Transparency is Coming to Equipment Finance

Financial crimes regrettably are a growing business: financing of terrorism; money laundering; tax, securities and other financial fraud; and drug trafficking. There has been evidence that privately held entities have been used to facilitate these activities. Consequently, Congress (as part of larger legislation passed on Jan. 1, 2021) enacted the Corporate Transparency Act (CTA). Effective Jan. 1, 2024, both existing and newly-formed “Reporting Companies” must obtain a federal identification number and submit their Beneficial Ownership Information Report (BOIR) to the US Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN). The statute is broad enough to cover both small equipment finance companies and special purpose entities (SPEs) created to facilitate securitizations or syndications. Violations of CTA carry both civil and criminal penalties. What’s a Reporting Company? A domestic Reporting Company is “a corporation, limited liability company, or other similar entity that is…created by the filing of a document with a secretary of state or a similar office under the law of a State or Indian Tribe.” Such entities which are formed under the laws of a foreign country also qualify as a Reporting Company if they are “registered to do business in the United States by the filing of a document with a secretary of state or a similar office under the laws of a State or Indian Tribe.” There are 23 exemptions that will enable an entity to avoid becoming a Reporting Company. The most likely one for equipment finance companies and SPEs applies to any entity “of which the ownership interests are owned or controlled, directly or indirectly, by [one] or more entities described in” various subsections. One of those entities is “any entity that—(I) employs more than 20 employees on a full-time basis in the United States; (II) filed in the previous year Federal income tax returns in the United States demonstrating more than $5,000,000 in gross receipts or sales in the aggregate…; and (III) has an operating presence at a physical office within the United States.” To use this so-called “large company” exemption, the Reporting Company must be owned by entities which themselves qualify under any one or more of the 23 exemption categories. In plain language, this means that if an SPE or other entity, which would otherwise qualify as a Reporting Company, is owned or controlled by any entity which meets each of I, II and III above, it will not be treated as a Reporting Company. In addition, if an entity is a sole proprietorship, general partnership, limited partnership, or trust which is not formed by filing a document with a State or Tribal office , then it would not fall within the definition of a Reporting Company. Of course, if an entity’s State or Tribal law does require such a filing, then it would need to establish an exemption. There are other, more limited, exemptions. If a Reporting Company has been inactive (and not owned by a foreign person), or is owned or controlled by a publicly traded company, a bank, a bank holding company, or an insurance company, then it will not be required to register with FinCEN. And if an exemption becomes inapplicable, then the entity has 30 calendar days to obtain a federal ID Number and file the initial BOIR. The same holds true for Reporting Companies, if any changes occur to previously furnished data regarding the entity or its beneficial owners. When Do We File? What Do We File? If a nonexempt Reporting Company was formed on or after January 1, 2024, then it is required to file the initial report within 30 calendar days after it receives notice that the creation of the entity is effective. A special rule for entities created during calendar year 2024 extends the period to file the initial report to 90 days. Nonexempt Reporting Companies formed before January 1, 2024 have until January 1, 2025 to file the initial report. The initial report must disclose the legal name of the entity, any trade names, its U.S. business address, its jurisdiction of formation, and IRS tax ID number. For each “Beneficial Owner,” the report must disclose the person’s legal name, birth date, home address, photo ID (such as a driver’s license or passport) and the identifying number contained therein. A “Beneficial Owner” is anyone who owns or controls at least 25% of the ownership interests in the entity, or who exercises “substantial control” over the Reporting Company . The latter category includes any senior officer, anyone with the power to remove or appoint senior officers or a majority of the board of directors or managers of the entity, and anyone with the power to make important decisions for the entity. Furthermore, nonexempt Reporting Companies formed on or after January 1, 2024 also must include in the initial report the same information about the “Company Applicant” as it is required to disclose about each Beneficial Owner. The Company Applicant is the individual who has filed the document which created or registered the entity, or who is primarily responsible for directing or controlling that filing. Readers are advised to consult FinCEN’s beneficial ownership information webpage, https://www.fincen.gov/boi for more detailed information, including its FAQ. Market participants continue to struggle with issues such as whether a statutory trust would constitute a Reporting Company; probably yes, if (as in Delaware) it is “formed at the time of the filing of the initial certificate of trust.” The same answer would seem to apply for a registered series of a limited liability company, where the applicable statute (as in Delaware) requires a certificate to be filed in order to create such a series. Titling trusts raises additional issues. For instance, if a SUBI (special unit of beneficial interest) were issued to an SPE, would that SPE be unable to utilize the “large company” exemption described earlier? Perhaps—but practitioners have suggested that if ownership of the SPE were pledged to a bank, insurance company, or other entity described in one of the other 23 exemptions, and the pledgee had the ability to control that ownership interest, then another exemption could be availing. Another line of thought holds that only the UTI (undivided trust interest in a titling trust) constitutes an “ownership interest” in the titling trust and hence that if the UTI were owned by an entity qualifying under the “large company” exemption, then the titling trust itself would not constitute a Reporting Company. New York LLC Transparency Act (“NYLTA”) The effective date for this state law will be January 1, 2026, (the “Effective Date”) and will apply to all LLCs formed under New York law or foreign LLCs that seek to be authorized to do business in New York State. Such LLCs formed or authorized on or prior to the Effective Date must file beneficial ownership reports by January 1, 2027; LLCs formed or authorized after the Effective Date must file the beneficial ownership report within 30 days of filing their articles of organization or application for registration as a foreign LLC. Although the New York statute contains the same exemptions as the CTA, the NYLTA requires every affected LLC to submit a statement, under penalty of perjury and within the same time frame, indicating the specific exemption for which the LLC qualifies. Once an LLC has filed the initial beneficial ownership report, it must file an annual statement confirming or updating its previous statement. Is the CTA Even Constitutional? In National Small Business United v. Yellen , the United States District Court for the Northern District of Alabama ruled that the CTA exceeded the authority granted to Congress under the Constitution, rejecting the Government’s arguments that the CTA is necessary to protect national security, to regulate interstate commerce, and to levy and collect taxes. That ruling was limited to the plaintiffs who brought the lawsuit and does not have a nationwide effect. An appeal has been filed with the United States Court of Appeals for the Eleventh Circuit and was assigned to that court’s calendar for oral argument during the week of September 23, 2024. Whatever happens on that appeal, this genie is out of the bottle. Effective immediately, sponsors of newly-formed Reporting Companies must include CTA compliance in their organizational checklists as well as in their annual compliance routines. Starting in 2026, LLCs formed in NY State, or qualified to do business there, will have to file with the NY Department of State, even if they are an exempt entity. Because other jurisdictions may adopt their own approach to transparency, lessors and other equipment finance companies will need to monitor developments nationwide.

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