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.

Corporate Transparency Act: ESOP and Deferred Compensation Implications

Corporate Transparency Act: ESOP and Deferred Compensation Implications
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Congress passed the Corporate Transparency Act (the 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 (“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.

As the CTA comes into effect, there are many important considerations for businesses and this advisory focuses on two: ESOPs and deferred compensation.

For companies that are not exempt from the CTA’s reporting requirements, a crucial aspect of the company’s compliance is assessing its beneficial owners. This key term goes beyond equity ownership. A “beneficial owner” is any individual who, directly or indirectly, (1) owns or controls at least 25% of the ownership interests of the reporting company (by vote or value) or (2) exercises substantial control over the reporting company.

An individual’s ownership interest will be determined by examining ownership of equity, stock or voting rights; capital or profits interests; convertible instruments (as if converted); options or privileges (as if exercised); and any other instrument, contract, arrangement, understanding, relationship or mechanism used to establish ownership. Reporting companies will need to “look through” ownership interests held by intermediary companies to identify the individuals who beneficially own such interests. Special rules apply to interests held by trusts.

An individual will exercise substantial control over the reporting company if such person is:

  • a senior officer of the reporting company;
  • a person who has the authority to appoint or remove certain officers or a majority of the board of directors;
  • a person who directs, determines or has substantial influence over important decisions of the reporting company, including decisions about its business, finances or structure; or
  • a person who otherwise exercises substantial control over the reporting company.

Any individual holding the position or exercising the authority of a president, chief financial officer, general counsel, chief executive officer or chief operating officer is a “senior officer.” On the other hand, whether an individual serving on the board of directors (or equivalent body) exercises substantial control over the reporting company is a question that must be analyzed under the above criteria on a director-by-director basis.

Employee Stock Ownership Plan (ESOP) Implications

ESOP ownership of a company, in whole or in part, does not automatically change the analysis or conclusion about whether the company must file reports under the CTA. However, ESOPs can impact the CTA analysis for non-exempt reporting companies in two ways. First, the ESOP trustee may be a beneficial owner for purposes of the CTA because an ESOP trustee may have the right to exercise certain aspects of control over the company, such as the right to appoint or remove board members. Not all ESOP trustees will be beneficial owners. Rather, ESOP companies should conduct an analysis of whether reporting requirements are triggered based on the specific circumstances. Second, an ESOP participant may be a beneficial owner for purposes of the CTA because a participant may be allocated shares that exceed 25% of the voting power or value of the company. As with the ESOP trustee, an analysis of the specific circumstances relating to the company’s capitalization table and ESOP will be important to determining if reporting is required and if so, what that reporting requires.

Deferred Compensation Implications

In many circumstances, deferred compensation and executive compensation (such as options, phantom stock and stock appreciation rights) will not change the reporting requirements under the CTA, but there are a few potential exceptions. First, deferred compensation could result in an individual owning (by vote or value) 25% or more of the company, triggering reporting requirements about that individual. Second, if the value of a company cannot be determined with enough certainty, reporting requirements can include individuals who own 25% or more of any class of equity (equity is broadly defined for this purpose and will include not only stock and ownership units, but also options, convertible instruments and other similar agreements and arrangements). If deferred compensation is designed in a way that creates a new class of equity, those who have 25% or more of that class of equity may need to report under the CTA. In many circumstances, with advanced planning, deferred compensation can be drafted to avoid creating a new class of equity, helping to simplify the CTA compliance analysis.

Conclusion

If your company maintains an ESOP, or awards deferred compensation or equity compensation, you should consider how this could impact your company’s CTA compliance. The analysis may evolve over time as an entity’s circumstances change and additional CTA guidance is released.

Varnum’s Corporate Transparency Act Taskforce of attorneys and other professionals can assist you. A recent client advisory explaining the CTA reporting requirements may be found here. Contact a member of Varnum’s Employee Benefits and Executive Compensation Team or any member of Varnum’s CTA Taskforce to learn more.

President Biden’s AI Executive Order: A Comprehensive Overview

President Biden AI Executive Order: A Comprehensive Overview

On October 30, 2023, President Biden announced a sweeping executive order on Artificial Intelligence (AI). The executive order issued various actions, which include:

New Standards for AI Safety and Security

Companies developing a foundational model–which may pose a risk to national security, national economic security, or national public health and safety–must notify the federal government during training, and must also share their results of all red-team safety tests.

The National Institute of Standards and Technology (NIST) will also implement new standards for red-team testing. The Department of Homeland Security will be tasked with applying these standards set by NIST to critical infrastructure sectors. Finally, the Department of Energy will be tasked with potential AI system’s threats to critical infrastructure, and other serious risks (i.e., chemical, biological, etc.).

New standards pertaining to biological synthesis screening will be developed to protect against the threat of using AI to engineer dangerous biological materials. These standards will be established by agencies that fund life-science projects, as a condition of receiving federal funding.

As it pertains to the use of AI for fraud and deception, new standards and best practices will be developed for detecting AI-generated content, while also authenticating official content. The Department of Commerce is tasked with implementing these new standards and best practices.

Additionally, the executive order reiterates the Biden administration’s focus on AI, with the goal to develop an advanced cybersecurity program to develop AI tools, which would help find and fix any vulnerabilities in critical software.

Finally, the executive order requires the development of a National Security Memorandum which would provide additional actions on AI and Security. This memo would be developed by the National Security Council, in partnership with the White House Chief of Staff.

Protecting Americans’ Privacy

The Executive Order makes clear that in other to protect American’s privacy, Congress must pass bipartisan data privacy legislation. Thus, any proposed legislation must:

  • Prioritize federal support for the development and use of privacy-preserving techniques;
  • Strengthen privacy-preserving research and technologies (i.e., funding a Research Coordination Network);
  • Evaluate how agencies collect and use commercially available information while also strengthening privacy guidance for federal agencies, and
  • Develop useful guidelines for federal agencies to evaluate their privacy-preserving techniques.

Advancing Equity and Civil Rights

The Biden Administration remains focused on advancing equity and civil rights. To build on their current efforts, the Executive Order proposes additional actions. First, to prevent AI from exacerbating discrimination, clear guidance must be provided to landlords, federal benefits programs, and federal contractors. Second, algorithmic discrimination must be addressed through additional training, technical assistance, and coordination between the Department of Justice and federal civil rights offices. Finally, best practices must be developed to ensure fairness throughout the criminal justice system, including parole and probation, pretrial release and detention, etc.

Standing Up for Consumers, Patients, and Students

While AI can provide endless benefits to consumers, it also can provide endless risks if not used correctly. To protect consumers, the executive order directs two actions. First, advance the responsible use of AI in healthcare and the development of affordable life-saving drugs. In the event of unsafe healthcare practices involving AI, the Department of Health and Human Services will establish a reporting mechanism. Second, create resources to support educators utilizing AI-enabled educational tools.

Supporting Workers

While AI may lead to improved productivity, it also may increase surveillance, bias, and job displacement. To avoid these risks, the Executive Order generally directs the development of principles and best practices to mitigate risks and exploit benefits. Additionally, the Executive Order directs the production of a report on the potential impact that AI may have on the labor-market. Where the report identifies workers facing labor disruptions, additional studies and federal support must be examined.

Promoting Innovation and Competition

To ensure America remains a leader in AI innovation and competition, the Executive Order outlines necessary actions to be taken, including:

  • A pilot of the National AI Research Resource (a tool providing AI researchers and students access to key AI resources and data);
  • Expand grants for AI research in areas such as healthcare and climate change;
  • Provide small developers and entrepreneurs access to technical assistance and resources, and
  • Utilize existing authority to expand the ability of highly skilled immigrants and non-immigrants to study, stay, and work in the U.S.

Advancing American Leadership Abroad

The key to AI’s success is the understanding that AI’s challenges and opportunities are global. Accordingly, the Executive Order directs various global actions. First, expanded global engagements to collaborate on AI. For instance, the State Department, in collaboration with the Commerce Department, will establish an international framework(s) to exploit AI’s benefits and manage its risks. Second, the development and implementation of vital AI standards must be accelerated, in partnership with international partners and in standards organizations. Finally, it is necessary to promote the safe and responsible development and deployment of AI stateside and abroad to solve global challenges.

Ensuring Responsible and Effective Government Use of AI

The federal government must use, modernize, and deploy AI responsibly. As such, the executive order requires: (i) the issuance of guidance for federal agencies’ use of AI, (ii) help federal agencies to acquire AI products and services, and (iii) accelerate the rapid hiring of AI professionals within the federal government.

Corporate Transparency Act Reporting Requirements: Is Your Nonprofit Organization Exempt?

Corporate Transparency Act Reporting Requirements: Is Your Nonprofit Organization Exempt?
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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 (“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.

Nonprofit organizations are “reporting companies” under the CTA and must assess whether an exemption applies. All reporting companies that are not exempt and formed on or after January 1, 2024 will need to comply with the CTA’s new reporting requirements in 2024, and those in existence before January 1, 2024 will have to file an initial report on or before January 1, 2025.

There is a three-pronged exemption for tax-exempt entities. Specifically, the following types of tax-exempt entities are exempt from the CTA’s reporting requirements:

  • Organizations described in IRC 501(c), determined without regard to IRC 508(a);
  • Certain political organizations; and
  • Certain non-exempt charitable or split interest trusts.

The first prong encompasses all IRC 501(c) organizations, including most charities, schools and other educational institutions, churches and other religious organizations, private foundations, social welfare organizations, labor organizations, trade associations, chambers of commerce, and social clubs. Notably, this prong applies without regard to whether the qualifying organization has filed an application for recognition of tax-exempt status pursuant to IRC 508(a).

Significantly, nonprofit status by itself is insufficient to qualify for this exemption: the organization must also be described in IRC 501(c). This could mean that defective drafting of a nonprofit’s Articles of Incorporation could inadvertently trigger the reporting disclosures of an organization that might otherwise qualify for exemption from those requirements.

Nonprofit organizations that lose their IRC 501(c) exempt status could also inadvertently become subject to the CTA’s reporting requirements. For example, this could occur if the organization fails to file its annual information return (IRS Form 990) for three consecutive years. In situations like this, the CTA provides such organizations a period of 180 days in which to reactivate their exempt status before the CTA reporting obligations are triggered. However, that is a relatively short window of time.

Keep in mind, too, that other types of tax-exempt entities exist but fall outside the exemption from the CTA’s reporting requirements. For example, homeowner and condominium associations covered by IRC 528 fall outside the CTA’s exemption for tax-exempt entities.

Nonprofit organizations and their Boards of Directors and Trustees should prepare now and familiarize themselves with the CTA, as fines of $500 per day can be levied for failure to timely comply with the new reporting requirements if not exempt. Criminal penalties (including imprisonment) are also available to regulators in certain circumstances, including where a person willfully fails to file any required report.

Varnum’s Corporate Transparency Act Taskforce of attorneys and other professionals can assist you. A recent client advisory explaining the CTA reporting requirements may be found here – contact your Varnum attorney or any member of Varnum’s CTA Taskforce to learn more.

2024 Cost of Living Adjustments

The Internal Revenue Service has announced the 2024 cost of living adjustments to various limits. The adjusted amounts generally apply for plan years beginning in 2024. Some of the adjusted amounts, however, apply to calendar year 2024. Please click for a printer-friendly version of the table below.

Employee Benefits Plan

Health Savings Accounts

Social Security

Social Security Retirement Age

Form I-9 Changes and Proposed H-1B Changes for Employers

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Revised Form I-9 Now in Effect

Beginning November 1st, 2023, employers completing the employment eligibility verification process must now utilize the revised Form I-9, dated 08/01/2023. All prior versions of Form I-9 will no longer be accepted, and use of a prior Form I-9 may subject employers to penalties. The revised form includes the following updates:

    • Shorter in length, combining Sections 1 and 2 to one page.
    • May be completed remotely, using tablets or mobile devises.
    • Separates Preparer/Translator Certification into standalone “Supplement A”.
    • Revises list of acceptable documents.
    • Includes new checkbox for employers examining documents remotely.

    H-1B Proposed Rule

    U.S. Citizenship and Immigration Services (USCIS) published a Notice of Proposed Rulemaking (“proposed rule”) which would modernize the H-1B specialty occupation worker program, while also reducing misuse and fraud. Specifically, the proposed rule would allow an individual who has a registration submitted on their behalf only one entry into the selection process, even if multiple registrations are submitted on their behalf.

    Overall, this proposed rule would:

    1. Streamline eligibility requirements:

    Revise the criteria and definition for “specialty occupation” positions for H-1B purposes, to reduce confusion and to clarify that a position may allow for a range of academic degrees (so long as these are related to the role). Improve program efficiency:

    Codifies that adjudicators generally should defer to a prior determination if the same candidate/employment was previously approved by the agency (so long as no material facts have changed at the time of a new filing).

    2. Provide greater benefits and flexibility for employers and workers:

    • Expand exemption eligibility for employers subject to the annual H-1B statutory limit, creating more flexibility for certain non-profit entities or governmental research organizations, as well as beneficiaries not directly employed by a qualifying organization. This change would allow more organizations to sponsor H-1B employment without the requirement that they compete in the annual cap lottery.
    • Extend flexibilities for students seeking to change their status to H-1B from an F-1 visa, such as extending the duration of F-1 status, and any employment authorization.
    • The proposed regulation would also establish new H-1B eligibility requirements for emerging entrepreneurs.

    3. Strengthen integrity measures:

    • Prohibit related entities from submitting multiple registrations for the same beneficiary, codify USCIS’s authority to conduct site visits, and clarify that refusal to comply with site visits may result in denial/revocation of the underlying petition.
    • Additionally, when a registration contains invalid information, the proposed rule would codify USCIS’s ability to deny an H-1B petition or revoke an approved H-1B petition.

    The 60-day public comment period for the proposed rule will be accepted through December 22nd, 2023. It is expected that the resulting regulations will be implemented in the coming months.

    Please contact your Varnum immigration attorney with any questions.

    Is Your Community Association Prepared for the Corporate Transparency Act?

    Prepare your community association for the Corporate Transparency Act.
    Visit our CTA Resource Center

    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 (“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.

    In certain states, including Florida and Michigan, condominium and homeowner associations are commonplace. Such associations are “reporting companies” under the CTA, and there may not be an exemption for them.

    Management firms that assist and manage such associations are also “reporting companies” under the CTA, and unless they qualify for a “large operating company” exemption based on their employee numbers and revenue, there may be no exemption available for these entities.

    These associations and other reporting companies formed on or after January 1, 2024 will need to comply with the CTA’s new reporting requirements in 2024, and those companies in existence before January 1, 2024 will have to file an initial report on or before January 1, 2025.

    The required disclosures include:

      • For the “reporting company” itself, basic corporate information such as full legal name, all fictitious names, complete address, state of formation, and taxpayer identification number;

      • For each “beneficial owner” of the entity, which in the case of associations may include directors and officers (full-time, part-time or volunteer), community association managers and agents of third-party management firms, each such individual’s full legal name, date of birth, residential address, and information from (along with an image of) the individual’s unexpired U.S. passport, state driver’s license or other government-issued identification document; and

      • For each “company applicant” of an entity formed on or after January 1, 2024, which would include any person who filed or directed the filing of a document creating the entity, substantially the same disclosures required of a beneficial owner.

    Reporting companies will also 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.

    Community association managers, boards of directors and management firms should prepare now and familiarize themselves with the CTA’s new reporting requirements, as 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.

    Varnum’s Corporate Transparency Act Taskforce of attorneys and other professionals can assist you. Our CTA Taskforce recently published an advisory explaining the CTA reporting requirements, and we are hosting a complimentary webinar on Wednesday, November 8 to address the requirements in further detail.

    Please contact your Varnum attorney or any member of Varnum’s CTA Taskforce if you have any questions about how the Corporate Transparency Act may impact you.

    Navigating the Updated Federal Trade Commission Guidelines for Social Media Influencer Marketing

    10 24 Advisory Updatedftcguidelinesarticle Linkedin

    Introduction:

    The Federal Trade Commission (FTC) recently updated its Guides Concerning Use of Endorsements and Testimonials in Advertising (Guidelines). There has not been an update to the Guidelines since 2009, before TikTok even existed and Facebook was still the hip new kid on the block.

    Clearly, a lot has changed since then, and being aware of and understanding the updates to these Guidelines is crucial for companies, influencers, brand ambassadors, and marketing professionals who engage in influencer marketing campaigns. The Guidelines take into account the evolving nature of influencer marketing and provide more specific guidance on how influencers can make clear and conspicuous disclosures to their followers. This summary provides a basic overview of the key changes and important points to consider in the wake of the updated Guidelines.

    Background:

    Anyone who has access to the internet is aware that social media influencer marketing has been a rapidly growing industry over the past decade, and the FTC recognizes the need for adequate transparency concerning this area of marketing to protect consumers from deceptive advertising practices.

    The general aim of the updated Guidelines is to ensure consumers can clearly identify when a social media post, blog post, video, or other similar media is sponsored or contains affiliate links. The updated Guidelines seek to develop or make clear guidance concerning specifically: (1) who is considered an endorser; (2) what is considered an “endorsement”; (3) who can be liable for a deceptive endorsement; (4) what is considered “clear and conspicuous” for purposes of disclosure; (5) practices of consumer reviews; and (6) when and how paid or material connections need to be disclosed.

    Key Changes and Considerations:

       

      • Clear and Conspicuous Disclosure: Influencers must make disclosures clear and conspicuous. This means disclosures should be easily noticed, not buried within a long caption or hidden among a sea of hashtags. The Guidelines require that disclosure be “unavoidable” when posts are made through electronic mediums. The FTC suggests placing disclosures at the beginning of a post, especially on platforms where the full content can be cut off (i.e., Instagram). In broad terms, a disclosure will be deemed “clear and conspicuous” when “it is difficult to miss (i.e. easily noticeable) and easily understandable by ordinary consumers.”

         

        • Updated Definition of “endorsements”: The FTC has broadened its definition of “endorsements” and what it deems to be deceptive endorsement practices to include fake positive or negative reviews, tags on social media platforms, and virtual (AI) influencers.

           

          • Use of Hashtags: The Guidelines still hold that commonly used disclosure hashtags such as #ad, #sponsored, and #paidpartnership are acceptable, but those must be displayed in a manner that is easily perceptible by consumers. Influencers should avoid using vague or ambiguous hashtags that may not clearly indicate a paid relationship. Keep in mind, however, whether a specific social media tag counts as an endorsement disclosure is subject to fact-specific review.

             

            • In-Platform Tools: Social media platforms increasingly provide built-in tools for influencers to mark their posts as sponsored. However, be aware, the Guidelines emphasize that these tools can be helpful in disclosing partnerships, but they are not always sufficient to ensure that disclosures are clear and conspicuous. Parties using these tools should carefully evaluate whether they are clearly and conspicuously disclosing material connections.

               

              • Affiliate Marketing: If an influencer includes affiliate links in their content, they must disclose this relationship. Simply using affiliate links is considered a material connection and requires disclosure. Phrases such as “affiliate link” or “commission earned” can be used to disclose affiliate relationships.

                 

                • Endorsements and Testimonials: The FTC guidelines apply not only to sponsored content, but also to endorsements and testimonials. Influencers must disclose material connections with endorsing products, whether they received compensation or discounted/free products. Beyond financial relationships as described above, influencers will need to disclose non-financial relationships, such as being friends with a brand’s owners or employees.

                   

                  • Ongoing Relationships: Disclosures should be made in every post or video if a material connection for benefit exists, even in cases of ongoing or long-term partnerships.

                     

                    • Endorsements Directed at Children: The updated Guidelines added a new section specifically addressing advertising which is focused on reaching children. The FTC states that such advertising “may be of special concern because of the character of audience”. While the Guidelines do not offer specific guidance on how to address advertisements intended for children, those who intend to engage in targeting children as the intended audience should pay special attention to the “clear and conspicuous” requirements espoused by the FTC.  

                    Enforcement and Penalties:

                    The FTC takes non-compliance with these guidelines seriously and can impose significant fines and penalties on brands, marketers, and influencers who fail to make proper disclosures. Significantly, the updated Guidelines make it clear that influencers who fail to make proper disclosures may be personally liable to consumers who are misled by their endorsements. Furthermore, brands and marketers may also be held responsible for ensuring that influencers with whom they have paid relationships adhere to these guidelines.

                    Conclusion:

                    Bear in mind, the Guidelines themselves are not the law, but they serve as a vital guide to avoid breaking it. Overall, the updated Guidelines on influencer disclosures emphasize transparency and consumer protection. To stay compliant and maintain consumer trust, it is imperative that all parties involved in influencer marketing familiarize themselves with these Guidelines and ensure that disclosures are clear, conspicuous, and consistently made in every relevant post or video. Furthermore, as this marketing industry continues to develop and evolve, it will be increasingly important to monitor ongoing developments and changes in the FTC guidelines to stay current with best practices.

                    If you would like assistance re-examining your advertising materials and practices or to discuss best practices in implementing a complete compliance program and/or policies for endorsements, reviews, or influencers, do not hesitate to get in touch with a Varnum attorney.