Don’t Let the Corporate Transparency Act Prevent Your Loans From Closing!
The Corporate Transparency Act, which takes effect January 1, 2024, requires obtaining and reporting identifying information to the United States Financial Crimes Enforcement Network (FINCEN) for every entity you own or control. This applies to every person in control (i.e., the entire management team of your syndicate or fund) plus any passive or active member who owns 25% or more of the interests in your company.
However, lenders, title companies, escrow companies and underwriters are taking the Corporate Transparency Act seriously (and over-zealously). Some lenders/underwriters are asking for identifying information for EVERY SINGLE MEMBER of your LLC — regardless of what percentage they own or whether they have any control over the entity — before they will close a loan!
We just had a client who was required by the lender to produce this information for every single investor, even those with 2% or 3% of the interests on the day of closing. Without it, the lender wouldn’t close the loan. In this case, one 2% investor held up the closing because they wanted to ask a bunch of questions about the loan before they would produce the identifying documents. Don’t get caught in this trap.
What kind of ‘identifying information’ do you need to collect?
- For individuals: Copies of driver’s licenses or passports, and Social Security numbers
- For legal entities: Organizational documents including Articles of Organization, Operating Agreements, and EINs
When do you have to report this information?
You will have up to 12 months to report identifying information for any entities formed prior to 2024 (i.e., by December 31, 2024). You will only have 30 days from formation for entities formed on or after January 1, 2024, and 30 days after admission to report any changes in ownership (i.e., when you admit new investors). Argh…
Here is what you need to do right now:
If you have a NEW Syndicate or Fund, make sure to obtain identifying information from EVERY SINGLE INVESTOR at the time they subscribe to your Offering. DO NOT accept any subscribers who won’t provide the information.
If you are planning to refinance at any point in the future, start gathering this information now (before the end of the year is ideal), as you will need it before you get new financing. Don’t wait until a loan is being processed and allow an investor (or disagreeable member of management) to hold you hostage.
Start gathering this information for every entity you own or control — current or future — even if you aren’t getting new financing, as you are required to report it anyway, and you may even need to produce it to open a bank account.
If you have entities you are not using, or that you haven’t gotten around to dissolving yet, dissolve them before the end of the year so you don’t have to pay to file reports for them. Your Registered Agent can help you file the appropriate papers (and make any required publication notices) before dissolving.
Who will do the filings?
Your Registered Agent, or any lender, bank, investor management platform — all of them are starting to require this information — but it’s your responsibility to do the FINCEN filing for your entities. Your Registered Agent may offer to do the filings for a fee; you should take them up on it.
What happens if you don’t comply?
You could get fined by FINCEN; a bank might not open a bank account for your entity (or could close one for an existing entity), or a lender won’t close!
Get Prepared
Let your investors know this is coming and that they are required to comply. If you have investors who won’t comply, you may need to hire an attorney to help you make them comply or get them out of your deal. Investors may try to use this as a “get out of a deal free” card, so be watchful, and hire counsel if you believe this is happening.
The best way to avoid getting caught in this trap is to get ahead of it and gather this information now.
Don’t wait until it’s too late. Act now!
