For all “reporting companies” created or registered on or after January 1, 2024, information concerning the “beneficial owners” of the reporting company must be reported to the Financial Crimes Enforcement Network (“FinCEN”) along with information concerning “company applicants.” As a result, both clients and counsel should be aware of who is, and who is not, a “beneficial owner.”

What You Need to Know:

• Companies must start the process of determining whether they are a “reporting company.”
• Reporting companies must now start determining who their direct and indirect “beneficial owners” are, and start collecting the required information. 
• Reporting companies must develop controls to monitor in real time any changes to their “beneficial owners.”

Beginning on January 1, 2024 for reporting companies created or registered on or after that date, and beginning on January 1, 2025 for reporting companies created or registered before January 1, 2024, the Corporate Transparency Act (the “CTA”) will require all reporting companies to report to the federal Financial Claims Enforcement Network (“FinCEN”) the following four pieces of information about their “beneficial owners”: the individual’s full legal name, date of birth, current residential or business street address, and a unique identifying number from an identification document (such as a passport) or the individual’s “FinCEN identifier.”

One critical question that all reporting companies will need to wrestle with is, “Who is a beneficial owner?” 

A “beneficial owner” is any individual who, directly or indirectly, either (i) directly or indirectly exercises substantial control over a reporting company, or (ii) owns or controls at least 25 percent of the ownership interests of such reporting company. The final regulations provide comprehensive guidance about each of those requirements. 

First, it is critical to note that beneficial owners must be individuals. The final regulations are clear that there are circumstances where individuals that control or own entities that control or own reporting companies may be “beneficial owners” of the underlying reporting company, but the controlling or owning entities themselves are not “beneficial owners” for which information must be provided. 

Second, the definition of the “exercise of substantial control” is extremely broad, and includes:

• serving as a senior officer of the reporting company; 
• having authority over the appointment or removal of any senior officer or a majority of the board of directors of the reporting company; 
• directing or having substantial influence over important decisions made by the reporting company; or 
• having any other form of substantial control over the reporting company. 

These rights may be exercised either directly, such as through board representation or direct ownership of voting power, or indirectly, such as through ownership of an intermediate entity that exercises substantial control over a reporting company, or through arrangements or financial or business relationships with other individuals or entities acting as nominees. Note that the last two categories set forth above are particularly broad and vague, which will require reporting companies to err on the side of caution in determining which individuals fall into the definition of “beneficial owner.” 

The third point to note is that the final regulations establish an expansive definition of “ownership or control” of the ownership interests of a reporting company. Ownership includes instruments that are not usually considered equity, such as convertible instruments, profit interests, warrants and options. Ownership includes (i) joint ownership, (ii) ownership through a nominee or custodian, (iii) trustees, certain trust beneficiaries, and certain trust grantors, and (iv) ownership through one or more intermediary entities. When calculating ownership percentage, all options or similar interests shall be treated as exercised, and the applicable ownership percentage is the higher of (i) the total combined voting power of all classes of ownership interests held, and (ii) the total combined value of all ownership interests held as a percentage of the total outstanding value of all classes of ownership interests. If for some reason those percentages are not calculable, any individual who owns or controls 25 percent or more of any class or type of ownership interest of the reporting company shall be deemed to own or control 25 percent or more of the ownership interests of the reporting company. 

The final point to note is that there are exceptions to the definition of “beneficial owner,” such as for individuals acting as nominees, certain individuals who hold ownership interests solely in their capacities as employees and do not derive any direct economic benefit from such holdings, creditors of reporting companies, and minor children provided that information is provided for their parent or legal guardian. However, the applicability of these exceptions may be limited and subject to interpretation or their own exceptions, and the interpretation of the exact wording of the regulations is critical, so you should consult carefully with your attorney before making the determination that an individual is not a “beneficial owner.” 

Takeaways—what do reporting companies need to be doing now? 

• identify the senior officers of the reporting company;
• identify all stockholders, whether solely entities or individuals, holding more than 25 percent of the voting and/or economic ownership interests of the reporting company; 
• for any stockholders that are entities that hold more than 25 percent of the voting and/or economic ownership interests of the reporting company, determine whether there are any individuals that own or control such entities; 
• carefully and securely start collecting all information that will be required to report to FinCEN for each beneficial owner in a manner that complies with all applicable privacy laws; and
• develop a process to enable evaluation in real time any changes to the individuals that control or own the reporting company, so that updated reports can be timely provided to FinCEN.