Angel Insights Blog

by Joe Wallin, leader of the Angel Capital Association Legal Advisory Council and Pricipal at the law firm of Carney Badley Spellman, P.S.

Big Picture

• The CTA is intended to assist law enforcement in combatting money laundering, tax fraud, financing of terrorism, and other illicit activity through anonymous shell and front companies. 
   
• Starting January 1, 2024, the Corporate Transparency Act (the CTA) will require all new business entities formed in the U.S. and foreign companies that qualify to do business in the U.S. to report information about the company, the company applicant (see the definitions below), and its “beneficial owners” to the Department of Treasury’s Financial Crimes Enforcement Network (FinCEN), with limited exemptions primarily for large companies.
   
• Companies formed before January 1, 2024 will have to file their initial reports with FinCEN no later than January 1, 2025.¹  Companies formed on or after January 1, 2024 must file their initial reports within 90 calendar days of formation. All updates after the initial filing are due within 30 days. 
   
• The obligation to report beneficial ownership information to FinCEN falls on the “reporting company,” which can be a corporation, limited liability company, limited partnership, or any other type of company that files documents with a secretary of state or any similar office of a State or Indian tribe, or a foreign company that registers to do business in the U.S. Unincorporated general partnerships will not have to make these filings. There is a limited number of exemptions primarily for larger companies, not startups. See the attached appendix.
   
• The company must report the following information about each of its individual beneficial owners (the “beneficial owner information” or “BOI”): (i) full legal name, (ii) date of birth, (iii) residence address, (iv) an identifying number from an unexpired US passport, driver’s license, or other government-approved document, and (v) a photo of such document.  
   
• If you are beneficial owner of many companies, you will provide this same information to each company. If you grow tired of this, you can apply for a number with FinCEN and then provide just the number to companies, but you will then have the obligation to update the FinCEN database if your information goes out of date.
   
• In addition to reporting information about its beneficial owners to the FinCEN database, the person filing the report for the Company has to provide the following information about the company itself (the “Company Information”): (i) full legal name, (ii) any trade name or “doing business as (DBA) name,” (iii) complete current U.S. address, (iv) State, Tribal, or foreign jurisdiction of formation, (v) IRS Taxpayer Identification Number (TIN), and (vi) for a foreign reporting company only, State or Tribal jurisdiction of first registration.

The CTA will have far-reaching implications for startups and early-stage companies. The important things for you to know as an angel investor right now are:

• Beneficial Owner. If you are or become a “beneficial owner” of a reporting company, you will need to provide the BOI that the company is required to upload to the FinCEN database. “Beneficial owner” means any individual who, directly or indirectly, either exercises substantial control over the reporting company (such as a director or senior officer) or owns or controls at least 25% of the ownership interests of the reporting company.
   
• Reporting Timeline. The rules go into effect January 1, 2024, but initially only for companies formed on or after that date. For companies formed before January 1, 2024, those companies will have to file their initial reports with FinCEN no later than January 1, 2025. If you qualify or a company thinks that you may qualify as a beneficial owner, you can expect to start receiving requests from companies for your BOI starting next year as the reporting deadline approaches.
   
• Continuous Reporting Regime. After providing initial information to FinCEN, the CTA requires both companies and beneficial owners to update the FinCEN database within 30 days of any changes in the information entered into the database (either company information or beneficial ownership information). For example, a reporting company will have to be on the lookout for any changes in the information it already provided to FinCEN (if, a beneficial owner moves to a new residence address, the company will have 30 days to update the database or be out of compliance).
   
• Continuous Verification. Companies will likely adopt policies to regularly verify whether any of your reported BOI has changed.  These policies may include requests to confirm the accuracy of your BOI when you log into company systems. Alternatively, if you do not access company systems, you may start receiving emails and/or texts from companies making sure your BOI has not changed.
   
• FinCEN Identifier. As an angel investor, you might sit on the board of one or more companies. You will have to report your BOI to those companies so that they can report it to FinCEN. The BOI information you provide is the same for each company. If you are required to give out your BOI frequently, you can instead apply for a FinCEN identifier unique to yourself. With this number, you can directly update any changes in your BOI with FinCEN. Then, you can simply provide companies with your FinCEN identifier rather than submitting all your personal information and the photograph of your document each time.
   
• Penalties. As a potential investor in a company, during due diligence you should inquire about the company’s practices and policies to get some comfort as to their compliance with these new rules. Noncompliance can result in civil and even criminal penalties. Specifically, if a company willfully fails to report complete or updated BOI or willfully provides false or fraudulent BOI, it may result in civil penalties (up to $500 per day that violation continues), or criminal penalties (up to a fine of $10,000 and/or two years of imprisonment). 
   
• Exemptions. The CTA mostly impacts startups and small businesses. It aims to cover companies that do not fall under an existing regulatory reporting framework with the government. Large and/or public companies are exempt from the BOI reporting requirements. Specifically, the CTA lists 23 types of exempt entities, such as companies that are already registered with the SEC, registered investor advisors, registered broker dealers, and large operating companies with over 20 employees, a physical U.S. office, and greater than $5,000,000 annual gross revenue. 

Should a Company Have a Compliance Policy?

Companies should designate someone as the person responsible for making and updating the FinCEN database.  For a new company, the most logical person to take control of the process at the start will be the person forming the entity (i.e., the person filing the form with the state to create the entity).

Companies will need to assess their reporting obligations and identify their beneficial owners. Companies will also need to monitor changes on an ongoing basis to avoid penalties. For example, since the update window is 30 days, basically what companies need is a continuous confirmation of the reporting data approximately every 20 days. They also need to be on the lookout for situations such as a new round of financing or the appointment of a new officer, which likely will trigger an updated filing. 

How to Conduct Due Diligence on This Issue; What to Ask for as an Investor?

When conducting due diligence, ask to see the company’s compliance policy, the name of the person charged with compliance, and a representation and warranty that the company is in compliance with the requirements of the CTA. 

What About Special Purpose Vehicles (SPVs) Formed to Make an Investment?

Special Purpose Vehicles (SPVs) might be formed to make an investment. How the SPV is set up will determine its reporting obligations.

• If the SPV is set up as a limited liability company, a limited partnership, or any other type of entity that has to be created by filing a form with a Secretary of State, then that SPV entity will need to file the BOI report with FinCEN.
• If the SPV is set up as an unincorporated general partnership or trust, that SPV entity does not have to file the BOI report with FinCEN.

If you invest in an SPV structured as an LLC or LP, you will not be required to provide your BOI to the SPV for filing with FinCEN unless you hold at least 25% ownership interests of the SPV or exercise substantial control over the SPV. In general, if you are a passive owner holding less than 25% of the SPV and not involved in a managerial role, the SPV LLC should not require information from you to file with FinCEN. If you are the manager of an SPV LLC or LP, then you will have to file with FinCEN for the SPV LLC and provide the company’s information and your BOI.

There is a filing exemption for inactive or defunct companies, but unfortunately this exemption is not available to entities which own stock or ownership interests in other entities.

Flowchart Definitions & Links:

Non-Exempt Reporting Company means a company that is not exempt from reporting. There are 23 types of exempt entities, including entities registered with the SEC, large operating companies ($5m in US revenue, US office, at least 20 employees), inactive entities, etc.

Beneficial Owner means any individual who, directly or indirectly, exercises substantial control over a reporting company OR owns or controls at least 25% of the ownership interests of a reporting company.

Ownership Interest means any of the following: equity, stock, or voting rights; a capital or profit interest; convertible instruments; options or other non-binding privileges to buy or sell any of the foregoing; and any other instrument, contract, or mechanism to establish ownership.

Substantial Control means an individual is a senior officer, has authority to appoint or remove certain officers or a majority of directors of the reporting company, is an important decision-maker, or has any other form of substantial control over the reporting company.

Senior Officer means any individual holding the position or exercising the authority of a president, chief financial officer, general counsel, chief executive officer, chief operating officer, or any other officer, regardless of official title, who performs a similar function.

Company Applicant means the individual who directly files the document that creates the entity, or in the case of a foreign reporting company, the document that first registers the entity to do business in the United States, and/or, the individual who is primarily responsible for directing or controlling the filing of the relevant document by another.

See the definitions in the regulations (31 C.F.R. § 1010.380).

https://www.federalregister.gov/documents/2022/09/30/2022-21020/beneficial-ownership-information-reporting-requirements

Disclaimer: This article is for informational purposes and does not contain or convey legal advice. The information herein should not be used or relied upon in regard to any particular facts or circumstances without first consulting a lawyer.

EXEMPTIONS

The term “reporting company” does not include:  

(i) Securities 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 Home Owners' Loan Act (12 U.S.C. 1467a(a)).

(vi) Money services business. Any money transmitting business registered with FinCEN under 31 U.S.C. 5330, and any money services business registered with FinCEN under 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 sections 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

(B) Is:

(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) 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 continue to be described in this paragraph (c)(1)(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 whose ownership interests are controlled or wholly owned, directly or indirectly, by one or more entities described in paragraphs (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 twelve-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 twelve-month period; and

(F) Does not otherwise hold any kind or type of assets, whether in the United States or abroad, including any ownership interest in any corporation, limited liability company, or other similar entity.

BENEFICIAL OWNER

Beneficial owner. For purposes of this section, the term “beneficial owner,” with respect to a reporting company, means any individual who, directly or indirectly, either exercises substantial control over such reporting company or owns or controls at least 25 percent of the ownership interests of such reporting company.

Substantial Control

(i)  Definition of substantial control. An individual exercises substantial control over a reporting company if the individual.

(A) Serves as a senior officer of the reporting company;

(B) Has authority over the appointment or removal of any senior officer or a majority of the board of directors (or similar body);

(C) Directs, determines, or has substantial influence over important decisions made by the reporting company, including decisions regarding:

(1) The nature, scope, and attributes of the business of the reporting company, including the sale, lease, mortgage, or other transfer of any principal assets of the reporting company;

(2) The reorganization, dissolution, or merger of the reporting company;

(3) Major expenditures or investments, issuances of any equity, incurrence of any significant debt, or approval of the operating budget of the reporting company;

(4) The selection or termination of business lines or ventures, or geographic focus, of the reporting company;

(5) Compensation schemes and incentive programs for senior officers;

(6) The entry into or termination, or the fulfillment or non-fulfillment, of significant contracts;

(7) Amendments of any substantial governance documents of the reporting company, including the articles of incorporation or similar formation documents, bylaws, and significant policies or procedures; or

(D) Has any other form of substantial control over the reporting company.

(ii) Direct or indirect exercise of substantial control. An individual may directly or indirectly, including as a trustee of a trust or similar arrangement, exercise substantial control over a reporting company through:

(A) Board representation;

(B) Ownership or control of a majority of the voting power or voting rights of the reporting company;

(C) Rights associated with any financing arrangement or interest in a company;

(D) Control over one or more intermediary entities that separately or collectively exercise substantial control over a reporting company;

(E) Arrangements or financial or business relationships, whether formal or informal, with other individuals or entities acting as nominees; or

(F) any other contract, arrangement, understanding, relationship, or otherwise.

¹Companies formed before January 1, 2024 will not have to report “company applicant” information but will have to report to the FinCEN database the company information and the beneficial ownership information.

Author:

• Joe Wallin leads the Angel Capital Association Legal Advisory Council and Pricipal at the law firm of Carney Badley Spellman, P.S.