Updated, 5 December 2016: Further to our September alert (below), the Bureau of Economic Analysis has published a final rule regarding portfolio investments. This rule, which became effective on 21 November 2016, relates to foreign investments into funds and is significant because it decreases the reporting burden for such portfolio investments.
Prior to this new rule, a non-U.S. investor would be required to report if it owned at least 10 percent or more of voting interest in a U.S. private fund, and such fund then owned at least 10 percent or more of voting interest in a U.S. operating company. The U.S. private fund, on behalf of the non-U.S. investor, would thus have to file even though the non-U.S. investment in the ultimate U.S. operating company was just 1 percent, which was not the intention of the BEA.
The BEA, in cooperation with the U.S. Treasury Department, now instructs reporters in such circumstances to instead report to the Treasury International Capital reporting system.
Therefore, only portfolio non-U.S. investors who own 10 percent or more of voting security in a U.S. operating company through a private fund are required to file under Form BE-13. It is no longer necessary to file under the BEA just on the basis that the non-U.S. investor owns more than 10 percent of voting interest in a U.S. private fund.
Legal Alert, 14 September 2016: The federal government agency, the Bureau of Economic Analysis, gathers investment data for the purpose of compiling economic statistics. The U.S. operations of non-U.S. entities are covered by this requirement to provide information. The penalties for non-compliance are significant, for example civil penalties of up to $25,000 and for certain intentional violations, criminal penalties of up to $10,000 and imprisonment for up to one year. The relevant requirements depend on the type of entity and applicable threshold criteria.
Furthermore, following a change a couple of years ago, entities are required to be pro-active in submitting the relevant information rather than waiting on being contacted by the BEA. Accordingly, it is important to verify how, and to what extent, your business may be affected.
The categories of non-U.S. entities primarily affected are those:
- owning voting security in a U.S. entity;
- investing in a U.S. entity;
- establishing a U.S. subsidiary; or
- expanding the U.S. operations of its U.S. subsidiary
Non-U.S. entities falling within category (1) in FY2017 must file a Form BE-12 form. The deadline for submitting this form is subject to confirmation by the BEA but is likely to be around mid-January 2018. The precise type of form to be filed depends upon whether the entity has a majority or minority ownership and the size of the U.S. entity. As a minimum requirement, a Form BE-12 “Claim for Not Filing” must be filed by a U.S. entity with non-U.S. voting security ownership in FY2017.
A non-U.S. entity that falls under any of the categories (2), (3) or (4) must file a Form BE-13 form no later than 45 days after the date of the investment transaction. Form BE-13 requires the non-U.S. entity to own voting security of 10 percent or more. A non-U.S. company making an investment (or project cost) that meets the 10 percent threshold but is less than $3 million would still be required to file the Form BE-13 “Claim for Exemption”.
Since fund investor interests are not typically voting securities, fund investments are not usually subject to the above requirements. The BEA is, however, currently developing rules that would require compliance from portfolio investments in the future.
A non-U.S. fund investing in operating companies or non-U.S. entities which become general partner or managing member of a U.S. Affiliate fund (including in a master fund structure) or portfolio company would generally be deemed to have met the voting security threshold and would therefore become subject to the above requirements.
We recommend that non-U.S. investors:
- clarify which categories their entities fall into;
- familiarize themselves with the applicable form and compliance requirements; and
- monitor the situation for future changes.
Borenius’ lawyers are available to assist in addressing any questions you may have regarding this client alert. Please feel free to contact any of the Borenius attorneys listed in this alert or those with whom you usually work.