations and covenants by their investors to their subscription and management agreements. Lenders should also consider adding similar representations and covenants by their borrowers to their loan documents.