Many U.S. cannabis companies will need to comply with a new reporting requirement under federal law, an attorney for the marijuana industry warns.
“This is a pretty complex law, and I think a lot of cannabis business owners are not aware that it exists,” said Rachel Gillette, a partner with Denver-based law firm Holland & Hart who specializes in marijuana business and tax law.
The new beneficial ownership reporting requirements under the Corporate Transparency Act likely will apply to “most small cannabis businesses – (although) there are certain exemptions,” Gillette explained.
Although the law is already in effect, most existing cannabis businesses won’t have to report immediately: Companies formed before Jan. 1, 2024, have until Jan. 1, 2025, to file their first ownership report.
“But if you form a company this year, then that’s when the clock starts ticking,” Gillette said.
Companies registered in 2024 must file within 90 days.
Reporting beneficial ownership
The Corporate Transparency Act, passed in 2021, targets the use of anonymous shell companies to hide business ownership.
It requires certain companies to file reports disclosing their beneficial ownership with the Financial Crimes Enforcement Network (FinCEN), an agency of the U.S. Department of the Treasury.
Gillette points out that disclosing beneficial ownership to the government already will be familiar to many marijuana companies “because most state laws for licensing of cannabis businesses require the disclosure of beneficial ownership.”
But the new federal beneficial ownership reporting requirement is separate from any state reporting requirements.
“This is a federal law, and cannabis businesses are not exempt from having to provide this information,” Gillette said.
For FinCEN’s purposes, the beneficial owner of a business isn’t simply a proprietor.
According to a FinCEN FAQ, a beneficial owner “either directly or indirectly: (1) exercises substantial control over the reporting company, or (2) owns or controls at least 25% of the reporting company’s ownership interests.”
“Substantial control” could include being:
- A senior company officer (such as president, CEO or chief financial officer).
- Someone with “authority to appoint or remove certain officers or a majority of directors.”
- Someone who is “an important decision-maker.”
- Anyone with “any other form of substantial control,” as defined in a FinCEN compliance guide.
Even a company officer who doesn’t own any shares in a business could count as a beneficial owner, Gillette observed.
Twenty-three types of companies are exempt from the beneficial ownership reporting requirement, and Gillette believes several of them are likely to apply to cannabis companies:
- “Securities reporting issuers” that report information under the Securities Exchange Act, which generally includes publicly traded companies.
- “Large operating companies” that meet six criteria, including employing more than 20 full-time employees and reporting more than $5 million in gross receipts or sales on their federal tax returns.
- Subsidiaries of some exempt entities.
- Inactive companies.
Details of the exemptions are laid out in the FinCEN compliance guide.
“But by and large, I think most mom-and-pop cannabis businesses – or smaller cannabis businesses, or businesses that have under $5 million in income or under 20 employees – those are all going to be companies that have to report,” Gillette said.
Penalties for failing to file
The federal government can levy stiff penalties on companies that don’t file beneficial ownership reports as required.
Those who “willfully” violate the reporting rule could face civil penalties of as much as $500 per day.
Criminal penalties for failing to report are also possible, including up to two years in prison, plus a fine of up to $10,000.
Changes affecting a company’s beneficial ownership also must be reported, Gillette noted.
“If you change your CFO, if you add a shareholder, and you’re not otherwise exempted from reporting – or, if you are an exempted company, and then all of the sudden you’re no longer exempt – you have to report,” she said.
For the cannabis industry in particular, one aspect of the reporting requirement gives Gillette pause.
FinCEN says it may share information about a company’s beneficial ownership with “federal, state, local and tribal officials, as well as certain foreign officials” for the purposes of “authorized activities related to national security, intelligence and law enforcement.”
“I know that might cause cannabis companies some heartburn, given the continued federal illegality” of marijuana, Gillette noted.
She points out that FinCEN’s ability to share beneficial ownership information with law enforcement includes “both criminal and civil investigations and actions,” according to a fact sheet from the agency.
Beneficial ownership reports can be filed via a portal on the FinCEN website. There is no filing fee.
Individual beneficial owners must provide FinCEN with their name, date of birth, address and a government-issued identification document.
For its part, FinCEN believes “that many, if not most, reporting companies” can file on their own without third-party help.
Still, Gillette expects third-party services will be available to help with filing.
“Certainly, companies could do it on their own,” she said, “but they may need to work with some kind of professional in order to determine whether they actually meet an exemption or don’t meet an exemption and then determine what they actually have to report.”
Solomon Israel can be reached at email@example.com.