The Corporate Transparency Act, adopted by Congress in late 2020, is going to dramatically change the way we do business. After it is implemented (expected to occur by the end of this year) most U.S. companies that are not exempt will need to file a beneficial ownership report with FinCEN - the U.S. Treasury Department's Financial Crime Enforcement Network.
The beneficial ownership report will need to identify each beneficial owner with a 25% stake or more, along with each other person "in substantial control" of the company. For each person identified, the report will need to provide the person's name, address and contact details, and a unique identifying number (which might be a social security number, passport number, or a unique ID number generated by FinCEN itself).
Lawyers have not yet begun to change their practices to reflect this new reality. Here are some key ways that the new law will change the way we do business:
1. No More Anonymity
The whole purpose of the new law is to build a database of private companies and their owners. Until now, corporations, LLCs and partnerships didn't have to identify their owners in their state organizational documents. Under the new law, however, private companies will need to supplement the FinCEN database with their owners' identifying information at the time of formation and within one year after any material change in ownership.
2. Confidentiality Takes on New Meaning
In most start-ups, investors agree to keep the new company's proprietary information confidential. In the new world created by the CTA, however, the company itself will be obligated to keep confidential the SSN and other personally-identifiable information of its investors. Investors will need to indemnify each other if they fail to provide updated personal information in time for the company to update its FinCEN report. Start-ups will need to find new ways to collect personally-identifiable information from their investors for FinCEN report purposes.
3. M&A Due Diligence Digs Deeper
M&A due diligence involving companies that are obligated to file FinCEN reports will need to add checklist items relating to the reports. Potential buyers will want to know that a target company has duly fulfilled its filing obligations and has kept its filings current.
4. Closing Binders Will Get Thicker
In many real estate deals, a single property acquisition and development might involve three or more LLCs, with each one representing a different group of investors with a slightly different interest in the deal. (For example, the landowner might have an LLC, the developer might have a separate LLC, mezzanine investors another, and so one.) There those LLCs cascade down the organizational chart, like bulbs on a Christmas tree, each level of organization is going to have its own FinCEN reporting obligations. Deal lawyers will need to plan to collect the SSNs, EINs and other details need to make sure that all of these newly-formed entities file their beneficial ownership reports on time.
5. Timely Reporting Changes in Ownership
Each company that files a beneficial ownership report is obligated to file an updated report within one year of any material change. In the past, it was not uncommon for deal participants to swap equity or assign equity to affiliates over time, sometimes to accommodate estate planning needs.
Companies will either need to implement procedures to become aware of change on a timely basis, or else adopt an annual report procedure that compels beneficial owners to update their information and certify its accuracy to the company. It will no longer be possible for companies to way until their is a strategic exit before refreshing their ownership tables.