Unveiling Beneficial Ownership and Filing: A Comprehensive Guide for Business Owners and Compliance Professionals

In general, beneficial owners are individuals who:

1. directly or indirectly exercise “substantial control” over the reporting company, or
2. directly or indirectly own or control 25% or more of the “ownership interests” of the reporting company.

Substantial Control

Individuals have substantial control of a reporting company if they direct, determine, or exercise substantial influence over important decisions of the reporting company. Those deemed to exercise substantial control over a reporting company include:

• • Senior officers such as chief financial officers, chief executive officers, general counsel, chief operating officers, or any other similar positions, regardless of title
  • An individual with authority over the appointment or removal of any senior officer or a majority of the board of directors (or similar body)
  • An individual who directs, determines, or has substantial influence over important decisions made by the reporting company, including decisions regarding:
    • The nature, scope, and attributes of the business of the reporting company, including the sale, lease, mortgage, or other transfer of any principal assets of the reporting company;
    • The reorganization, dissolution, or merger of the reporting company;
    • Major expenditures or investments, issuances of any equity, incurrence of any significant debt, or approval of the operating budget of the reporting company;
    • The selection or termination of business lines or ventures, or geographic focus, of the reporting company
    • Compensation schemes and incentive programs for senior officers;
    • The entry into or termination, or the fulfillment or non-fulfillment, of significant contracts;
    • Amendments of any substantial governance documents of the reporting company
  • An individual with any other form of substantial control over the reporting company

  An individual may directly or indirectly, including as a trustee of a trust or similar arrangement, exercise substantial control over a reporting company through:

  • Board representation (determined on a case-by-case basis);
  • Ownership or control of a majority of the voting power or voting rights of the reporting company;
  • Rights associated with any financing arrangement or interest in a company;
  • Control over one or more intermediary entities that separately or collectively exercise substantial control over a reporting company;
  • Arrangements or financial or business relationships, whether formal or informal, with other individuals or entities acting as nominees; or
  • Any other contract, arrangement, understanding, relationship, or otherwise.

An individual may directly or indirectly, including as a trustee of a trust or similar arrangement, exercise substantial control over a reporting company through:

• Board representation (determined on a case-by-case basis);
• Ownership or control of a majority of the voting power or voting rights of the reporting company;
• Rights associated with any financing arrangement or interest in a company;
• Control over one or more intermediary entities that separately or collectively exercise substantial control over a reporting company;
• Arrangements or financial or business relationships, whether formal or informal, with other individuals or entities acting as nominees; or
• Any other contract, arrangement, understanding, relationship, or otherwise.

Based on the breadth of the substantial control definition, FinCEN has stated that it expects a reporting company will identify at least one beneficial owner under that definition, regardless of whether (1) any individual satisfies the ownership definition, or (2) exclusions to the definition of beneficial owner apply.

Ownership Interests

Ownership interest (for purposes of determining whether an individual directly or indirectly owns or controls 25% or more of the “ownership interests” of the reporting company) is defined as follows:

• Any equity, stock, or similar instrument; preorganization certificate or subscription; or transferable share of, or voting trust certificate or certificate of deposit for, an equity security, interest in a joint venture, or certificate of interest in a business trust; in each such case, without regard to whether any such instrument is transferable, is classified as stock or anything similar, or confers voting power or voting rights;
• Any capital or profit interest in an entity;
• Any instrument convertible, with or without consideration, into any share or instrument described in above, any future on any such instrument, or any warrant or right to purchase, sell, or subscribe to a share or interest described above, regardless of whether characterized as debt;
• Any put, call, straddle, or other option or privilege of buying or selling any of the items described above  without being bound to do so, except to the extent that such option or privilege is created and held by a third party or third parties without the knowledge or involvement of the reporting company; or
• Any other instrument, contract, arrangement, understanding, relationship, or mechanism used to establish ownership.

An individual may also directly or indirectly own or control an ownership interest of a reporting company through any contract, arrangement, understanding, relationship, or otherwise, including:

• Joint ownership with one or more other persons of an undivided interest in such ownership interest;
• Through another individual acting as a nominee, intermediary, custodian, or agent on behalf of such individual;
• With regard to a trust or similar arrangement that holds such ownership interest:
  • As a trustee of the trust or other individual (if any) with the authority to dispose of trust assets;
  • As a beneficiary who:
    • Is the sole permissible recipient of income and principal from the trust; or
    • Has the right to demand a distribution of or withdraw substantially all of the assets from the trust; or
    • As a grantor or settlor who has the right to revoke the trust or otherwise withdraw the assets of the trust; or
    • Through ownership or control of one or more intermediary entities, or ownership or control of the ownership interests of any such entities, that separately or collectively own or control ownership interests of the reporting company.

The rules provide that beneficial owners do not include:

• A minor child, provided the reporting company reports the required information of a parent or legal guardian of the minor child and states that the individual is the parent or legal guardian of a minor (once the minor child reaches the age of majority, the report must be updated)
• An individual acting as a nominee, intermediary, custodian, or agent on behalf of another individual
• An employee of a reporting company, acting solely as an employee, provided that such person is not a senior officer
• An individual whose only interest in a reporting company is a future interest through a right of inheritance
• A creditor of a reporting company