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Business & Corporate Law

The Corporate Transparency Act: What It Is and What It Means for Your Small Business

The Corporate Transparency Act: What It Is and What It Means for Your Small Business

Madison Shaner

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On January 1, 2021, as part of the federal Anti-Money Laundering Act (the “AMLA”), Congress enacted the Corporate Transparency Act (the “CTA”) in an effort to increase corporate transparency. The CTA requires certain companies to file information on their businesses, including “beneficial ownership” information, with the Financial Crimes Enforcement Network (“FinCEN”). The impact of the CTA on companies and those who would be required to report information has not been clear. However, on December 7, 2021, FinCEN issued a Notice of Proposed Rulemaking to establish the regulations that would implement the CTA, and provide additional clarity on which businesses would be considered “reporting companies” under the CTA.

Which companies are subject to reporting requirements?

Almost all types of domestic and foreign business entities are included in the CTA’s definition of “reporting companies”. This includes limited liability companies and corporations. That being said, the CTA allows for a number of exemptions for companies that will not be required to make CTA filings. However, these exemptions apply only to large entities and entities that are already subject to various reporting requirements due to size or industry regulations.

Companies that are considered “large operating companies” are not required to make filings under the CTA. The proposed rules clarify that “large operating companies” are those that: (1) employ more than 20 employees on a full-time basis in the United States; (2) filed Federal income tax returns in the prior year demonstrating more than $5,000,000 in gross receipts or sales in the aggregate (including receipts or sales from entities owned by the entity and through which the entity operates); and (3) has an operating presence at a physical office within the United States. The CTA additionally does not require filings for subsidiaries of exempted entities, meaning entities whose ownership interests are entirely owned or controlled by an exempt entity. Subsidiary entities that are partially-owned by exempt entities, are, however, not exempted.

What does a reporting company have to report?

Reporting entities will be required to disclose basic information regarding the entity itself, including the company’s full name, any trade name (or D/B/A), business street address(es), the jurisdiction of formation, and taxpayer identification information (EIN). In addition to entity information, reporting entities are required to report information on their beneficial owners. Meaning that each reporting entity will be required to report the name, birthdate, address, and unique identifying number from an acceptable identification document (such as a passport or driver’s license) with an image of the document. The beneficial owner information must be provided for each company applicant and beneficial owner of the entity. Beneficial owners are defined by the CTA as “any individual who, 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.” 

While the CTA doesn’t define “substantial control” or “ownership interests,” the proposed regulation clarifies that “substantial control” is viewed through the lens of three specific indicators: (1) service as a senior officer of a reporting company; (2) authority over the appointment or removal of any officer or dominant majority of the board of directors of a reporting company; (3) direction, determination or decision of, or substantial influence over important matters of a reporting company (e.g. sale, lease or transfer of principal assets of the company, entry into or termination of major contracts, major expenditures and investments, compensation of senior officers). The proposed regulations also take an expansive view of what constitutes an “ownership interest” to include both equity in the reporting company and other types of interests, such as capital or profits interests, convertible instruments, warrants or rights, or other options to acquire equity, capital, or other interests in a reporting company.

When do reporting companies have to report their information?

When reporting companies are required to comply with the CTA depends on the date of the company formation. After FinCEN’s regulations become final, new reporting companies will be required to report the information about their beneficial owners upon formation or within fourteen days thereof. Any existing company formed prior to the effectiveness of the FinCEN regulations will be required to report its information within two years of the promulgation of the new regulations. Reporting companies will also need to update their information within a year of any change of beneficial ownership.

Who will be able to see and access information regarding beneficial ownership?

The beneficial owners of consumer facing companies may be concerned about the accessibility of their personal information given the reporting requirements. This concern is largely unfounded, however. The reporting information will be kept in a secure, private, database maintained by FinCEN. The database of reporting information will not be publicly available, and ownership information will be available upon requests only from federal law enforcement agencies; state, local, or tribal law enforcement agencies authorized by court order; a federal agency on behalf of a foreign country if such request is pursuant to an international agreement; or a financial institution for customer due diligence purposes authorized by the reporting company.

The current proposed rulemaking is one of three to implement the CTA. Companies should begin evaluating whether they will fall within the reporting requirements and who within their entity structure may be considered a beneficial owner based on this initial proposed rulemaking.

 

ABOUT THE AUTHOR

ASSOCIATE

Madison (Maddie) Shaner joined Milgrom & Daskam as an Associate in 2019. Her practice focuses on corporate and real estate transactions. Prior to joining Milgrom & Daskam, Maddie was an associate at Tyson, Gurney & Hovey, LLC where she conducted oil and gas title examination and assisted in drafting drilling and division order title opinions for upstream oil and gas clients

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The Lasting Impact of Covid-19 on Commercial Lease Negotiations

The Lasting Impact of Covid-19 on Commercial Lease Negotiations

Madison Shaner

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When COVID-19 struck businesses in March of 2020, many assumed the impact would be short-lived, that after a few weeks of shutdowns and lock-ins, business and life would return to normal. Now, well over a year later, and with new variants and surges emerging despite vaccines, the question is: when, how, or even if, a return to offices will occur. Employees are increasingly likely to seek other opportunities if their employers press a return to full-time, in-person work. Job seekers have also begun prioritizing remote work options when looking for new jobs. 

Facing this rising desire to stay remote or move to a hybrid work model, employers must now determine what their physical workspace needs are in the post-pandemic world. A recent McKinsey study forecasts that roughly 38% of businesses will implement some sort of hybrid work arrangement in industries where remote work is feasible. This will likely result in a dramatic shift in the commercial real estate space, particularly where office spaces are concerned, as employers find they don’t want to be locked into a long-term lease, want more flexibility in their leased spaces, or that they need significantly less space than they previously required for their workforce. In a post-COVID world, many lease provisions will play a key role in future lease negotiations, and this shift may see tenants wielding more negotiating power than ever before.

1. Term

While negotiating the term of a lease is nothing new, we may see a trend toward shorter lease terms in the future. Previously, landlords were reluctant to grant leases for commercial spaces in less than five-year terms, particularly where there was build-out performed as part of a landlord’s lease obligations. However, given the shift in the real estate market, and the increases in vacant commercial space, landlords may have to accept shorter-term leasing arrangements from potential tenants who don’t want to get locked into leases given the uncertainty of the world and the shift toward hybrid work models.

2. Expansion/Contraction

Tenants may be seeking options that will allow them to adjust their space needs as they change in post-pandemic leases. Tenants may seek to expand their space as more employees come in for workdays, or to accommodate necessary physical distancing requirements. Conversely, as many employees continue to work remotely, tenants may only need a fraction of the space previously required because there are simply fewer bodies in the building at any given time. Landlords may have limited flexibility here but may also want to leave the door open depending on what their vacant space looks like, and whether trades can be made between tenants who are seeking more space with tenants who are seeking less space. Landlords may even elect to keep certain spaces open as short-term (e.g., daily, or weekly) rental options for tenants who only need more space for brief stretches of time.

3. Force Majeure.

Force majeure provisions were often the first contract provision everyone looked to when COVID hit to determine their liability and ability to avoid consequences for a lack of performance under the terms of the lease or contract. Pre-pandemic, force majeure clauses typically did not offer tenants relief from their obligation to pay rent, even if they may have offered protection from breaching their leases for failure to continuously operate their businesses out of the leased premises. Moving forward, landlords and tenants should expect force majeure provisions to be a more heavily negotiated lease provision, including specific language relating to government shutdowns, public health orders, and crises.

4. Subleasing and assignment.

When lessees become unable to meet their obligations under their leases due to either reduced business or shutdowns and government mandates, they may try to either sublease their spaces or transfer their leases to a third party by assigning the lease. Prior to the pandemic, many landlords, particularly in commercial leases, were reluctant to allow tenants to sublease or assign their leases. Lessees who could sublet or assign their spaces under the terms of their leases were able to defray their overhead costs by finding sublessees or assignees for spaces they either no longer needed or were no longer able to use during the pandemic. As such, assignment and sublease provisions became valuable focal points in existing leases and will likely be heavily negotiated in new leases.

Beyond the shift in lease provisions, it is likely that more and more tenants will seek flexible working spaces that allow people to work in person when desired or necessary. To capitalize on the new hybrid work models, landlords and owners must consider how to best transition their spaces and lease agreements to give tenants flexibility, or risk being stuck with empty commercial spaces.

The real estate team at Milgrom & Daskam is skilled at drafting and negotiating commercial leases, and whether you’re a landlord or a tenant, we would love to help craft the solutions that work best for you. Reach out to our team for a consultation if you’re looking for assistance in your upcoming commercial real estate transactions.

ABOUT THE AUTHOR

ASSOCIATE

Madison (Maddie) Shaner joined Milgrom & Daskam as an Associate in 2019. Her practice focuses on corporate and real estate transactions. Prior to joining Milgrom & Daskam, Maddie was an associate at Tyson, Gurney & Hovey, LLC where she conducted oil and gas title examination and assisted in drafting drilling and division order title opinions for upstream oil and gas clients.

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Legal Fundamentals of Contracts for Influencers and Brands

Legal Fundamentals of Contracts for Influencers and Brands

Madison Shaner

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Whether you call them influencers, brand advocates, or goodwill ambassadors, social media content creators represent a rapidly growing marketing segment, with companies set to spend up to $15 billion on influencer marketing by 2022.

As more and more businesses move toward using content creators and influencers in their marketing campaigns, and as the percentage of marketing budgets spent on content creators grows, the question becomes how to effectively paper these transactions to protect both content creators and the businesses that hire them. 

The use of content creators for marketing allows businesses access to targeted demographics in an easy, relatively inexpensive manner, and the quality of traffic driven to businesses from content creators is often seen as better than traffic coming from other sources. Influencer marketing, especially ads in stories, has a significant impact on click-through rates because the content feels less like an advertisement to viewers. Consequently, viewers may be more inclined to trust the ads and to purchase products featured. With changes to how apps can track user activity and therefore how brands can use that information to target ads to their desired audiences, even larger portions of marketing budgets may move toward the use of content creators as time goes on.

If your business hires content creators for marketing campaigns or has ongoing relationships with content creators, having effective and efficient contracts with your influencers is critical to protecting your business. Alternatively, if you are a content creator, the contracts you sign as you work with companies are critical to building your brand and maintaining your own business. The contracts between brands and content creators should cover everything from employment status, to the payment and posting terms, to the ownership of intellectual property, to the requirements set forth by the Federal Trade Commission (FTC) and truth in advertising, and even what happens if either the brand or the content creator does something that results in being “canceled,” or how the parties can part ways.

If a business and a content creator don’t anticipate an ongoing contractual relationship, the parties should, at a minimum, document the brand’s permission to use the content and the duration and parameters of that grant. For instance, if a content creator posts images unsolicited by the brand that features the brand’s product, the brand should make an inquiry to the content creator and obtain their permission before reposting the images. Failure to obtain the content creator’s consent to re-posting the images may result in claims of copyright infringement or misappropriation of the creator’s right of publicity and may lead to Digital Millennium Copyright Act (DMCA) takedown requests through social media platforms. This could negatively impact both the brand’s image as well as its ability to market itself on the content creator’s social media channel in the future.

Critical to the conversation around using content creators in marketing is the FTC’s increased interest in influencer advertising. FTC rules provide that content creators must disclose their relationships with brands within their posts so that followers can understand whether the content that they are seeing is organic or whether it’s an ad that the content creator is being paid to post. Failing to appropriately disclose the relationships between brands and content creators can result in penalties, fines, and legal fees. In November 2019, the FTC released a “Disclosures 101 for Social Media Influencers” brochure to teach content creators how to correctly disclose when the content they post constitutes a paid endorsement. In 2020, the FTC requested public comments on whether the guidelines for influencers should be revised. The guidelines from the FTC indicate that even products received for free in exchange for an endorsement trigger the disclosure requirement, and the disclosures must be easy to understand and placed in such a way that an average viewer would be able to see that the content is sponsored.

While the FTC guidelines place adherence to the disclosure requirements on the shoulders of content creators, it is incumbent on companies to ensure content creators they work with are following these requirements because brands may also be held liable when the content creators they work with aren’t diligent about their disclosures. For instance, in March of 2020, the FTC entered into a settlement with Teami, LLC, for $1 million after alleging that Teami promoted its products using deceptive health claims and endorsements by well-known influencers and celebrities who failed to adequately disclose that they were being paid to promote the products. The FTC imposed a $1 million fine on Teami after determining that Teami would be unable to pay the full $15.2 million judgment against it.

The corporate attorneys at Milgrom & Daskam have extensive experience drafting and negotiating contracts between businesses and content creators. If you are entering into such an agreement and would like counsel to help you protect your interests, feel free to reach out to the corporate practice group at Milgrom & Daskam for a free consultation

ABOUT THE AUTHOR

ASSOCIATE

Madison (Maddie) Shaner joined Milgrom & Daskam as an Associate in 2019. Her practice focuses on corporate and real estate transactions. Prior to joining Milgrom & Daskam, Maddie was an associate at Tyson, Gurney & Hovey, LLC where she conducted oil and gas title examination and assisted in drafting drilling and division order title opinions for upstream oil and gas clients.

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