Tag: Beneficial Ownership

SEC Brings Multiple Enforcement Actions Relating to Beneficial Ownership and Other Reporting Obligations

On September 25, 2024, the Securities and Exchange Commission (the SEC) announced that it had instituted and settled enforcement actions under Section 13(d), Section 13(g) and Section 16(a) of the Securities Exchange Act of 1934 (as amended, the Exchange Act). The actions involved 21 individuals and entities that allegedly had failed to timely file Schedule 13D or 13G to report beneficial ownership of greater than 5% of the registered equity securities outstanding and/or amendments to such reports, and/or to timely file Form 3, 4 or 5 to report ownership of, and transactions in, registered equity securities by executive officers, directors and greater-than-10% beneficial owners (collectively, insiders). As part of the settlements, individual respondents agreed to pay civil monetary penalties ranging from $10,000 to $200,000, and entities agreed to pay civil penalties ranging from $40,000 to $750,000. As part of the same set of settlements, the SEC also instituted and settled two enforcement actions against public companies for allegedly causing certain of their insiders’ Form 3, 4 or 5 filing failures or for failing to report such filing delinquencies. Just a week earlier, the SEC had announced the institution and settlement of enforcement actions under Section 13(f) and Section 13(h) of the Exchange Act against 11 institutional investment managers that allegedly had failed on a timely basis to file one or more quarterly Form 13F reports and/or periodic Form 13H reports.

The Bottom Line

The foregoing actions are part of an SEC enforcement initiative aimed at ensuring compliance with ownership disclosure and other reporting rules. Insofar as the beneficial ownership and insider actions are concerned, the most recent set of settlements suggest a possible willingness on the SEC’s part to bring enforcement actions even for minor and technical violations. Insofar as the institutional investor enforcement actions, the recent “sweep” appears to mark the first such broad action by the SEC. Notably, for two of the sanctioned institutional investment managers that were based outside the US and where the managers self-reported their errors to the SEC, no monetary penalties were assessed. A third institutional investment manager did not pay a monetary penalty for its Form 13H filing delinquency, which had been self-reported to the agency. Further, the SEC’s public announcement of the settlements indicated that the SEC staff used data analytics to identify the delinquent filings. The SEC has occasionally used various technological solutions to search for late filings and other violations of law in the vast EDGAR database, and as artificial intelligence and similar applications become more widespread and economical, we expect the SEC to make greater use of automated techniques in the future as part of its ongoing filing review process.

The Full Story

5% Beneficial Owners, Insiders and Public Company Issuers

Under Section 13(d)(1) of the Exchange Act and Rule 13d-2(a) promulgated thereunder, any person who acquired beneficial ownership of more than 5% of a public company’s stock must, within 10 calendar days of the relevant acquisition,[1] file an initial set of disclosures on Schedule 13D with the SEC. The beneficial owner must then file updates with the SEC to report any material changes to its position or other facts disclosed in prior filings. Certain investors (mostly passive ones) are eligible to file a simplified set of disclosures on Schedule 13G. The deadline to file a Schedule 13G was also within 10 calendar days of acquiring more than 5% beneficial ownership, but certain institutional investors were permitted to defer disclosing their passive holdings on Schedule 13G until 45 days after the end of the calendar year.[2]

Under Section 16(a) of the Exchange Act and Rule 16a-3 promulgated thereunder, officers and directors of public companies, and any beneficial owners of greater than 10% of stock in a public company, were (and currently are) required to file initial statements of holdings on Form 3 either within 10 calendar days of becoming an insider or on or before the effective date of the initial registration of the stock. Such insiders are then obligated to keep this information current by reporting subsequent transactions on Forms 4 and 5 (in most instances, within two business days of any change). In addition, Section 13(a) of the Exchange Act and Item 405 of Regulation S-K promulgated thereunder require issuers to disclose information regarding delinquent Section 16(a) filings by insiders in their annual reports.

Here, the SEC alleged that 14 persons, who were obligated to file Forms 3/4/5, failed to timely file or update such reports required under Section 16(a), that two public companies caused some of those late filings and/or did not disclose the late filings when required, and that 18 persons who were obligated to file and/or amend Schedules 13D/13G failed to do so timely as required under Sections 13(d) and (g). In most of the non-issuer settlements, there appear to have been repeated failures over multiple issuers, sometimes over several years. However, not all persons settling with the SEC had failures that were repeated or otherwise egregious. Each of two of the matters that settled for $25,000 or less alleged only a few violations (and one of those included two alleged Schedule 13D violations that arguably are supported by a compliance and disclosure interpretation but not by the actual wording of Section 13 and its implementing rules). By contrast, among the 11 beneficial ownership settlements that the SEC announced nearly a year ago, none were below $66,000. This suggests that the SEC may once again be bringing less serious enforcement actions and pursuing even minor infractions.

Institutional Investment Managers

Under Section 13(f) of the Exchange Act and Rule 13f-1 promulgated thereunder, entities with investment discretion over at least $100 million worth of specified US publicly-traded securities (and certain securities exercisable for or convertible into such securities) (institutional investment managers) are required to file quarterly Form 13F reports detailing their ownership of such securities regardless of the percentages owned. Reports can omit certain de minimis positions, though the de minimis level is set quite low so relatively few positions are typically excluded from Form 13F on this basis. The $100 million threshold was originally set in 1975, is not indexed for inflation and has not been adjusted since. Each report for a calendar quarter must be filed no later than 45 calendar days after the end of the preceding quarter.

Under Section 13(h) of the Exchange Act and Rule 13h-1 promulgated thereunder, persons who trade US publicly-traded securities equal to or exceeding two million shares or $20 million during any calendar day, or 20 million shares or $200 million during any calendar month (collectively, large traders) are required to file required Form 13H reports with the SEC. Unlike the beneficial ownership reports and Form 13F, Form 13H reports are confidential and viewable only by the SEC. While the specific reporting thresholds for Form 13F and Form 13H are different, most (but not all) large traders will also be institutional investment managers. But most institutional investment managers will not necessarily be large traders.

The SEC alleged that nine institutional investment managers failed to timely file required Form 13F reports—often over a long period of years. Those nine firms (not including one which was part of the beneficial owner settlements discussed above but had also not filed Form 13F for a number of years) agreed to pay in aggregate more than $3.4 million to settle those cases. Notably, two additional settling parties (both institutional investment managers located outside the US) were not assessed penalties relating to their delinquent Form 13F’s because they self-reported their failure to report directly to the SEC.

Two of the parties settling Form 13F failures also were charged with failing to timely file required Form 13H reports. Because both of these parties self-reported their Form 13H filing failures, neither was assessed a penalty relating to Section 13(h).

[1] The deadlines described here were in effect during the relevant periods in the settled actions. Effective on and after February 5, 2024, the initial Schedule 13D must be filed within five business days of the relevant acquisition.

[2] The deadlines described here were in effect during the relevant periods in the settled actions. Effective on and after September 30, 2024, the filing deadline for an initial Schedule 13G (other than for certain institutional investors) is within 5 business days of the relevant acquisition; certain institutional investors are permitted to delay their initial filing of Schedule 13G to 45 calendar days after the end of relevant calendar quarter.

Copyright © 2024, Hunton Andrews Kurth LLP. All Rights Reserved.
For more on SEC Enforcement Actions, visit the NLR Securities SEC section.

Client Alert: New Reporting Requirements Under the Corporate Transparency Act

On January 1, 2024, the Corporate Transparency Act (CTA) took effect. This new federal anti-money laundering law obligates many corporations, limited liability companies and other business entities to report to the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN), certain information about the entity, the entity’s beneficial owners and the individuals who created or registered the entity to do business. This client alert summarizes the CTA’s key requirements and deadlines. For more detailed information, please review the official “Beneficial Ownership Information Reporting FAQs” and the “Small Entity Compliance Guide” published by FinCEN.

Frequently Asked Questions

WHO MUST REPORT INFORMATION UNDER THE CTA?

The following “reporting companies” are subject to the CTA’s reporting requirements: (a) any U.S. corporation, limited liability company or other entity created by the filing of a document with a state or territorial government office; and (b) any non-U.S. entity that is registered to do business in any U.S. jurisdiction.

The CTA provides for 23 types of entities that are exempt from its reporting requirements, including companies that currently report to the U.S. Securities and Exchange Commission, insurance companies and tax-exempt entities, among others. Most notably, a company does not need to comply with the CTA if it has more than $5,000,000 in gross receipts for the previous year (as reflected in filed federal tax returns), at least one physical office in the U.S. and at least 20 employees in the U.S. For a full list of exemptions, including helpful checklists, please see Chapter 1.2, “Is my company exempt from the reporting requirements?”, of the Small Entity Compliance Guide.

A subsidiary of an exempt entity also will enjoy exempt status.

WHAT INFORMATION MUST BE REPORTED?

A reporting company is required to report the following information to FinCEN, and to keep the information current with FinCEN on an ongoing basis:

  1. The reporting company’s full legal name;
  2. Any trade name or “doing business as” (DBA) name of the reporting company;
  3. The reporting company’s principal place of business;
  4. The reporting company’s jurisdiction of formation (and, for non-U.S. reporting companies, the jurisdiction where the company first registered to do business in the U.S.); and
  5. The reporting company’s Employer Identification Number (EIN).

A reporting company also is required to identify its “beneficial owners” and “company applicant.” A beneficial owner is an individual who either: (a) exercises “substantial control” over the reporting company; or (b) owns or controls at least 25 percent of the ownership interests of the reporting company. A company applicant is an individual who directly files or is primarily responsible for filing the document that creates or registers the reporting company.

A reporting company must report and keep current the following information for each beneficial owner and company applicant:

  1. Full legal name;
  2. Date of birth;
  3. Complete current address;
  4. Unique identifying number and issuing jurisdiction from, and image of, one of the following non-expired documents:
    a. U.S. passport;
    b. State driver’s license; or
    c. Identification document issued by a state, local government or tribe.

WHEN ARE REPORTS DUE?

A reporting company that was first formed or registered to do business in the United States before January 1, 2024 will need to file its initial report with FinCEN no later than January 1, 2025.

A reporting company that is first formed or registered to do business in the United States between January 1, 2024 and January 1, 2025 will need to file its initial report with FinCEN within 90 calendar days after the effective date of its formation or registration to do business.

A reporting company that is first formed or registered to do business in the United States on or after January 1, 2025 will need to file its initial report with FinCEN within 30 calendar days after the effective date of its formation or registration to do business.

HOW DOES MY COMPANY FILE REPORTS WITH FINCEN?

Reports must be filed electronically through the BOI E-Filing System. For additional instructions and other technical guidance, please see the Help & Resources page.

WHAT HAPPENS IF MY COMPANY DOES NOT COMPLY WITH THE CTA?

At the time the filing is made, a reporting company is required to certify that its report or application is true, correct, and complete. Therefore, it is the reporting company’s responsibility to identify its beneficial owners and verify the accuracy of all reported information.

A person or reporting company who willfully violates the CTA’s reporting requirements may be subject to civil penalties of up to $500 for each day that the violation continues, plus criminal penalties of up to two years’ imprisonment and a fine of up to $10,000.

In the case of an accidental violation – for instance, if an initial report inadvertently contained a typo or outdated information – the CTA provides a safe harbor for reporting companies to correct the original report within 90 days after the deadline for the original report. If this safe harbor deadline is missed, the reporting company and individuals providing inaccurate information may be subject to the CTA’s civil and criminal penalties.

OTHER THAN FILING ACCURATE REPORTS, HOW CAN MY COMPANY STAY COMPLIANT?

A reporting company should consider taking the following actions to facilitate compliance with the CTA’s reporting requirements:

  • Amending existing governing documents, such as LLC or stockholder agreements, to require beneficial owners to promptly provide required information and otherwise cooperate in the company’s compliance with the CTA;
  • Designating an officer to oversee the company’s initial and ongoing CTA reporting;
  • Maintaining, reviewing and updating records on a regular cadence to reflect equity transfers, option grants and other transactions that affect ownership interest calculations; and
  • Developing a secure process for collecting and storing a beneficial owner’s photo identification and other sensitive information for CTA reporting purposes.
© Copyright 2024 Stubbs Alderton & Markiles, LLP
For more news on CTA Reporting Requirements, visit the NLR Financial Institutions & Banking section.

Corporate Transparency Act: Implications for Business Startups

Congress passed the Corporate Transparency Act (CTA) in January 2021 to provide law enforcement agencies with further tools to combat financial crime and fraud. The CTA requires certain legal entities (each, a “reporting company”) to report, if no exemption is available, specific information about themselves, certain of their individual owners and managers, and certain individuals involved in their formation to the Financial Crimes Enforcement Network (FinCEN) of the U.S. Department of Treasury. The beneficial ownership information (BOI) reporting requirements of the CTA are set to take effect on January 1, 2024. Those who disregard the CTA may be subject to civil and criminal penalties.

A recent advisory explaining the CTA reporting requirements in further detail may be found here.

While the CTA includes 23 enumerated exemptions for reporting companies, newly formed businesses (Startups) may not qualify for an exemption before the date on which an initial BOI report is due to FinCEN. As a result, Startups (particularly those created on or after January 1, 2024) and their founders and investors, must be prepared to comply promptly with the CTA’s reporting requirements.

As an example, businesses may want to pursue the large operating company exemption under the CTA. However, among other conditions, a company must have filed a federal income tax or information return for the previous year demonstrating more than $5 million in gross receipts or sales. By definition, a newly formed business will not have filed a federal income tax or information return for the previous year. If no other exemption is readily available, such a Startup will need to file an initial BOI report, subject to ongoing monitoring as to whether it subsequently qualifies for an exemption or any reported BOI changes or needs to be corrected, in either case triggering an obligation to file an updated BOI report within 30 days of the applicable event.

Startups also should be mindful that the large operating company exemption requires the entity to (i) directly employ more than 20 full time employees in the U.S. and (ii) have an operating presence at a physical office within the U.S. that is distinct from the place of business of any other unaffiliated entity. Importantly, this means that a mere “holding company” (an entity that issues ownership interests and holds one or more operating subsidiaries but does not itself satisfy the other conditions of this exemption) will not qualify. Startups may want to consider these aspects of the large operating company exemption during the pre-formation phase of their business.

Fundraising often requires Startups to satisfy competing demands among groups of investors, which can lead to relatively complex capitalization tables and unique arrangements regarding management and control. These features may cause BOI reporting for Startups to be more complicated than reporting for other small and closely held businesses. Founders, investors, and potential investors should familiarize themselves with the CTA’s reporting requirements and formulate a plan to facilitate compliance, including with respect to the collection, storage and updating of BOI.

By ensuring all stakeholders understand the BOI reporting requirements and are prepared to comply, your Startup can avoid conflicts with current and potential investors and ensure that it collects the information that it needs to provide a complete and timely BOI report.

Yezi (Amy) Yan and Jordan R. Holzgen contributed to this article.

© 2023 Varnum LLP
For more news on the Corporate Transparency Act, visit the NLR Corporate & Business Organizations section.

How Changing Beneficial Ownership Reporting May Impact Activism

The SEC in February proposed amendments to Regulation 13D-G to modernize beneficial ownership reporting requirements. Adoption of the amendments as proposed will accelerate the timing – and expand the scope – of knowledge of certain activist activities. The deadline for comments on the proposed rules was April 11 and final rules are expected to be released later this year.

The current reporting timeline creates an asymmetry of information between beneficial owners on the one hand and other stockholders and issuers on the other. The SEC proposal is seeking to eliminate this asymmetry and address other concerns surrounding current beneficial ownership reporting. The accelerated beneficial ownership reporting deadlines will result in greater transparency in stock ownership, allowing market participants to receive material information in a timely manner and potentially alleviating the market manipulation and abusive tactics used by some investors.

The shortened filing deadlines should benefit a company’s overall shareholder engagement activities. The investor relations team at a company will have a more accurate and up-to-date picture of its institutional investor base throughout the year, which should result in more timely outreach to such shareholders.

INVESTOR ACCUMULATION OF SHARES BEFORE DISCLOSURE

Although issuers will likely view the proposed rules as beneficial, many commentators have predicted a negative impact on shareholder activism. Under the current reporting requirements, certain activist investors may benefit by having both additional time to accumulate shares before disclosing such activities and potentially more flexibility in strategizing with other investors.

Many commentators have argued that the proposed shorter timeline for beneficial ownership reporting will negatively impact an activist shareholder’s ability to accumulate shares of an issuer at a potentially lower price than if market participants had more timely knowledge of such activity and intent. In many cases a company’s stock price is impacted once an investor files a Schedule 13D with clear activist intent. This can even occur in some cases once a Schedule 13G is filed by a known activist investor without current activist intent.

If the shorter reporting deadlines reduce such investors’ profit, it is expected that an investor’s incentive to accumulate stock in order to initiate change at a company will also be reduced. Activists instead may be encouraged to engage more with management. In other words, the shorter reporting period may deter short-term activists and encourage more long-term focused activism.

TIMING OF ISSUER RESPONSE

The shorter reporting deadlines are also expected to result in management having earlier notice of any takeover attempt and to give a company the opportunity to react more quickly to any such attempt. There is potential for this to lead to increased use of low-threshold poison pills. But the SEC stated in the proposed rules release that it believes the risk of abundant reactionary low-threshold poison pills is overstated due to scrutiny of such poison pills from courts and academia, limitations imposed by state law and the unlikelihood that the beneficial ownership would trigger the low-threshold poison pills.

Companies that have low-threshold poison pills – such as one designed to protect a company’s net operating losses – may want to review them to confirm that the proposed rules would not be expected to have any impact. For example, such poison pills may link the definition of beneficial ownership to the SEC rules, including Schedule 13D and 13G filings.

‘GROUP’ REPORTING

Another proposed change expected to affect shareholder activism is the expanded definition of ‘group’ for the purposes of reporting under Schedule 13D. The current rules require an explicit agreement between two or more persons to establish a group for purposes of the beneficial ownership reporting thresholds.

Commentators believe that under the current rules, certain investors seeking change at a company may share the fact that they are accumulating shares of a company with other shareholders or activists, which can then act on this information before the general public is aware; in other words, before public disclosure in and market reaction to the Schedule 13D filing. This activity may result in near-term gains for the select few involved before uninformed shareholders can react.

Under the SEC’s proposed amended Rule 13d-5, persons who share information with another regarding an upcoming Schedule 13D filing are deemed to have formed a group within the meaning of Section 13(d)(3) regardless of whether an explicit agreement is in place, and such concerted action will trigger reporting requirements. This proposed change is expected to benefit companies and shareholders overall by preventing certain investors from acting in concert on information not known to a company and its other shareholders.

The full impact of the proposed rule changes on shareholder activism cannot be accurately predicted, but we believe that at a minimum, issuers will find it beneficial to have more regularly updated information on their institutional investor base for, among other things, their shareholder engagement efforts.

Article By Alexandra Clark Layfield and Rachel Solino of  Jones Walker LLP

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