The Beneficial Ownership Information Reporting Rule: A New Compliance Structure with Wide-Ranging Impact

To comply with legislation passed in 2021, US regulators implemented a reporting rule that will apply to a large portion of US companies, including many startups and small businesses. Depending on the nature of ownership, the reporting requirements can be simple and straightforward or significantly more complex, especially in an instance of a rapid growth startup receiving early-stage funding. Given the breadth of the Rule, founders and their team will need to pay close attention to a company’s ownership structure, decision makers, and corporate documentation.

On January 1, 2024, the Beneficial Ownership Information Reporting Requirements Rule (the “Rule”), a rule derived from anti-money laundering regulations, went into effect. The Rule stems from the Corporate Transparency Act (the “Act”) passed by Congress in 2021 to better equip law enforcement agencies with tools to combat financial crime and fraud like money laundering and the financing of terrorism. The Rule obligates certain companies known as reporting companies to provide information regarding ownership or control as well as, in certain cases, the individual(s) who files to create the company to the Financial Crimes Enforcement Network (“FinCEN”) and stored in a secure FinCEN database.

               Who has to report?

The Rule requires that all reporting companies report the required information unless subject to an exemption. The definition creates two subcategories: (a) domestic reporting companies and (b) foreign reporting companies.

A domestic reporting company is any entity that is (i) A corporation; (ii) A limited liability company; or (iii) Created by the filing of a document with a secretary of state or any similar office under the law of a State or Indian tribe.

A foreign reporting company is similar and is any entity that is: (x) A corporation, limited liability company, or other entity; (y) Formed under the law of a foreign country; and (z) Registered to do business in any State or tribal jurisdiction by the filing of a document with a secretary of state or any similar office under the law of a State or Indian tribe.

These broad definitions are by design and are intended to capture the millions of registered entities that operate in the United States because there is no centralized repository and states generally do not require detailed information on a formed entity’s officers and those who control the entity. Many startups are corporations formed in Delaware by filing Articles of Incorporation with the Delaware Secretary of State or by filing similar forms with Secretaries of State in the startups localized jurisdiction. Because of this, without an exemption, these companies would be subject to the reporting requirements outlined in the Rule.

               What are the Exemptions to the Reporting Rule Requirements?

While the initial definition of a reporting company is broad, there are 23 categorical exemptions to the Rule. Many of those exemptions are for entities that by the nature of their business have heightened regulatory reporting requirements such as banks, credit unions, and other financial and investment organizations operating under sectoral laws that carry those increased reporting regulations. Certain tax-exempt entities like 501(c) organizations and certain trusts are also exempt from the reporting requirements, and there is an exemption for “large operating companies” which are companies with (i) a physical presence in the United States, (ii) more than 20 full-time employees; and (iii) more than $5,000,000 in gross receipts or sales in the previous year. Given the specific nature of the exemptions, many startups and small businesses are likely unable to rely on an exemption to the reporting requirements and would need to submit the required information or face penalties.

                Timing of Reports

As a new Rule, FinCEN provides a lengthy reporting grace period for companies existing prior to January 1, 2024, a smaller window for companies formed in 2024, and a fixed period for companies formed in 2025 and beyond.

• Companies formed prior to January 1, 2024: Companies in existence prior to the effective date of the new Rule have until January 1, 2025, to file an initial report.
• Companies formed in 2024: New reporting companies formed in 2024 shall file a report within 90 calendar days of the earlier of the date on which it receives actual notice that its creation has become effective or the date on which a secretary of state or similar office first provides public notice, such as through a publicly accessible registry, that the domestic reporting company has been created.
• Companies formed in 2025 and beyond: Reporting companies formed after 2024 will have 30 days of the earlier of the date on which it receives actual notice that its creation has become effective or the date on which a secretary of state or similar office first provides public notice, such as through a publicly accessible registry, that the domestic reporting company has been created.
• Updates to any report need to be submitted within 30 days from the date the change occurs.

With a full year to file an initial report, it may make sense for existing companies to take their time and file later in the year. For example, if a company is expecting financing that may impact the list of beneficial owners or substantial control, it could be beneficial to wait until completion of the financing to reduce the reporting burden of tracking and filing updated reports as opposed to filing an initial report and then an updated report once the financing is complete.

               What information is required?

The Rule requires detailed information about the company and any beneficial owners of the company. The company information is standard formation information that was likely provided to the Secretary of State during the company’s initial formation or obtained early in the company’s lifecycle and includes: Company name, any dba, address, state of formation, and company TIN. The beneficial owner information can be more complex but at a high level, it amounts to any individual who, directly or indirectly, exercises substantial control over the company or who owns at least 25% of the ownership of the company. However, ownership may include individuals who are holders of SAFEs or convertible notes and even options, so companies who have received significant investment will need to closely calculate potential ownership percentages to identify whether certain investors meet the thresholds of beneficial ownership outlined in the Rule.

Individuals who exhibit substantial control over a company are individuals like the CEO, COO, general counsel, board members and similarly situated individuals. But even these roles will need to be reviewed to determine if they in fact are able to exhibit the substantial control element to qualify as a beneficial owner. For example, some board members may not meet the substantial control bar and would not be a beneficial owner.

Beneficial owners will need to provide name, date of birth, address, a unique identifying number from a form of government issued documentation like a passport or driver’s license and a copy of that document. Companies formed in 2024 and beyond will also need to report applicant information. An applicant is the individual(s) who directly files the document that creates or registers the company. You can find more information on beneficial owners here.

               Penalties for Non-Compliance

With potential penalties and fines for non-compliance, reporting is not something that can be overlooked by non-exempt reporting companies. The Rule states that the willful failure to report complete or updated beneficial ownership information to FinCEN, or the willful provision of or attempt to provide false or fraudulent beneficial ownership information may result in a civil or criminal penalties, including civil penalties of up to $500 for each day that the violation continues, or criminal penalties including imprisonment for up to two years and/or a fine of up to $10,000. Senior officers of an entity that fails to file a required BOI report may be held accountable for that failure.

Additionally, a person may be subject to civil and/or criminal penalties for willfully causing a company not to file a required BOI report or to report incomplete or false beneficial ownership information to FinCEN.

               What does this new Rule mean for a Company?

For companies formed prior to January 1, 2024, that cannot avail themselves of an exemption to the Rule, they have most of the year to compile this information and provide it to FinCEN. If the company has a few founders and has not accepted outside financing, then collecting the information will be straightforward. However, if a company received outside financing in just about any form, then the exercise to understand and document who is a beneficial owner or who exhibits substantial control over a company becomes more complex, and the best approach would be to start as early as possible and work with someone knowledgeable in the regulations to avoid the risk of any penalties for failing to provide the information.

Companies can start by getting organized. They should determine whether this Rule applies, begin looking at their ownership structure, review who is or is not a beneficial owner, and outline realistic investment options in the near term to ensure compliance with the new Rule by the end of the grace period. Additionally, existing corporate documents may need to be amended and template documents may need additional language to ensure compliance with the Rule. Companies should also create a monitoring framework to flag potential future changes in beneficial ownership information.

The Rule is an adjustment to the existing entrepreneurial reporting landscape, but with planning and pragmatic steps towards compliance, any interference with day-to-day operations can be minimized.