As we advised last November, a new filing requirement with the U.S. Financial Crimes Enforcement Network (FinCEN) begins January 1, 2024. Any business entity formed or registered to do business in a U.S. state, territory or tribal land must determine if it is required to submit a filing. If a filing is required, the business will need to collect and report information about the entity and the individuals who own or control it.
What you need to know
- U.S. private equity investment vehicles and holding companies are among those likely to have to file.
- For entities newly formed or registered to do business in 2024, FinCEN is expected to extend the filing deadline from 30 to 90 days.
- Businesses with complex corporate organizational charts need to think through and identify the beneficial owners of their reporting companies.
- Companies and private equity funds should implement processes to track information changes that they will need to provide in updated filings.
Important reminders about this new U.S. filing requirement
The reporting obligations, when applicable, are mandatory. FinCEN is authorized to impose substantial fines, and even criminal penalties, for a willful failure to file or a willful provision of false information. Senior officers of an entity that fails to file may be held accountable for that failure.
Entities existing before January 1, 2024 that are required to file will have one year to do so—by January 1, 2025. For entities created or registered to do business in the U.S. in 2024, FinCEN is expected to extend their time to file an initial report to 90 days. On and after January 1, 2025, all reporting companies will have 30 days to file after formation or registration.
Exempt from filing are "large operating companies" that have a physical operating presence, more than 20 full-time employees in the U.S., and consolidated gross revenues or sales from U.S. sources of $5 million or more. Wholly owned subsidiaries of exempt entities are also exempt from filing. Most other filing exemptions apply to companies that are already regulated by U.S. federal or state governments, such as U.S. public issuers, registered investment advisers and the companies they advise, banks, and insurance companies.
A U.S. holding company, for example, will be required to file even when its exempt operating subsidiaries do not. For a foreign-owned U.S. holding company, the foreign parent will not be obligated to file, assuming it is not registered to do business in the U.S. However, it will need to collect and report the information of non-U.S. individuals who qualify as its beneficial owners.
FinCEN has not yet made the electronic filing portal available
but says that it will be ready to go for the new year. In the
meantime, it has published several guidance materials, including a
relatively comprehensive Small Entity Compliance Guide,
which is useful for all readers despite its limiting title.
On March 1, 2024, a Canadian private equity firm forms a Delaware limited liability company (Topco) to acquire a target company in the U.S. (Target). Target has 100 employees, offices in five states, and had $100 million of revenues last year. Later in 2024, after Topco has acquired Target, Target does an add-on transaction by which it acquires 75% of another U.S. company (Subsidiary) that has 15 employees in one state and existed before January 1, 2024.
- Topco will need to file a report of its beneficial owners within 90 days of its formation (i.e., by May 28, 2024, assuming FinCEN extends the current 30-day deadline to 90 days).
- Target does not need to file a report of its new beneficial owners because it is exempt as a large operating company.
- Subsidiary will need to file a report of its beneficial owners on or before January 1, 2025 because a) it existed before January 1, 2024, b) it is not an exempt large operating company, and c) it is not an exempt wholly owned subsidiary of an exempt entity.
Beneficial owners include more than just owners
FinCEN's terminology of a "beneficial owner" is a misnomer because it includes many more individuals than just shareholders with a 25% or more direct interest in a company. For one thing, beneficial owners include all individuals who own or control a 25% or more ownership interest directly or indirectly. A beneficial owner, therefore, includes one or more individuals who ultimately hold such interests even if they are several layers removed from the reporting company on the corporate organization chart. There is no limit to the number of beneficial owners a reporting company may have.
A beneficial owner also is any individual who, directly or indirectly, exercises "substantial control" over an entity. It includes "senior officers", who are defined to mean a company's president, chief executive officer, chief financial officer, chief operating officer, general counsel or any person who performs functions similar to such officers. It also includes each individual who has substantial influence over important decisions regarding the company's business, finances or structure.
Individuals may directly or indirectly exercise substantial control, including through "contracts, arrangements, understandings, relationships or otherwise". A director of a corporation may or may not exercise substantial control depending on the specific facts and circumstances. Importantly, there are two key exceptions for persons who may appear to qualify as beneficial owners but do not actually exercise substantial control: 1) an employee of a reporting company, other than a senior officer, whose exercise of substantial control derives solely from their employment; and 2) an individual who merely acts on behalf of an actual beneficial owner as their nominee, intermediary, custodian or agent. Businesses comprising numerous affiliates and subsidiaries will need to consider all the individuals who may qualify as a beneficial owner, including managers, trustees, board members and ultimate owners.
Entities formed or registered to do business in the U.S. on or after January 1, 2024 also must report up to two "company applicants". In most cases, a company applicant is the individual who physically or electronically files the formation or registration document with a secretary of state's office. A company applicant will often be an individual employed by a law firm or a corporate services company engaged by the reporting company. A company applicant also includes the person, if any, who directs or controls the filing of the relevant document. Because companies existing before January 1, 2024 do not report company applicants, they need not scour their records for the individuals who made such filings in years past.
All changes of previously filed information must be updated within 30 days
Unfortunately, a company's obligations do not end with the filing of its initial report. Any change to the information filed about an entity or its beneficial owners (but not of company applicants) must be reported within 30 days. Such changes include the reporting company's new address, changes to its beneficial owners, such as a new CEO or after the sale of shares to a new owner, and any time an individual beneficial owner's information on file changes, such as their home address or driver's licence number. Therefore, reporting companies need to implement recordkeeping processes to keep track of such changes and promptly make updated filings.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.