Starting January 1, 2024, all beneficial owners (i.e., members) of your corporate entities (Corporations, LLCs, LPs, LLPs, and business trusts) must be disclosed to the U.S. Financial Crimes Enforcement Network (FinCen). Additionally, financial institutions will be required to verify the identity of any individual owning ≥25% of a legal entity, as well as all individuals who control such legal entity. This means syndicators and small business owners who have existing or are forming new companies must gather and report identifying information from every investor and each member of your management team.
The final rule, called “Beneficial Ownership Information Reporting Requirements” (BOI)
was published in the Federal Register on September 30, 2022. To read the final rule, click here.
According to FinCen, “the rule will help to stop criminal actors, including oligarchs, kleptocrats, drug traffickers, human traffickers, and those who would use anonymous shell companies to hide their illicit proceeds.” This information will help “protect U.S. national security and the U.S. financial system from illicit use and provide essential information to national security, intelligence, and law enforcement agencies.”
There are 23 exemptions to the rule, none of which apply to real estate syndicates, small businesses or blind pool funds, so the rule will apply to all of Syndication Attorneys, PLLC’s real estate syndication and small business clients and each of their related entities.
When Reports Must be Filed
The “effective date” of the rule is January 1, 2024. Every entity you own or control prior to the effective date will have one year to file an initial report. Entities formed after the effective date will have 30 days after formation to file their initial report, and any changes in membership must be reported within 30 days.
What Does This Mean for Syndicators, Fund Managers and Small Business Owners Who Are Raising Capital?
- You may have to file your initial report before you know who your members are, as some of your entities may be formed >30 days prior to admitting investors, and
- You will have to file an amendment within 30 days of breaking impounds and using investor funds (i.e., as that’s when most investor members are admitted), and
- You will have to file amendments within 30 days of admitting new members subsequent to that date (e.g., for late-coming investors or members added to management).
So as not to miss these deadlines, we recommend you admit new members in “tranches” versus one-by-one, with each tranch “closing date” (i.e, when new members are admitted) becoming the 30-day trigger for filing your updates.
What Information Must be Provided
Information that must be reported for each of your entities will include:
- Its full name,
- Any trade name or “dba” name for your company,
- Its business street address,
- The state where it was formed, and
- Its IRS taxpayer identification number (e.g., the Federal Employer Identification Number or “EIN”)
Information to be reported for each “beneficial owner” (i.e., member) includes:
- Their full legal name, and
- Their date of birth, and
- Their current residential or business street address, and
- A unique identifying number from one of four types of acceptable identification documents:
- A nonexpired U.S. passport;
- A nonexpired state, local, or Tribal identification document;
- A nonexpired state-issued driver’s license; or,
- If an individual lacks one of those other documents, a nonexpired foreign passport, and
- You must provide an image of the identifying document.
We will update our Subscription Agreements for investors in securities offerings we draft to make each of these items required, but it will be up to our clients to gather and provide the information to us in an Excel spreadsheet and to sign the report to be filed with FinCen.
Who Can Access the Information
FinCen plans to issue additional rules regarding who will be able to access the information and how such information will be safeguarded.
Penalties for Non-Compliance
The BOI was enacted to implement Section 6403 of the Corporate Transparency Act (CTA), that is part of the National Defense Authorization Act for Fiscal Year 2021 (NDAA). The CTA has established that it is unlawful for any person to willfully provide false information. The final rule includes a “certification” requirement that states that “each person filing a report under that section must certify that the report is accurate and complete.”
Commenters on the final rule expressed concern that “the certification requirement could expand a person’s liability for providing inaccurate information even if the information was provided in good faith.” Nonetheless, the rule squarely places the burden of providing accurate and complete information on the reporting company; the individual who signs the form does so in their capacity as a member or manager of the reporting company. FinCen, during the rulemaking process, indicated that it was doubtful that an inadvertent mistake would be considered “willfully false or [a] fraudulent violation.”
Share this article with your investors so they understand their obligations, as some of them also are using entities to invest that will be required to do their own reporting. Doing so can also help them understand their obligation to provide complete and accurate information to you.