On January 1, 2024, previously enacted federal legislation called the Corporate Transparency Act (the “CTA”) went into effect. The CTA aims to assist law enforcement in tackling money laundering, tax fraud, terrorism financing, and various other illicit activities facilitated by anonymous shell companies. Here we briefly discuss the basics of the CTA and how certain requirements under the CTA can be triggered in the context of buying or selling the equity of a business.
General Requirements of the CTA
The CTA mandates that “reporting companies,” as defined by the CTA, must submit specific information to the US Department of the Treasury’s Financial Crimes Enforcement Network (“FinCEN”). This includes details about the reporting company itself and personal information for two groups of individuals:
- Beneficial owners, as outlined in the CTA, of the reporting company.
- For reporting companies established or registered to operate in the US on or after January 1, 2024, the individuals who formed the entity or registered it to do business in the US.
According to FinCEN’s final rule on beneficial ownership information (“BOI”) reporting, any US reporting company established or, if foreign, registered for US operations:
- Created or registered on or after January 1, 2024, must submit its initial BOI report within:
- 90 calendar days of creation or registration for entities established or registered in 2024; or
- 30 calendar days of creation or registration for entities established or registered on or after January 1, 2025.
- For those reporting companies established or registered before January 1, 2024, the deadline for the initial BOI report is January 1, 2025.
Additionally, and likely most importantly in the context of buying or selling a business, reporting companies are also required to promptly update their BOI report with any modifications to previously submitted information within a 30-calendar-day window from the time of the change.
CTA compliance is something businesses and business owners must take seriously. Beneficial owners and reporting companies are subject to potentially stiff penalties associated with violations of the CTA, including the following:
- If a person willfully engages in any of the following conduct, then he or she could be subject to civil or criminal penalties, including daily fines up to $500 for each day the violation continues (but not totaling more than $10,000 total), imprisonment for up to two years, or both:
- Attempting to provide or providing false or fraudulent information on a BOI report, including a false or fraudulent identifying photograph or document.
- Failing to report complete or updated beneficial ownership information to FinCEN.
- Additionally, penalties may be levied against reporting companies or persons that:
- Cause a reporting company not to report BOI to FinCen.
- Are senior officers of a reporting company that fails to accurately report or update BOI.
M&A Considerations
Understanding the fundamentals of the CTA and its reporting requirements for reporting companies is crucial when considering the purchase or sale of the equity (i.e., stock or membership interests) of such a reporting company. As described above, the penalties for CTA violations can be quite severe, and both buyers and sellers should keep this in mind when entering into a deal. If the seller has CTA violations, those violations are likely to transfer to the buyer after the deal has been completed, and thus the buyer may be the one left on the hook for the penalties associated therewith. Therefore, the buyer should take the following steps when looking to purchase the equity of a reporting company:
- Due Diligence: The requirement to submit and update beneficial ownership information within specific timelines necessitates thorough due diligence on behalf of the buyer before acquiring a reporting company. Buyers need to communicate with sellers to verify the accuracy of the reported information and ensure that all necessary disclosures have been made under the CTA.
- Representations and Warranties: Regardless of what the buyer may uncover in due diligence, the buyer will likely want the seller to make certain representations and warranties regarding the CTA and its past compliance.
- Compliance Assurance: Being aware of the reporting obligations under the CTA and requesting certain due diligence materials related to such compliance can help provide comfort to the buyer that the seller is compliant with the CTA’s regulatory requirements. If the buyer discovers instances of non-compliance with the CTA before the sale, then the buyer could potentially avoid legal issues, fines, disruptions in business operations, or later indemnification claims.
- Continued Compliance: Adhering to the reporting requirements of the CTA is essential for maintaining legal compliance post-acquisition. Buyers must ensure that the reporting company continues to fulfill its obligations under the CTA to avoid potential legal consequences, including, but not limited to, updating the BOI report for the acquired reporting company within 30 calendar days of the acquisition.
- New Entities: Oftentimes, depending on the existing structure of the buyer and the seller, new entities will have to be formed for a variety of reasons when undertaking the process of buying or selling the equity of a business. In those instances, either the buyer or the seller, as applicable, should keep in mind the reporting requirements of the CTA and make sure to file the BOI report and any updates thereto in a timely manner.
Summary
As newly enacted federal legislation, the CTA could be an afterthought for the parties to a deal. Having skilled advisors on your team can help you keep the CTA in mind to avoid being tripped up by any of its requirements. The mergers and acquisitions practice group at Riggs Davie PLC counsels clients through deals on the buy-side and sell-side in a wide range of industries, including technology, health care, health tech, fintech, professional services, financial services, real estate, business services, manufacturing, and distribution. For more information about our services, please visit www.riggsdavie.com or contact our practice group by email at dealteam@riggsdavie.com.
