The Corporate Transparency Act (CTA) requires companies in the U.S. to file a beneficial ownership report with FinCEN. The beneficial ownership report must disclose the company applicant and each beneficial owner of the company. For each of these individuals, the company must provide the individuals full legal name, date of birth, residential address, and a unique identifying number. The company must include an image of the document that represents the unique identifying number for each individual.
CTA Reporting Requirements
The CTA will impose immense obligations on companies that must file a beneficial ownership report. The company will need to analyze its corporate governance to determine which individuals are “beneficial owners”. The company will need to collect the relevant data from each beneficial owner and store it securely. The company will also need to develop procedures to remain aware of changes in its reported data. The CTA obligates reporting companies to amend their report within 30 days after any change in their reported data.
The stakes will be high for reporting companies under the CTA. Companies that fail to file to on time must pay a $500 per day penalty. An individual who willfully refuses to file (or who files inaccurate information) may be guilty of a felony.
Nevertheless, the CTA exempts some companies from its reporting requirements. This post examines the 23 potential exemptions under the CTA.
The draft regulations provided by FinCEN exempt 23 types of companies from the CTA’s reporting obligation:
(i) SEC reporting issuer. Any issuer of securities that is:
(A) An issuer of a class of securities registered under section 12 of the Securities Exchange Act of 1934 (15 U.S.C. 78l); or
(B) Required to file supplementary and periodic information under section 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78o(d)).
(ii) Governmental authority. Any entity that:
(A) Is established under the laws of the United States, an Indian tribe, a State, or a political subdivision of a State, or under an interstate compact between two or more States; and
(B) Exercises governmental authority on behalf of the United States or any such Indian tribe, State, or political subdivision.
(iii) Bank. Any bank, as defined in:
(A) Section 3 of the Federal Deposit Insurance Act (12 U.S.C. 1813);
(B) Section 2(a) of the Investment Company Act of 1940 (15 U.S.C. 80a– 2(a)); or
(C) Section 202(a) of the Investment Advisers Act of 1940 (15 U.S.C. 80b– 2(a)).
(iv) Credit union. Any Federal credit union or State credit union, as those terms are defined in section 101 of the Federal Credit Union Act (12 U.S.C. 1752).
(v) Depository institution holding company. Any bank holding company as defined in section 2 of the Bank Holding Company Act of 1956 (12 U.S.C. 1841), or any savings and loan holding company as defined in section 10(a) of the Homeowners’ Loan Act (12 U.S.C. 1467a(a)).
(vi) Money transmitting business. Any money transmitting business registered with FinCEN under 31 U.S.C. 5330 and 31 CFR 1022.380.
(vii) Broker or dealer in securities. Any broker or dealer, as those terms are defined in section 3 of the Securities Exchange Act of 1934 (15 U.S.C. 78c), that is registered under section 15 of that Act (15 U.S.C. 78o).
(viii) Securities exchange or clearing agency. Any exchange or clearing agency, as those terms are defined in section 3 of the Securities Exchange Act of 1934 (15 U.S.C. 78c), that is registered under section 6 or 17A of that Act (15 U.S.C. 78f, 78q–1).
(ix) Other Exchange Act registered entity. Any other entity not described in paragraph (c)(2)(i), (vii), or (viii) of this section that is registered with the Securities and Exchange Commission under the Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.).
(x) Investment company or investment adviser. Any entity that is:
(A) An investment company as defined in section 3 of the Investment Company Act of 1940 (15 U.S.C. 80a–3), or is an investment adviser as defined in section 202 of the Investment Advisers Act of 1940 (15 U.S.C. 80b–2); and
(B) Registered with the Securities and Exchange Commission under the Investment Company Act of 1940 (15 U.S.C. 80a–1 et seq.) or the Investment Advisers Act of 1940 (15 U.S.C. 80b-1 et seq.).
(xi) Venture capital fund adviser. Any investment adviser that:
(A) Is described in section 203(l) of the Investment Advisers Act of 1940 (15 U.S.C. 80b–3(l)); and
(B) Has filed Item 10, Schedule A, and Schedule B of Part 1A of Form ADV, or any successor thereto, with the Securities and Exchange Commission.
(xii) Insurance company. Any insurance company as defined in section 2 of the Investment Company Act of 1940 (15 U.S.C. 80a–2).
(xiii) State-licensed insurance producer. Any entity that:
(A) Is an insurance producer that is authorized by a State and subject to supervision by the insurance commissioner or a similar official or agency of a State; and
(B) Has an operating presence at a physical office within the United States.
(xiv) Commodity Exchange Act registered entity. Any entity that:
(A) Is a registered entity as defined in section 1a of the Commodity Exchange Act (7 U.S.C. 1a); or
(1) A futures commission merchant, introducing broker, swap dealer, major swap participant, commodity pool operator, or commodity trading advisor, each as defined in section 1a of the Commodity Exchange Act (7 U.S.C. 1a), or a retail foreign exchange dealer as described in section 2(c)(2)(B) of the Commodity Exchange Act (7 U.S.C. 2(c)(2)(B); and
(2) Registered with the Commodity Futures Trading Commission under the Commodity Exchange Act.
(xv) Accounting firm. Any public accounting firm registered in accordance with section 102 of the Sarbanes-Oxley Act of 2002 (15 U.S.C. 7212).
(xvi) Public utility. Any entity that is a regulated public utility as defined in 26 U.S.C. 7701(a)(33)(A) or (D) that provides telecommunications services, electrical power, natural gas, or water and sewer services within the United States.
(xvii) Financial market utility. Any financial market utility designated by the Financial Stability Oversight Council under section 804 of the Payment, Clearing, and Settlement Supervision Act of 2010 (12 U.S.C. 5463).
(xviii) Pooled investment vehicle. Any pooled investment vehicle that is operated or advised by a person described in paragraph (c)(2)(iii), (iv), (vii), (x), or (xi) of this section.
(xix) Tax-exempt entity. Any entity that is:
(A) An organization that is described in section 501(c) of the Internal Revenue Code of 1986 (Code) (determined without regard to section 508(a) of the Code) and exempt from tax under section 501(a) of the Code, except that in the case of any such organization that ceases to be described in section 501(c) and exempt from tax under section 501(a), such organization shall be considered to be continued to be described in this paragraph (c)(2)(xix)(A) for the 180-day period beginning on the date of the loss of such tax-exempt status;
(B) A political organization, as defined in section 527(e)(1) of the Code, that is exempt from tax under section 527(a) of the Code; or
(C) A trust described in paragraph (1) or (2) of section 4947(a) of the Code.
(xx) Entity assisting a tax-exempt entity. Any entity that:
(A) Operates exclusively to provide financial assistance to, or hold governance rights over, any entity described in paragraph (c)(2)(xix) of this section;
(B) Is a United States person;
(C) Is beneficially owned or controlled exclusively by one or more United States persons that are United States citizens or lawfully admitted for permanent residence; and
(D) Derives at least a majority of its funding or revenue from one or more United States persons that are United States citizens or lawfully admitted for permanent residence.
(xxi) Large operating company. Any entity that:
(A) Employs more than 20 full time employees in the United States, with ‘‘full time employee in the United States’’ having the meaning provided in 26 CFR 54.4980H–1(a) and 54.4980H–3, except that the term ‘‘United States’’ as used in 26 CFR 54.4980H–1(a) and 54.4980H–3 has the meaning provided in § 1010.100(hhh);
(B) Has an operating presence at a physical office within the United States; and
(C) Filed a Federal income tax or information return in the United States for the previous year demonstrating more than $5,000,000 in gross receipts or sales, as reported as gross receipts or sales (net of returns and allowances) on the entity’s IRS Form 1120, consolidated IRS Form 1120, IRS Form 1120–S, IRS Form 1065, or other applicable IRS form, excluding gross receipts or sales from sources outside the United States, as determined under Federal income tax principles. For an entity that is part of an affiliated group of corporations within the meaning of 26 U.S.C. 1504 that filed a consolidated return, the applicable amount shall be the amount reported on the consolidated return for such group.
(xxii) Subsidiary of certain exempt entities. Any entity of which the ownership interests of such entity are controlled or wholly owned, directly or indirectly, by one or more entities described in paragraph (c)(2)(i), (ii), (iii), (iv), (v), (vii), (viii), (ix), (x), (xi), (xii), (xiii), (xiv), (xv), (xvi), (xvii), (xix), or (xxi) of this section.
(xxiii) Inactive entity. Any entity that:
(A) Was in existence on or before January 1, 2020;
(B) Is not engaged in active business;
(C) Is not owned by a foreign person, whether directly or indirectly, wholly or partially;
(D) Has not experienced any change in ownership in the preceding 12-month period;
(E) Has not sent or received any funds in an amount greater than $1,000, either directly or through any financial account in which the entity or any affiliate of the entity had an interest, in the preceding 12-month period; and
(F) Does not otherwise hold any kind or type of assets, whether in the United States or abroad, including but not limited to any ownership interest in any corporation, limited liability company, or other similar entity.
Each of these 23 exemptions has its own unique requirements. In future posts we will dig deeper into the rules for each exemption type.
Update: FinCEN issued its Final Rule on beneficial ownership reports under the Corporate Transparency Act on September 29, 2022 and portions of this post are superseded by the Final Rule. Here is a complete index of all twenty-three exemptions under the Corporate Transparency Act, as updated by the Final Rule.