The Oklahoma Bar Journal December 2022

owners. 19 A beneficial owner is defined as any individual who 1) exercises substantial control over the reporting company or 2) owns or controls at least 25% of the reporting company’s ownership interests. 20 Substantial control. Anyone who exercises direct or indirect substantial control over a report ing company is classified as a beneficial owner. A beneficial owner exercises direct or indirect substantial control over a report ing company by undertaking any of the following actions or retain ing the following rights: 1) majority ownership of the reporting com pany, 2) substantial control rights in conjunction with certain financing arrangements, 3) controls inter mediaries that retain the ability to exercise substantial control over the reporting company, 4) serving as a senior officer or board member, 5) the authority to appoint or remove the reporting company’s senior officers or a majority or dom inant minority of the reporting com pany’s board of directors (or similar body), 6) the ability to direct, deter mine, decide or exercise substantial influence over important matters affecting the reporting company 21 or 7) exercising any other form of sub stantial control over the reporting company whether through financial or business relationships or any other contract, understanding or relationship. 22 Twenty-five percent owner ship. Anyone who owns or con trols at least 25% of the reporting company’s ownership interests is classified as a beneficial owner. The percentage of such owner ship interests that an individual owns or controls is determined by aggregating all of the individual’s ownership interests in comparison to the undiluted ownership inter ests of the company. 23 The pro posed rules do not provide ways

States, as determined under federal income tax principles. 15 The large operating company exemption will not apply to newly formed compa nies. It will provide relief for many existing companies. Subsidiaries of exempt entities. Entities whose ownership interests are directly or indirectly owned by an exempt entity are also exempt. 16 The proposed regulations limit this exemption to subsidiaries that are wholly owned by an exempt entity. 17 Thus, if a company has issued restricted stock or profit interests to service providers, for example, the entity would no lon ger qualify for this exemption. Inactive entities. Inactive entities are also exempt from reporting. The proposed regula tions define inactive entities as those that 1) were in existence before Jan. 1, 2020; 2) are no longer engaged in active business; 3) do not hold any assets (including ownership interests in other enti ties); 4) are not owned by a foreign person; 5) whose ownership has not changed during the immedi ately preceding 12-month period; and 6) have not sent or received more than $1,000 in the immedi ately preceding 12-month period. 18

of which does not require a secretary of state filing. It does include limited partnerships, limited liability partnerships and limited liability limited partner ships. It is unclear whether the definition would include entities such as business trusts, which are not formed by a secretary of state filing. 10 A separate series within a series LLC is not formed by a secretary of state filing. Whether such separate series falls within the definition of reporting com pany is unclear. The question may be resolved by later rulemaking. Reporting Company Exemptions Exempt from the definition of reporting company are 23 types of entities, most of which are cur rently subject to extensive regula tion or are otherwise required to report their beneficial ownership information. 11 Those exemptions include, among others, Securities and Exchange Commission reporting companies, government authorities, public utilities, invest ment companies and advisors, banks, bank holding companies, credit unions, insurance com panies and tax-exempt entities. 12 Three exemptions are of particular note: “large operating companies,” “subsidiaries of certain exempt entities” and “inactive entities.” Large operating companies. Large operating companies are exempt from reporting. A large operating company is defined as an entity that 1) employs more than 20 full-time employees 13 in the United States, 2) has an operating presence at a physical office in the United States 14 and 3) filed in the previous year federal income tax returns demonstrating more than $5 mil lion in gross receipts or sales (net of returns and allowances) on the entity’s annual income tax returns, excluding gross receipts or sales from sources outside the United

DEFINING ‘BENEFICIAL OWNER’ AND A ‘COMPANY APPLICANT’ Every reporting company

will have at least one “beneficial owner” and “company applicant” whose personal information must be submitted to FinCEN along with that of the reporting com pany. The proposed regulations describe who is a beneficial owner and who is a company applicant.

Beneficial Owner (Including Managers) Every reporting company is

required to report certain infor mation about each of its beneficial

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THE OKLAHOMA BAR JOURNAL