In prior blog, I wrote about the federal Corporate Transparency Act (“CTA”) passed on January 1, 2021. Implementation of certain aspects of the CTA were deferred until the United States Department of Treasury could pass rules that clarify the new law. The regulatory process is progressing. Consider the following…
The Corporate Transparency Act and its Regulations…
The CTA will require most existing and new corporate entities (e.g., corporations, limited liability companies, etc.) to report personal information about company owners and incorporators to the Department of Treasury. The face of the CTA raised many questions as to the precise scope of the law and its implementation. On April 5, 2021, the Financial Crimes Enforcement Network (FinCEN) of the Department of Treasury issued an advance notice of proposed rulemaking (ANPRM). The ANPRM invited public commentary on the CTA and requested input on forty-eight specific questions.
After receiving commentary, FinCEN published a Notice of Proposed Rulemaking (NPRM) on December 7, 2021. The proposed rules in FinCEN’s recent NPRM attempt to clarify three questions surrounding the reporting requirements under the CTA: Who must file; When they must file; and What information they must file. The last issue of my blog addressed the question of who. This blog will (start to) address the question of what. The questions of when will be addressed in a future blog.
Beneficial Owners…
The CTA states that a reporting company must file a report that includes the name, date of birth, current residential or business address, and a unique identifying number (i.e., either one issued by FinCEN or one from an acceptable identification document) of each beneficial owner. The CTA defined beneficial owner as an individual who exercises substantial control over the company or owns or controls 25% or more of the ownership interests of the entity.
Which address? FinCEN’s NPRM actually narrowed the address requirement by stating the residential address used for tax residency purposes—not a business address—must be furnished.
What is substantial control? In its NPRM, FinCEN says three specific indicators of substantial control are: (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. In addition, FinCEN says a determination can be based upon any other applicable factors.
What is an ownership interest? As to what constitutes an “ownership interest,” FinCEN’s NPRM stated that (1) traditional “equity” in a company, (2) interests such as capital or profit interests, convertible instruments, warrants or rights, or other options or privileges to acquire equity, capital, or other interests in a company, and (3) debt instruments that enable the holder to exercise similar rights will be deemed to be an ownership interest.
Conclusion…
The CTA and its regulations will continue to be watched and analyzed in the coming weeks and months. Please stay tuned or reach out to me for more information about how this may impact you and your company.
PLEASE NOTE: This blog is merely for the general interest of the reader. It is not legal advice or opinion and it does not create an attorney-client relationship. Please call me at 973-921-0600 if you’d like to have a free initial telephone consultation or learn more about me or my practice. Thank you.