As we have previously reported (see Prior Alert 1, Prior Alert 2, and Prior Alert 3), on January 1, 2024, the new Beneficial Ownership Information (BOI) reporting requirements under the U.S. Corporate Transparency Act (CTA) came into effect. These reporting obligations require “reporting companies” to submit BOI reports to the Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S. Department of Treasury, to help combat money laundering, terrorist financing, and other illicit activity in the U.S.
A “reporting company” is any entity that i) was formed in the U.S., or ii) was formed outside of the U.S. and registered to do business in the U.S. As part of the reporting process, reporting companies will be required to identify their beneficial owners–i.e., any individual, who directly or indirectly, either i) exercises “substantial control” over a reporting company, or ii) owns or controls at least 25 percent of the ownership interests of a reporting company.
Does the CTA Apply to Public Companies?
Generally speaking, public companies are “reporting companies” under the CTA. However, only non-exempt reporting companies are required to submit BOI reports. Public companies are exempt as “securities reporting issuers”–i.e., entities required to file reports with the U.S. Securities and Exchange Commission.
That is not, however, the end of the analysis for public companies. While public companies may be exempt, affiliated entities within their organizational structure may not be. A BOI analysis will need to be performed on an entity-by-entity basis to determine whether any joint ventures, investment companies, or subsidiaries of public companies may be required to file (see Appendix 1 for a flow chart to assist with this analysis).
Are There Common Exemptions for Affiliated Entities of Public Companies?
Yes, there are several ways in which affiliated entities of public companies may claim to be exempt from these BOI reporting requirements. Foreign subsidiaries of U.S. public companies (i.e., entities that were formed outside of the U.S.) that are not registered to do business in the U.S. are not “reporting companies” and therefore are not required to file BOI reports. For domestic affiliates formed in the U.S. or foreign affiliates that are registered in the U.S., the following common exemptions, among others, may apply:
- Wholly owned or controlled subsidiary of certain exempt entities–any entity whose ownership interests are controlled or wholly owned, directly or indirectly, by certain types of exempt entities (including securities reporting issuers).
- It is important to emphasize that this test is for entire control or entire ownership of the ownership interests in the reporting company (rather than control of the reporting company itself).
- Large operating company–any entity that:
- employs more than 20 full time employees in the U.S.;
- has an operating presence at a physical office within the U.S.; and
- filed a federal income tax or information return in the U.S. for the previous year demonstrating more than $5,000,000 in gross receipts or sales (net of returns and allowances) on the entity’s applicable IRS form, excluding gross receipts or sales from sources outside the U.S.
What If a Subsidiary of a Public Company Needs to File a BOI Report?
It is possible that a public company may be identified as a beneficial owner of a non-exempt reporting company. There is a special rule that states a reporting company may report the name(s) of an exempt entity or entities in lieu of an individual beneficial owner who owns or controls ownership interests in the reporting company entirely through ownership interests in the exempt entity or entities; however, this special rule only applies to the ownership prong of the beneficial ownership analysis. Thus, if a beneficial owner also exercises substantial control, a “look through” analysis should be performed to determine which individuals within the public company indirectly exercise that substantial control over the reporting company.
What Are the Reporting Timelines?
Reporting companies formed or registered in the U.S. prior to January 1, 2024, have until January 1, 2025, to submit their initial reports. Reporting companies also have an ongoing obligation to submit “updated reports” within 30 calendar days of any change to previously reported information about the reporting company itself or its beneficial owners. Examples of changes that may trigger an update include:
- A change of address (for a reporting company or beneficial owner);
- A name change (for a reporting company or beneficial owner);
- The removal, resignation, or appointment of a beneficial owner;
- Changes in equity ownership; and
- Exit events.
Public companies should implement appropriate compliance procedures to ensure the continued accuracy of information reported to FinCEN.
What Are the Penalties for Noncompliance?
Anyone who willfully provides false or fraudulent BOI, or who willfully fails to report complete or updated BOI to FinCEN may be subject to i) civil penalties of up to $500 per day (adjusted for inflation), and ii) criminal penalties of up to two years in prison and a fine of up to $10,000, or both. While not binding, FinCEN has stated that it does not expect that an inadvertent mistake by a reporting company acting in good faith after diligent inquiry would constitute a willfully false or fraudulent violation.
Next Steps
Remember, the deadline to file is the end of this year. We encourage you to review FinCEN’s FAQs for any questions that you may have.
Please contact your attorney at Wilson Sonsini for more information on how these new BOI reporting requirements may apply to you.
APPENDIX 1: Is a Public Company Subsidiary Required to File BOI Reports?
