Beware of Corporate Transparency Act Scams and Fraud

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The Corporate Transparency Act’s (CTA) Beneficial Ownership Information reporting requirements are set to take effect on January 1, and bad actors are already using the CTA’s requirements to solicit unauthorized access to Personally Identifiable Information. To that end, the U.S. Department of Treasury’s Financial Crimes Enforcement Network (FinCEN) recently issued a warning regarding such scams. FinCEN describes these efforts as follows:

“The fraudulent correspondence may be titled “Important Compliance Notice” and asks the recipient to click on a URL or to scan a QR code. Those e-mails or letters are fraudulent. FinCEN does not send unsolicited requests (emphasis added). Please do not respond to these fraudulent messages, or click on any links or scan any QR codes within them.”

Be on guard against such fraud and stay abreast of key developments involving this new law by visiting Varnum’s CTA Resource Center.

It’s That Time of Year: Keep Deferred Compensation in Mind

Navigating Year-End Deferred Compensation

At year end it is common to provide bonuses and additional compensation. A growing part of that compensation is deferred – promised in one year and paid in a later year. The Tax Code provides strict rules for when and how to award deferred compensation. In time for year-end awards and vesting, we are providing four reminders to help with compliance.

When Do the Deferred Compensation Rules Apply?

Whenever a business promises compensation in one year that could be paid in another year, the deferred compensation rules (known as 409A rules after the Code Section where they are located) might apply. There are limited exceptions, such as for 401(k) as well as other qualified retirement plans, health and welfare benefits, and compensation paid by March 15th of the year after the award vests.

Follow Your Plan Documents

One of the biggest risks is failing to follow the documentation around deferred compensation. The Tax Code requires there to be a written record of deferred compensation that includes the key features, including, without limitation, who receives an award, the amount of the award, when the award will vest, and how payment occurs. The documentation will also provide important definitions from the Tax Code that control how those same terms would otherwise be used. For example, the Tax Code has definitions that must be used for separation of service, termination of employment, disability and change of control. Beyond definitions and documentation generally, it is important to remember that once a deferred compensation award is made, it should be modified or amended only after talking to legal counsel, as changing existing awards is an easy way to create problems which are best avoided.

Avoid Accelerating Payment

The Tax Code has strict prohibitions against speeding up a deferred compensation payment. However, waiving or accelerating vesting is not normally a problem. For example, if deferred compensation vests 20% for each of five years and then pays out at the end of the fifth year, it is normally permitted to accelerate vesting, so long as the award will still be paid at the end of the fifth year. One important exception is when vesting triggers payment. For example, it would be a compliance concern if vesting was accelerated in an award that paid when it vested on the earlier of five years, death or disability. The prudent approach is not to accelerate an award unless it is expressly permitted by the award or if experienced legal counsel has reviewed the circumstances.

Carefully Consider New Deferred Compensation

Even though deferred compensation does not get paid out right away, there are real costs and expectation that come with it. Deferred cash needs to be paid out over time and even synthetic equity, which is based on the value of the company is paid out, normally in cash. This cost is one of the many reasons why it is important, when granting new awards, to consider what type and how much compensation is appropriate for the position and goals. Another important factor is whether awards will be made on a one-time basis or annually. If awards will be made every year, it is worth considering smaller annual awards that when collected over several years, remain at an appropriate or reasonable level of compensation.

Value the Awards Properly

One technical and important aspect of the deferred compensation rules is the proper determination of fair market value for equity-based awards. A valuation that complies with the Tax Code is often required when an award is made or paid out. For publicly traded companies, the trading price is the value. If a company is not publicly traded, the Tax Code establishes guidelines for valuation. These guidelines are technical. Getting help from a valuation expert is important, even if an executive or accounting team has established a valuation for other purposes.

If you have questions about your existing deferred compensation awards or are considering new awards, you can contact a member of the employee benefits team for additional information.

NCAA President Proposes Rule Permitting Division I Schools to Pay Athletes

NCAA President Proposes Rule Permitting Division I Schools to Pay Athletes

On December 5, 2023, NCAA President Charlie Baker sent a letter to over 350 member schools, which proposed rules that would permit Division I member schools to pay their athletes for the first time, in ways not tied to educational resources.

The letter outlined a broad “forward-looking” framework needed to sustain the best elements of the student-athlete experience, build on the investments that have changed the trajectory of women’s sports, and enhance the athletic and academic experience for student-athletes.

In order to “deliver this framework” Baker proposed three fundamental changes:

  • First: permit all Division I colleges and universities to offer student-athletes “any level of enhanced educational benefits they deem appropriate.”
  • Second: rules should be changed to permit any Division I school to enter into name, image, likeness (NIL) licensing opportunities with their student athletes.
  • Third: proposed the creation of a subdivision comprised of institutions that would invest in their student-athletes. The institutions in this subdivision would be required to:
    • (1) (within the framework of Title IX) invest at least $30,000 annually into an enhanced educational trust fund for at least half of the institution’s eligible student-athletes, and
    • (2) commit to work collaboratively with peer institutions in this subdivision in order to create rules that may differ from the rules in place for the rest of Division I. These rules may include, but are not limited to, scholarship commitment and roster size, recruitment, transfers or NIL.

Baker noted that the first two changes seek to enhance the financial opportunities available to all Division I student-athletes. Additionally, the first two changes will help to level the playing field between men and women student-athletes, as schools must abide by existing gender equity regulations in their athletic program investment decisions. As it pertains to the third fundamental change, as it stands now, the NCAA would permit schools to choose who, when, and how their student-athletes receive the trust fund money. Importantly, the NCAA does not intend to require that an athlete finish their degree before they have access to the trust fund.

In short, for the schools that choose to adopt these rules, these fundamental changes have the effect of permitting Division I schools to pay their student athletes in ways not tied to educational resources. Baker’s letter is seen by the NCAA as a model that Congress may use should it choose to enact federal laws governing college sports. While there is no timeline as to when these proposed rules may be enacted, members and student-athletes are encouraged to provide the NCAA with feedback as the NCAA works to further develop this proposal. In order to adopt this proposal, NCAA schools must vote to adopt the changes.

Corporate Transparency Act: Implications for Business Startups

Corporate Transparency Act: Implications for Business Startups
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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.

Varnum’s Corporate Transparency Act Taskforce of attorneys and other professionals can assist you. Contact your Varnum attorney or any member of Varnum’s CTA Taskforce to learn more.

Corporate Transparency Act’s Reporting Requirements: Impact on the Private Client

Cooperate Transparency Act: Impact on the Private Client
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Private clients and family offices commonly create legal entities, such as limited liability companies, limited partnerships and corporations, to facilitate investment, asset management, tax planning, business succession planning, privacy, liability protection and many other purposes.  Such planning will be impacted by disclosures required by the Corporate Transparency Act (CTA), set to take effect January 1, 2024. The CTA, enacted to combat illicit financial activities, brings significant regulatory changes and effectively creates a national registry for law enforcement and certain other entities of the beneficial ownership information (BOI) for many legal entities formed or registered in the U.S. (Reporting Companies).

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

Under the CTA, Reporting Companies include limited liability companies, corporations, and any other entities created by the filing of a document with a secretary of state or other similar office, whether or not the legal entity engages in any business or other commercial activity. If a legal entity meets the definition of a Reporting Company and does not qualify for an exemption, the Reporting Company will be obligated to disclose to the U.S. Department of Treasury’s Financial Crimes Enforcement Network (FinCEN) specific information about itself and the BOI of its beneficial owners and company applicants, including their full name, date of birth, complete address, and other identifying information. The CTA defines “beneficial owner” as an individual who either, directly or indirectly, exercises substantial control over the Reporting Company or owns or controls at least 25% of the ownership interests of the Reporting Company.

A trust itself is not a Reporting Company if it is not created by the filing of a document with a secretary of state or other similar office (which is often the case). Regardless, if a trust exercises substantial control over the Reporting Company or holds an ownership interest in a Reporting Company and the other requirements are met, at least one individual associated with the trust will be a beneficial owner. The CTA contains specific rules under which an ownership interest held by a trust or similar arrangement is attributed for determining the individual(s) subject to the BOI disclosure requirement. The Reporting Company should attribute such ownership as follows:

  • To any individual trustee that has “the authority to dispose of trust assets.”

  • To any individual beneficiary who “(i) is the sole permissible recipient of income and principal, or (ii) has the right to demand a distribution of or withdrawal substantially all the assets from the trust.”

  • To any individual grantor or settlor who “has the right to revoke the trust or otherwise withdraw the assets of the trust.”  

For many trusts, more than one individual will meet these criteria, and, in such cases, each individual’s BOI must be reported. Even if a trust owns or controls less than 25% of the ownership interests of the Reporting Company, the Reporting Company must assess whether the trustee exercises substantial control over the Reporting Company, such as through board representation.

As noted above, certain Reporting Companies are exempt from the CTA, including certain tax-exempt entities, certain entities subject to other federal reporting, and certain large operating companies. Additionally, certain individuals who may otherwise qualify as a beneficial owner will not be required to disclose BOI if an exception applies, including minor children (if applicable, the Reporting Company may instead report information about the parent or legal guardian of the minor child). The failure to timely comply with the reporting requirements could result in civil and criminal penalties.    

The disclosure of BOI for private clients and family offices may be counter-productive to privacy and other goals and may in some circumstances necessitate further analysis and planning. Each private client, family office, and small business owner should prepare now.  Varnum’s Corporate Transparency Act Taskforce of attorneys and other professionals can assist you. Contact your Varnum attorney or any member of Varnum’s CTA Taskforce to learn more.

Michigan’s Legislature Makes Renewable Energy Goals a Reality

Michigan Legislature Makes Renewable Energy Goals a Reality

Governor Gretchen Whitmer introduced Michigan’s Healthy Climate Plan in April 2022, boldly targeting 60% of the State’s power being derived from renewables by 2030, including a 50% renewable energy standard for utilities. However, Michigan’s renewable energy goals are no longer just ambition; they are now a reality with the recent passage of renewable-friendly legislation. The package of bills (SB 271, SB 273, SB 277, SB 502, SB 519) that have cleared the Legislature, and now await the Governor’s signature to become law, do several things to advance Michigan’s clean energy goals including:

  • Set a 100% clean electricity standard by 2040
  • Require utilities to get a certain percent of electricity from renewal energy sources (like wind and solar), including: 15% through 2029, 50% by 2030 and 60% by 2035
  • Raise caps on distributed energy sources
  • Set an energy storage standard of 2.5 Gigawatts by 2030

This package of bills, being called the “Clean Energy Future Plan,” represents a momentous change in Michigan’s energy law. With the Governor expected to sign these bills in the near future, Michigan will soon join other states committed to a 100% clean energy standard. 

State Siting of Renewables in Michigan

In conjunction with the Clean Energy Future Bills, the Michigan Legislature also recently passed House Bill (HB) 5120 and HB 5121, two bills that would streamline the permitting process for renewable energy projects, making them easier to be built in Michigan. Specifically, these bills allow utility-scale wind, solar, and storage facilities to be approved by Michigan’s Public Service Commission (MPSC). Currently, local municipalities (often rural townships) are tasked with permitting utility-scale renewable energy projects in Michigan. Renewable energy developers have often been met with ardent opposition from local municipalities. 

These new bills provide three key changes that will give developers a much needed reprieve from the permitting obstacles at the local level: (1) the MPSC will have authority over wind projects generating more than 100 megawatts, and solar and battery storage projects generating more than 50 megawatts (unless a local municipality adopts an ordinance that is not more restrictive than HB 5120’s mandates and timely approves compliant applications); (2) local municipalities will not be able to enact moratoria to stall renewable energy projects; and (3) Section 7 of HB 5121 (which is tie-barred to HB 5120) allows projects already approved by a municipality between 2021 and the Bill’s enactment to be a nonconforming use that is grandfathered in, so long as a developer has spent a certain amount of money on the project’s construction costs, or obtains “substantial construction.” This last development serves as a backstop for developers that have already put money into an approved project and a municipality seeks to subsequently amend its zoning ordinance.

Because HB 5120 explicitly contains an effective date, it will take effect one year from the Governor’s signature. Conversely, because HB 5121 has no explicit effective date, and has not been given immediate effect by a two-thirds vote of the Legislature, it will take effect 90 days after the Legislature adjourns sine die, which took place on November 14, 2023.  As a result, HB 5121 should take effect around February 12, 2024.

Varnum—Your Trusted Legal Advisor

Varnum continues to monitor these key changes to Michigan’s energy law to provide its clients with the most current information and the legal support needed to successfully build renewable energy projects in Michigan. With our extensive experience working with renewable energy developers in Michigan, Varnum is committed to assisting developers to reach their project goals. Please look for forthcoming Varnum advisories on Michigan’s new state siting processes.  In the meantime, if you have questions about these recent developments, or about siting renewable energy projects in Michigan, please contact Seth Arthur, Dave Caldon or Peter Schmidt from Varnum’s Renewable Energy Team. 

Navigating the Entrepreneurial Landscape: Exploring Acqui-Hire Strategies

The Acqui-Hire Trend: A new Path to Entrepreneurial Success

We are all familiar with the “garage-to-greatness” entrepreneurial stories of Steve Jobs, Larry Page, Jeff Bezos and the like. Left untold are the stories of brilliant, diligent entrepreneurs, perhaps with equally compelling products, who succumbed to the challenges of securing investors, resources, or good fortune before reaching the echelons of greatness. 

The Acqui-Hire Trend

Founders often dream of selling their company’s assets or stock to a large strategic buyer or going public. However, some ventures and their founders, less fortunate, may discover an alternative “exit event” through a trend known as “acqui-hiring.” This term describes the process wherein “Company A” acquires a modestly successful (and often underfunded) startup, “Company B-Minus,” primarily for the purpose of hiring its brain trust. Unlike traditional acquisitions that may seek intellectual property rights, hard assets, customers, services, or market presence, an acqui-hire primarily focuses on acquiring a team with a highly sought-after skill set.

A successful acqui-hire strategy allows Company A to swiftly assemble a team of tech-savvy innovators ready to create new products and explore fresh revenue streams. Moreover, it burnishes the CVs of the acquired talent, enabling them to present their venture not as a failure but as an “exit.” In this evolving landscape of corporate maneuvers, the emphasis shifts from conventional acquisition metrics to the cultivation and assimilation of intellectual prowess.

Potential Drawbacks

One potential downside is that the product Company B-Minus offered may be shelved in an acqui-hire situation and Company B-Minus may be shut down completely. Additionally, the purchase price in an acqui-hire acquisition will generally be much less than in a traditional acquisition. In fact, the price paid to acquire the firm is often calculated as a “price per head” without regard to any products or intellectual property which may come along in the deal. The buyer, however, must make the deal attractive enough to retain key talent and ensure continued employment post-closing. Additionally, a founder will likely need to give up their director and officer titles for a less prestigious position at Company A.

For companies engaged in potential acqui-hire deals, whether as buyers or sellers, there are several considerations.

Acquiring Companies Should Ask:

  • Will I end up with what I paid for? Will the targeted talent remain after their lock-up periods end?
  • Do the costs outweigh the benefits? How will this ROI be measured?
  • Will the deal crush the morale of loyal employees expected to work with “outsiders” who walk in with outsized salaries? Will you need to award retention bonuses or other compensation to keep your own team intact?

The Target Company Should Ask:

  • How much intellectual property (if any) should be included in the sale? What (if anything) can be carved out?
  • Is it important to continue developing the business or projects that inspired you in the first place? Is this realistic?
  • Is accepting this deal worth forgoing other potential opportunities?
  • Does the company have any outstanding obligations (debt, litigation, etc.) that need to be considered in the acquisition?
  • Will the transaction be too disruptive to staff in terms of a potential new location, new job description, cultural fit and new management?

  •  Will the board of directors and stockholders approve the acquisition? Will the purchase price satisfy current investors with at least a return of their original capital?

In essence, so long as acqui-hire strategies furnish a reliable exit strategy for enthusiastic entrepreneurs and investors, they can effectively mitigate risk and foster innovation resulting in an advantageous outcome for all parties involved.

If you would like to discuss the possibility of an acqui-hire transaction or any start-up needs, please contact your Varnum attorney.

Corporate Transparency Act Reporting Requirements: What Steps Can Companies Take Now?

Corporate Transparency Act Compliance: Key Steps Companies Can Take Now
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Congress passed the Corporate Transparency Act (CTA) in January 2021 to provide law enforcement agencies with information that may be used 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 (“beneficial owners”), and certain individuals involved in their formation (“company applicants”) to the Financial Crimes Enforcement Network (FinCEN) of the U.S. Department of Treasury.

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

Reporting companies formed or registered in the U.S. on or after January 1, 2024 that do not qualify for an exemption will need to comply with the new CTA reporting requirements promptly upon formation or registration, while non-exempt reporting companies in existence before January 1, 2024 will need to file an initial report on or before January 1, 2025. Reporting companies will be required to file updated reports within 30 days of any change to the reported information and must promptly correct any inaccuracies in their disclosure to avoid penalties.

Fines of $500 per day can be levied for failure to timely comply with the new reporting requirements. Criminal penalties (including imprisonment) are also available to regulators in certain circumstances, including where a person willfully fails to file the required reports.

Existing companies should familiarize themselves with the CTA’s reporting requirements and formulate a plan to facilitate compliance. Actionable steps that businesses can take now include the following:

  1. Get organized.
    Businesses should determine whether their legal entities will be required to file reports with FinCEN under the CTA and, if so, what information they will need to collect in order to comply. This will require a review of your legal entity structure chart, current capitalization table(s), governing documents, and equity and debt documents. While ownership and control may be relatively straightforward for certain companies, others will require a more detailed analysis. Each legal entity within an affiliated group must be assessed.

    Keep in mind that there is no exemption for holding companies. Many private businesses are legally structured with one or more operating entities under a holding company. If applicable, careful attention should be given to the requirements of the large operating entity exemption for assessing its availability.

  2. Make a plan for filing your initial BOI Report, if necessary.
    If your business is subject to BOI reporting requirements, you will need to consider how to collect and handle the information from direct and indirect owners, senior officers and others in control of the business. This task may present certain practical challenges that you should be ready to address, including:

    Such individuals may be reluctant to provide their personal information as part of a BOI Report on privacy grounds. There is currently no statutory or regulatory relief for failure to file a complete BOI report on the grounds that one or more required persons refused to provide the required disclosure, so their failure to cooperate will prevent the reporting company from complying with the CTA. The company may wish to consider what actions it is willing and able to take to compel compliance, including repurchase of equity or termination and removal of noncompliant persons.

    Such individuals may be willing to provide disclosure to FinCEN but not to the reporting company itself. FinCEN will allow individuals to provide their disclosure directly to FinCEN and obtain a unique FinCEN identifier. The individual may then provide the FinCEN identifier to the reporting company in lieu of the underlying information. With respect to changes to such individual’s information, the burden shifts from the company to the individual to file any updated reports.

    Certain of the information required to be included in BOI Reports may constitute personal identifiable information (PII) that is entitled to special protection or that triggers further reporting or compliance obligations on the part of the entity that collects and stores it. Reporting companies may prefer to engage a third-party service provider or ask their beneficial owners or company applicants to obtain FinCEN identifiers to minimize this risk.

    The Beneficial Ownership Secure System (BOSS), which FinCEN is creating to collect and store BOI Reports, will be accessible by reporting companies; however, third-party service providers may help facilitate compliance by allowing required persons to provide their information separately from the company filing and by storing their personal information. You may wish to consider whether the additional features provided by these service providers will help your company in its compliance efforts.

  3. Make a plan for monitoring events that may require you to file an initial or updated BOI Report.
    You will need to continuously monitor for changes that may trigger reporting requirements. Reporting companies will need to promptly report any change in information reported to FinCEN, including changes in beneficial ownership and control. Beneficial owners will need to provide updates to their names, addresses, or filed government documents. Companies with complex beneficial ownership structures may want to designate a CTA compliance officer who can monitor these issues and provide the necessary training to individuals whose cooperation will be required to facilitate compliance.
  4. Dissolve any inactive entities before January 1, 2024 to avoid unnecessary costs.
    There is a limited exemption from BOI reporting requirements for inactive entities, but entities do not qualify if, among other things, they (i) were formed on or after January 1, 2020, (ii) are owned in whole or in part by a foreign person, or (iii) hold assets or equity interests. Unless this or another exemption from BOI reporting requirements applies, you may wish to consider dissolving entities that you do not intend to use in the future to avoid incurring unnecessary costs under the CTA.
  5. Form new entities now that you believe will be needed after January 1, 2024.
    Entities formed or registered in the U.S. prior to January 1, 2024 will not be required to file an initial BOI Report until January 1, 2025, and they will not be required to disclose their company applicants. Therefore, if you intend to engage in a transaction or restructuring, or any new business that will involve the creation of one or more new entities, you may wish to form those entities before January 1, 2024.
  6. Review and, if appropriate, amend your governance documents to facilitate CTA compliance.
    To comply with BOI reporting requirements, reporting companies will need to collect and report up-to-date information with respect to each of their beneficial owners. Reporting companies should consider amending their shareholder agreements, operating agreements and/or other governance documents to require affirmative cooperation with respect to CTA compliance obligations. Recourse for any failure to provide or update reporting information should also be considered, including by way of indemnification.
  7. Reach out to Varnum.
    Varnum’s Corporate Transparency Act Taskforce stands ready to assist you with every stage of the compliance process. Please contact us if you are interested in engaging Varnum to represent you regarding compliance or reporting under the Corporate Transparency Act.