An alert client or two has asked us about a new compliance requirement for all U.S. companies (not just cannabis companies). Here’s the details!
Compliance Update: Beneficial Ownership Reporting Rolls Out in 2024
Starting January 1, 2024, companies will be required to report more information to the U.S. government about who owns and controls them. This rule was promulgated by Congress in 2021 through the Corporate Transparency Act, which was designed to “make it harder for bad actors to hide or benefit from their ill-gotten gains through shell companies or other opaque ownership structures”. In other words, this is an anti-money-laundering disclosure law like banks’ “Know Your Customer.”
It is not specific to cannabis businesses in any way, but it does require greater disclosure about the people in control of businesses to the federal government than most have previously had to provide.
This requirement will apply to basically all of the LLCs owned by our clients, including single-owner LLCs.
When do you need to report?
Businesses formed before Jan. 1, 2024 have until January 1, 2025 to file their first beneficial ownership report with FinCEN (a “BOI Report”).
Going forward, new businesses being formed will have to file a BOI Report within 90 days after formation (if formed during 2024) and within 30 days after formation (if formed Jan. 1, 2025 or later).
What needs to be reported?
Information about the people who are “beneficial owners” of the company, which includes any individual who owns or controls 25% of a company or has substantial control over the company. For the purposes of this Act, “Substantial Control” includes individuals who are a Senior Officer, have appointment or removal authority, are deemed an important decision maker, or any other individual with substantial control. Individuals who serve as a Senior Officer do not need to own 25% or more of the company to be deemed a Beneficial Owner.
Going forward, companies will also have to include information about Company Applicants: the “Direct Filer,” the individual who directly filed the document that created the company, and any individual who was primarily responsible for directing or controlling the filing of the company. However, a company that was formed prior to January 1, 2024 will not need to include a Company Applicant on their BOI report.
For each individual, the BOI Report requires their full legal name, date of birth, current address, and the number and an image of a passport, driver’s license, or other identification document issued by a state, local government, or tribe.
Additionally, information changes require an update to the report, including but not limiting to a new DBA, ownership changes, or death of a member. Once the change has occurred, the company has 30 days to update their report.
How to report
FinCEN will be promulgating a required form and accepting reports at its website (https://fincen.gov/boi), beginning on Jan. 1, 2024.
There is no fee.
Consequences of not reporting
If a company does not report this information, they could face civil penalties of up to $500 each day the violation continues, or criminal penalties including imprisonment for up to two years and/or a fine of $10,000. Further, if any individual willfully causes a company not to file the required report or provides knowingly incomplete or false information, they may be subject to civil and/or criminal penalties.
Who will have access to BOI Reports?
It will be stored in a secure, non-public database accessible to regulators at all levels, but not the general public. Specifically, FinCEN says that “Federal, State, local, and Tribal officials…[may] obtain beneficial ownership information for authorized activities related to national security, intelligence, and law enforcement,” and financial institutions (like banks) can access the information with the consent of the subject company.
How to get more information
FinCEN has a great deal of information on their website at https://fincen.gov/boi.
Key Takeaways for Our Cannabis Clients
We encourage all of our clients to plan to file a BOI Report in the later part of the required period (i.e. in late 2024 if your company already exists). While in some senses this feels like increased risk exposure, the information about beneficial owners will generally be required in license applications, as well, which will ultimately be fully public information.
As we have discussed with many clients, it is important to know who is on your cap table, and we do encourage you to be transparent with your partners and regulators about who controls an entity.
If you need help sorting out who your beneficial ownership owners are, including due to poorly papered equity issuances, inheritance or other issues, or if your business does not have an operating agreement, contact us for help and we can get you sorted out before the deadline.
