Corporate Transactions and Compliance Blog

Recording Security Interests in Copyrighted Works: Recordation v. Indexing, and Constructive Notice

Posted by Andrew Hackett on Thu, May 25, 2017

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By Maryna Koberidze and Andy Hackett, COGENCY GLOBAL INC.

To perfect the creditor’s interest, a security interest in a registered copyrighted work must be recorded with the U.S. Copyright Office (“Copyright Office”), whereas a security interest in an unregistered work can be perfected by filing a financing statement with the Secretary of State under a state law version of Article 9 of the Uniform Commercial Code.

This post focuses on recordation of security interests with the Copyright Office, and some of the peculiarities of the process for doing so.

Recording Security Interests with the Copyright Office

As noted in our previous article, “Tips for Recording Assignments at the U.S. Copyright Office”, recording a document pertaining to a copyrighted work provides several benefits. One such benefit is that recordation establishes priority between conflicting conveyances involving the same copyrighted work. Another benefit entails constructive notice, meaning that upon recordation of the document with the Copyright Office, members of the public are presumed to have knowledge of the facts stated in the recorded document and cannot claim otherwise.

Both priority and constructive notice are intended to protect purchasers, licensees and secured creditors from the risk of losing their interests in case of conflicting assignments or the copyright owner’s bankruptcy. To get the advantage of either, certain conditions must be met.

Conditions for Priority

When two conflicting conveyances involve the same work, the one that was executed first will prevail, but only if the document is recorded: (1) within one month after execution (if executed in the U.S.), (2) within two months after execution (if executed outside the U.S.), or (3) at any time before the other document was recorded with the Copyright Office.

Otherwise, the later conveyance will prevail if: (1) taken in good faith, for valuable consideration or on the basis of a binding promise to pay royalties, (2) taken without notice of the earlier conveyance, and (3) recorded in a manner required to give constructive notice.

(For discussion of priority between a conflicting transfer and a nonexclusive license, see 17 U.S.C. § 205(e)).

Conditions for Constructive Notice

Recordation of a document gives all persons constructive notice, provided that: (1) the document specifically identifies the work to which it pertains so that, after the document is indexed by the Copyright Office, it would be revealed by a reasonable search under the title or registration number of the work; and (2) the work has been registered with the Copyright Office.

Recordation Process

The Copyright Office’s Circular 12, Recordation of Transfers and Other Documents,  explains that the recordation process generally includes the following: (1) receiving the copyright-related document for recordation and providing a return receipt if requested by the remitter; (2) reviewing the document to determine its eligibility for recordation; (3) numbering, cataloging, imaging and storing the document in the Copyright Office’s electronic recordation system, so that it is available to the general public for inspection and copying upon request; (4) indexing the document in the Copyright Office’s online public catalog under the names of the parties involved, the titles of works listed in the document, and the registration numbers for the works associated with the document (where applicable); and (5) returning the original document to the remitter along with a certificate of recordation bearing the date of recordation and the volume and document number identifying the recorded document.

Currently, the Copyright Office does not require that a copyright-related document submitted for recordation include registration numbers associated with the works, but only suggests the format for such numbers should the remitter chose to supply them. Unfortunately, the Copyright Office’s public catalog, the online index for registrations and recordations, provides no formal linkages between registrations and recorded documents, which makes searching the index very challenging.

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Indexing and Electronic Title Lists

Indexing is an important part of recordation process, as well as the most labor-intensive one. It involves creating an online public record in the Copyright Office’s public catalog. This record contains information about the recorded document and all the titles it concerns, and is searchable through the Copyright Office’s website.

As a general practice, the Copyright Office manually transcribes the information from paper title lists submitted with a document for recordation into its online public catalog. In 2014, however, the Copyright Office made changes to its recordation practices. The Office now officially offers an option for submission of electronic title lists where a document concerns 100 or more titles of works.

Given the Copyright Office’s backlog (the Office is currently processing January 2016 submissions), submission of electronic lists may help to speed up the processing of the documents. Nevertheless, one should keep in mind that submission of an electronic title list does not eliminate the need for submission of a paper title list. Nor is the electronic title list considered part of the recorded document. Rather, it is used by the Copyright Office only as a means to facilitate the indexing of submitted documents, by allowing clerks to cut and paste the entries from the electronic list into the catalog. More importantly, if an electronic list is inconsistent with the information provided in the paper document and such discrepancies result in corresponding inaccuracies in the Copyright Office’s public catalog, the remitter bears the legal consequences of any such inaccuracies, including losing the benefits of priority and constructive notice.

If time is of essence, the Copyright Office’s special handling service may be a reasonable alternative to submission of electronic lists to expedite processing of documents submitted for recordation. Documents submitted with “special handling” are returned to the remitter with a certificate of recordation in about six weeks after submission, or even sooner.  Indexing also occurs faster as a result. The cost for this expedited service is $550, and is subject to the Copyright Office’s approval.

Recordation and Constructive Notice

The date of recordation is the date when the Copyright Office receives the accepted document in proper form and the proper fee, regardless of when the recordation specialist reviews and records the document.

However, priority vests and constructive notice attaches only upon recordation of the document with the Copyright Office. Thus, the question arises – when is such a document deemed to be properly recorded for constructive notice purposes? Is the copyright-related document recorded when it is received by the Copyright Office, when it is imaged into a volume open to public inspection, when it is indexed in the Copyright Office’s online public catalog, or when it is returned to the remitter with a recordation certificate? It is also unclear what comes first—indexing or returning the document to the remitter.

As stated in the Copyright Office’s Circular 12, indexing comes first. Likewise, the Report on Transforming Document Recordation at the United States Copyright Office notes that the Copyright Office creates a recordation certificate for a document only after a document has been imaged and indexed. According to the Compendium of U.S. Copyright Office Practices, however, indexing comes after the Copyright Office returns the original document to the remitter.

Our experience shows that the latter is often the case. Moreover, we have seen a growing “time gap” open between the receipt of a recordation certificate and the actual indexing of the titles in the catalog. The gap grows longer when a submission concerns longer lists of titles. Most recently, we have seen the Copyright Office’s online public catalog provide a “shell record” of the submission listing only the first title, but noting that “Titles associated with this document not yet indexed in the Public Catalog.” (See a sample image of such a record below).

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This seems to confirm the Copyright Office’s practice of indexing after returning the recordation certificate, but does not answer the question at what point in time does recordation give constructive notice to the public. Since the Copyright Act ties constructive notice to indexing by the Copyright Office, one would expect that constructive notice occurs only when indexing is complete. At the time of publication, we were unable to obtain confirmation of this from the Copyright Office, so it remains an open question.

We hope that once the Copyright Office concludes its announced IT modernization and develops an electronic recordation system, the recordation process will be handled in a more efficient and speedy manner so there will little or no time gap between issuing a recordation certificate and indexing all the titles associated with the recorded document. In addition, the Copyright Office has recently proposed to amend its regulations (including a requirement of including registration numbers) in anticipation of the development of an electronic system for submission of documents for recordation. The proposed rulemaking touches upon constructive notice requirements and electronic submission under the to-be-developed system. If you are interested in providing public input to the Copyright Office, written comments are due on July 17, 2017, at 11:59 p.m. and can be submitted here.

This article is provided for informational purposes only and should not be considered, or relied upon, as legal advice.

Sources used:

  1. 17 U.S.C. § 101, 205, 705(a).
  2. 37 C.F.R. § 201.4.
  3. Circular 12: Recordation of Transfers and Other Documents, U.S. Copyright Office, 1-2, 5-6 (rev. Sept. 2016), available at https://www.copyright.gov/circs/circ12.pdf.
  4. The Compendium of U.S. Copyright Office Practices, ch. 2300, sec. 2304.1(B), 2309.3, 2309.3(A)-(E) (3d ed. 2014), available at https://www.copyright.gov/comp3/chap2300/ch2300-recordation.pdf.
  5. Report of the U.S. Copyright Office: Provisional Information Technology Modernization Plan and Cost Analysis, U.S. Copyright Office, 54-56 (Feb. 29, 2016), available at https://www.copyright.gov/reports/itplan/technology-report.pdf.
  6. Modernizing Copyright Recordation, 82 Fed. Reg. 22,771, 22,777-78 (May 18, 2017), available at https://www.gpo.gov/fdsys/pkg/FR-2017-05-18/pdf/2017-09810.pdf.
  7. David Muradyan, How to Perfect a Security Interest in Intellectual Property (Copyrights, Trademarks and Patents), The IP Law Blog (May 13, 2011), http://www.theiplawblog.com/2011/05/articles/copyright-law/how-to-perfect-a-security-interest-in-intellectual-property-copyrights-trademarks-and-patents/.
  8. Reagan Fibbe, Perfecting Security Interests In Intellectual Property, Law 360 (July 10, 2007), https://www.law360.com/ip/articles/29111/perfecting-security-interests-in-intellectual-property.
  9. John F. Hornick, Security Interests in Intellectual Property, Finnegan, Henderson, Farabow, Garrett & Dunner, LLP (Oct. 2003), http://www.finnegan.com/resources/articles/articlesdetail.aspx?news=4c698bab-7284-48a2-a8bd-12e04b5bf9ef.

Tags: Copyright office, intellectual property, Corporate Compliance, security interest, copyright recordation

Don’t Use Whipped Cream Frosting!

Posted by Teri Mayor on Thu, May 18, 2017

The Importance of Doing Your Research for a Business License

By Teri Mayor, COGENCY GLOBAL INC.

Business Licenses and Permits.jpgBack when our kids were young, a friend and I dreamed up an idea for creating at-home children’s birthday parties for busy parents and decided to give it a try. We spent hours figuring out a business plan, designing a website and planning the party themes. We also spent hours on a much more frustrating activity, trying to determine whether we needed a business license or permit to include a home-baked and decorated birthday cake as part of the festivities. We searched online, called the state health department, county agencies and town agencies. Again and again we got no answers, just a referral to another person to call. We didn’t fall into a known category, and no one seemed to be able to answer our question -- would we need a “regulation kitchen” in which to bake our cakes? Finally, we got an answer. We could make our cakes at home and bring them along as long as we didn’t use whipped cream frosting. Hurray! Buttercream frosting it was.

This experience taught me two things. First, figuring out which business licenses and permits are required can be difficult! Second, as tempted as you are to say the heck with it after your third or fourth hour of research, it’s important to figure out what licenses and permits are required. Had we not known about the whipped cream rule, we would have offered that as an option. Giving parties to the general public and offering this option on our website, it was likely the county health department would discover the issue and levy fines or penalties, or at the least, ask us to change our business model, generating a fair amount of additional work to re-vamp everything. Even if we didn’t get caught, our lack of a properly outfitted kitchen could have been used against us if we were ever sued.

Business License Requirements Vary by Location

My current role as the product manager for our business licensing services has taught me one important thing I never even considered then. It was our local county that gave us the whip cream rule, but we gave many parties in neighboring counties. It never occurred to me to determine if their rules were the same, I just assumed they were.

Oversights like this are much more common than you might think for successful businesses operating in many states and counties. While architecture and engineering firms, insurance agencies and pharmacies are usually very aware that there are licensing requirements for their professions in almost every state, it is the local tax registrations and business licenses that often trip companies up. Each location has its own rules. In some cases, a business needs a license if it has a brick and mortar presence; in other cases, a sales associate working from their home can trigger the requirement. A business that operates in a state that doesn’t have many local licenses may assume, as I did, that they don’t need to worry about licensing when they start up in another location. That could be a dangerous assumption to make.

The Consequences of Doing Business without the Proper Licenses

Lack of proper licenses can create major issues for a business.  Here are some key difficulties:

Fines and Penalties: As local governments get leaner, they are getting much more serious about enforcement. Many local governments are using the internet to seek out businesses operating in their jurisdiction and comparing them against their licensing lists, issuing fines and penalties to businesses that are not compliant. 

Bad Public Relations: The internet can also be used by the general public to embarrass or create difficulties for businesses. As more and more license data become available online, it is not unheard of for a disgruntled customer to do their own research and publicly post about a business’s lack of proper licensure.

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Business Closure: A business that lacks proper licensure may need to close or stop offering the service or product for which it lacks a license. There are all sorts of potential costs to the business here, from lost business, to marketing and advertising dollars wasted to bad PR, if customers face a locked door and a sign about closure due to lack of a license.

Business Cost: Even if none of these things happen, businesses can face unintended costs if they set up a business model or product offering that does not agree with regulations everywhere they are doing business. For example, an engineering firm may want to offer an Employee Stock Ownership Plan. However in some states, regulations for the firm’s engineering license require that only licensed engineers can own shares in the company. If the company converts to an ESOP first and then discovers the issue, it will likely face a lot of legal costs to address the problems created by this action.

The Quick and Easy Way to Research Business License Requirements

A reputable company with experience researching these issues can be hired to determine what licenses are required based on a company’s specific business model. While the service is not free, it can be less expensive than the time cost of figuring it out yourself. In either case, the cost of doing the research ahead of time and finding out what you need to know (“Don’t use whipped cream frosting!”) can save a company a lot of headaches and difficulties in the long run. 

 

 This article is provided for informational purposes only and should not be considered, or relied upon, as legal advice. 

Tags: Business License

Cover All Your Bases to Maintain Your Company's Good Standing [Infographic]

Posted by Colleen DeVries on Thu, May 11, 2017

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COVER ALL YOUR BASES TO MAINTAIN YOUR COMPANY’S GOOD STANDING

Once a company is formed or registered in any state, there are many annual or periodic compliance obligations that must be met. Maintaining the existence of the company and authority to conduct business within each state is critical to an operating business. Keeping your company in “good standing” may seem simple, but requirements and terminology regarding what “good standing” actually means varies from state to state. Failure to maintain good standing status can jeopardize your right to conduct business, access to courts, limited liability status and can also delay closing financing transactions, in addition to other adverse consequences. Being aware of some of the nuances and questions to ask is helpful to ensuring that you have all of your bases covered when managing compliance for your business entities.

1st Base:  TRACK TYPES OF REPORTS AND TAXES AND DUE DATES

  • Consider using an entity management system that includes the due dates of all filings required by the Secretary of State, federal and state income tax returns, business license filings, and any other regulatory filing that may trigger loss of good standing.

2nd Base: BE CLEAR ON WHO IS RESPONSIBLE FOR FILINGS AND PAYMENTS

  • Many companies delegate the responsibility for handling different types of filings to multiple teams or advisors.
  • Consider a point person who can field questions and be the main contact to ensure coordination among your legal and tax advisors, as well as your registered agent to ensure that all filings and tax payments are being taken care of.

3rd Base: AVOID “GETTING OUT” AND PAYING PENALTIES AND FEES DUE TO MISSED FILINGS

  • Missed filings can cause a company to lose good standing and, after a period of time, be revoked in a state.
  • Penalties, interest and other fees are often charged to reinstate a company back in to good standing.

Home Base: HOME RUN

  • The above tips can increase your confidence that you will maintain good standing in all of the states you are conducting business.

 

This article is provided for informational purposes only and should not be considered, or relied upon, as legal advice. 

Tags: Corporate Compliance

The Curious Case of Ronald Markt Nay

Posted by Bruce Gallo on Thu, May 04, 2017

The Importance of Getting the Debtor Name Exactly Right on UCC Financing Statements

By Bruce S. Gallo and Despina Shields, COGENCY GLOBAL INC.UCC Financing Statement Driver's License Name.jpg

 

In re: Ronald Markt Nay, Bankruptcy Case No. 16-90762, 2017 Bankr. LEXIS 472 (Bankr. S.D. Ind.  January 23, 2017).

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As most followers of our blog know, Article 9 of the Uniform Commercial Code (UCC) was amended a few years back to clarify the rules pertaining to the correct legal name of individuals for the purposes of perfecting security interests through filed financing statements. The rule in most states, including Indiana in this case, is that the name of an individual on a financing statement must be as it is indicated on the debtor’s driver’s license. Seems pretty straightforward and simple enough. And in applying the rules surrounding this principle, this court certainly seems to have reached the correct result. But while the facts as stated in the case of Ronald Markt Nay appear not to be in dispute, there are a number of “missing” or “unaddressed” facts that make this a curious case.

Secured Party One, Secured Party Two, and the Omitted ‘T’

The agreed upon facts are pretty clear: The first secured party, SP1, properly perfected its blanket-type security interest against Mr. Nay by filing a financing statement with the Indiana Secretary of State on February 4, 2014. The second secured party, SP2, subsequently filed two financing statements with the Indiana Secretary of State on December 10, 2015 and December 21, 2015, pertaining to two specific pieces of equipment it had financed for Mr. Nay. SP2 claims a superior secured position relating to these two pieces of equipment, presumably because purchase money security interests in equipment were involved in both those loans, although the court really doesn’t state that fact specifically. On both of these filings, SP2 indicates the debtor’s name as “Ronald Mark Nay”, omitting the “t” that appears at the end of his middle name on his driver’s license. So the case boiled down to whether these filings by SP2 were legally sufficient, thus enabling it to acquire a superior position to SP1 pertaining to those specific items of collateral.

Ruling in Favor of Secured Party One

The court used essentially a three-tiered analysis in reaching its conclusion that SP2 did not have a superior position to SP1 concerning these two pieces of equipment: Was the clear statutory requirement met for the indication of the debtor’s correct legal name? If not, was the defect curable under the concept of “minor error”? Even then, could these financing statements be saved under the “safe harbor” provisions where they were discoverable by searching under the debtor’s correct name using the standard search logic of the filing office? The court answered each of these questions in the negative.

Pertaining to the first question, the court properly cited IC 26-1-9.1-503(a), which, since 2013, provides that if the debtor is an individual to whom a driver’s license has been issued, a financing statement sufficiently provides the name of the debtor only if it provides the name of the individual which is indicated on the driver’s license. In this case that standard was not met by the filings made by SP2, as Mr. Nay’s middle name was incorrectly stated.

On the second and third questions, the court properly cited IC 26-1-9.1-506(a) which provides that a financing statement substantially satisfying requirements of IC 26-1-9.1-501 through IC 26-1-9.1-527 is effective, even if it has minor errors or omissions, unless the errors or omissions make the financing statement seriously misleading. Section 26-1-9.1-506(b) provides that except as otherwise provided in subsection (c), a financing statement that fails sufficiently to provide the name of the debtor in accordance with IC Section 26-1-9.1-503(a) is seriously misleading. Section 26-1-9.1-506(c) provides that if a search of the records of the filing office under the debtor’s correct name using the filing office’s standard search logic, if any, would disclose a financing statement that fails to sufficiently provide the name of the debtor in accordance with IC 26-1-9.1 503(a), the name provided does not make the financing statement seriously misleading. So in this case, since the defect on the financing statements went to the sufficiency of the debtor’s name, SP2 had a very weak claim of “minor error”.  And since a search of the filing office records under the correct name of “Ronald Markt Nay” using the filing office’s standard search logic did not reveal the defective financing statements, SP2 could not prevail when it essentially asked the court, as Salvatore Tessio famously asked of Tom Hagen, “Can you get me off the hook?” We all know how that worked out…

Mark vs. Markt: The Case of a Typo?

So while all of this seems right and reasonable, and while it’s hard to find fault with the court’s decision, we still wish that a few “facts” were explored a little further.

One such fact is the actual middle name of the debtor. Is “Markt” really Mr. Nay’s middle name? That looks a lot like a typo to us. Sure it’s the middle name on his driver’s license, but is his middle name actually “Mark”? Did the parties brief the court on this issue? It’s hard to figure from the opinion, but we would have loved to see a court address the issue where the name on the driver’s license is actually wrong in fact, but right for financing statement purposes. (The authors have actual personal experience seeing such an error, and we wonder if any of our readers have seen this as well.)

Then there is the issue of the loan application by Mr. Nay with SP2. We wonder what middle name he indicated on the application. Did he at that time indicate “Mark”, on the good chance that is actually his middle name, not “Markt”? Or did the staff at SP2 that completed the erroneous financing statements seeing the name on the application as “Markt” just assume they were fixing a typo when they completed the financing statements without the “t”? It does look like a typo!

Searching the Public Record

Also relating to these loan applications with SP2, did SP2 do a search of the public record to find previous financing statements filed against Mr. Nay? We are guessing that they did, indeed, do searches since they appear to have filed PMSI financing statements in an attempt to leapfrog the first in time security interest perfected by SP1. Wouldn’t they have noticed the unusual spelling of Mr. Nay’s middle name when they looked at the search results, and maybe question how they should have completed their own filings?

This, in turn, leads to the question of whether during the loan approval process at SP1 whether anyone noticed this unusual spelling of Mr. Nay’s middle name. Wouldn’t it have been a prudent practice to file that original financing statement providing a second name as well as the one of the driver’s license, one that indicated the middle name as “Mark”? We think we might have asked that question somewhere during the loan process.

Use Search Logic Rules to Your Advantage

One last point on conducting searches. Under both the Model IACA Search Logic and the Indiana standard search logic, if the search query is made only using the first and last names of a debtor, the results returned from the search will include all matches -- with or without any middle names. Yes, filers need to get the name exactly right, but searchers can use the search logic rules to their advantage to find records they really want to look at. We understand that many searchers want to conduct searches using the exact name on the driver’s license, but when the name looks off, it might be wise to do a less restrictive search.

 

This article is provided for informational purposes only and should not be considered, or relied upon, as legal advice.

Tags: UCC

Initial Charitable Solicitation Registration: What, When, Where & How [Infographic]

Posted by Ron Barrett on Tue, May 02, 2017

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Initial Charitable Solicitation Registration: What, When, Where & How

What: Charities soliciting contributions from potential donors must apply for a charitable solicitation registration, license, or permit in most states, and renew them every year (every two years for DC and  GA). Exemptions are available in most states, especially for religious organizations, educational institutions (colleges, universities, etc.), and hospitals. Exemptions vary widely by state, and a review of each states statute is required.

When: Registration is required in advance of solicitation, with the exception of CA, which allows a 30-day grace period from the time that charitable assets are first received. For smaller organizations, usually revenue or contributions under $25K, an exemption is available in most states. However, some of these states require a one-time exemption filing.

Where: Charitable registrations/renewals are required in 37 states and Washington D.C. Only nine states: DE, ID, IN, IA, MT, NE, SD, VT & WY do not have a charitable solicitation statute, and thus do not require registration; TX requires registration only by law enforcement, public safety and veterans organizations; AZ requires registration only by veterans organizations. MO will exempt all 501c3 charities, 501c7 (social clubs), and 501c8 (fraternal societies) nonprofits, upon the filing of a one-time exemption request; and LA only requires nonprofits that use paid professional fundraisers/solicitors to solicit contributions in the state.

In most states, charitable registration filings are made at the Office of the Secretary of State (Charities Division), Office of the Attorney General, or a consumer protection or licensing office under the SOS or AG’s office.

How: If you have some spare time, you can do it yourself, but it’s not recommended, unless you use a DIY tool to assist you such as the Nonprofit Fundraising Registration: Nolo’s 50-State Digital Guide or C3 Central. Also, attorneys and CPAs can assist, but their rates tend to be high and many are not experienced with the nuances of managing and maintaining charitable registration filings. For charities short on time and funds, the best solution is to use a service company to file charitable registrations, exemptions and renewals. 

For more information, check out the following articles:  

Which States Require Charitable Solicitation Registration for Nonprofits?

Nonprofit Corporate Compliance: Required Annual and Periodic Reports and the Consequences of Failing to Comply

 

This article is provided for informational purposes only and should not be considered, or relied upon, as legal advice.

Tags: Charitable solicitation registration

One Year After Panama Papers, Much Needs to Be Done to Achieve Transparency in Company Ownership

Posted by Karen Redman on Thu, Apr 27, 2017

By Karen Redman, National Corporate Research, Ltd.

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In April 2016, in the biggest data leak in history, 11.5 million documents and 260 GB of internal information from the global Panamanian law firm, Mossack Fonseca, was obtained by an anonymous source at the German newspaper Süddeutsche Zeitung. The paper shared them with the International Consortium of Investigative Journalists (ICIJ) which, in turn, released the information, known as the Panama Papers, to their network of international media partners.

Exposing Tax Havens, Politicians, and Public Officials

These documents revealed a number of ways the wealthy could exploit the secretive world of tax havens, and relates to more than 200,000 companies for which the firm acted as registered agent. Often used lawfully to anonymously hold property and bank accounts, these companies were registered in a range of tax havens. The British Virgin Islands, for example, held more than 100,000 companies. [1]

This was big news at the time because of the number of politicians and famous names behind these companies. The documents reference 12 current or former world leaders, as well as 128 other politicians and public officials.

The reaction was immediate, global and angry. Within two days of its release, Panama Papers incited anger and street protests in Iceland, Sierra Leone, Malta and Pakistan, conspiracy theories and denunciations, and launched government investigations and potential prosecutions. [2]

Soon thereafter, Iceland’s Prime Minister Sigmundur Gunnlaugsson resigned following revelations that Gunnlaugsson once owned – and his wife still owns – an offshore investment company with multimillion-pound claims on Iceland’s failed banks. [3]

One year later, there have been almost 150 audits, investigations, prosecutions and arrests spread across approximately 80 countries. An estimated $135 billion was wiped off the value of nearly 400 companies. Governments are investigating more than 6,500 taxpayers and companies, and have recouped at least $110 million so far in unpaid taxes or asset seizures. [4] These investigations will continue for years to come.

So, in the intervening year, what progress has been made so that people cannot hide behind anonymous offshore companies to conceal their wealth and avoid taxes?

Panama Papers Scandal.jpg

Global Progress Towards Transparency

After the Panama Papers, the European Union (EU) set up a special committee to examine the root and the scale of the problem (this work is ongoing). Additionally, the EU is in the midst of a two-year window to negotiate the implementation of their fourth Anti-Money Laundering Directive with its member states. As a result, the EU member states are adopting a revision to the fourth Directive to move towards central registers listing information on the ultimate beneficial owners of corporate and other legal entities, including trusts. [5] Information on additional amendments to the Directive post-Panama Papers is here.

In addition, several governments at the anti-corruption summit in London in May, 2016, such as Germany, Norway, Netherlands, France, Afghanistan, Nigeria and Ghana committed to set up public registers of the beneficial owners of companies. [6] The U.K. already has the Persons with Significant Control (25% ownership or significant control) register. It should be noted that one of the amendments for the EU 4th Directive is reducing the 25% threshold in the definition of Beneficial Ownership to 10%.

A number of non-governmental organizations have also banded together, with initial funding from the Department of International Development (U.K.), to form OpenOwnership, whose goal is to create global registry of corporate beneficial owners. This is currently searchable by the public in beta phase and can be found here.

So much has been done that is positive but unfortunately, this road to full public transparency is one less traveled in the world of offshore tax havens.

Loopholes in Transparency Remain

Despite the new rules in the U.K. allowing for a public register of beneficial ownership, the U.K. crown dependencies and territories have been spared the obligation. More than half of the companies implicated in the Panama Papers are registered in these U.K. crown dependencies and territories (there were over 100,000 in the British Virgin Islands alone). After years of negotiations, many of these jurisdictions have agreed to have a central registry of beneficial ownership that is open to law enforcement but not to the public. In terms of transparency, this is immense progress. However in the fight against tax evasion, corruption and money laundering, this means companies cannot be investigated unless under suspicion[7].

Even in the EU, where there is no argument that progress towards transparency has been exceptional, Malta, which holds the rotating EU chair until July, said the proposed reforms to the fourth Directive would increase uncertainty, harming international investment and trade. Malta and other smaller EU states with low tax regimes have repeatedly showed caution in the push for reform, fearing multinationals headquartered in their territory may leave.[8]

Lastly, we cannot talk about loopholes in transparency without discussing the U.S. In defending the U.K.’s decision to not strong-arm their crown territories to have a public register, James Duddridge, a junior Foreign Office minister, said it was only fair to congratulate the territories on their “superb progress”, especially as some states in the U.S. continued to allow companies to be formed without the need for a registry of beneficial ownership.[9] It is true that states do not collect this information; their reasoning is that it is collected elsewhere by financial institutions, by the Financial Crimes Enforcement Network FinCEN and the IRS. In addition, states fear that any action on their part towards imposing beneficial ownership requirements would allow a different state to become a more preferred incorporation jurisdiction.

In December 2016, The Financial Action Task Force (FATF) issued its report on the U.S. regarding anti-money laundering measures. The report can be found here. There were a number positive remarks regarding the U.S.’s cooperation with other countries. However one of the most significant weakness discovered was lack of information on beneficial owners.

One Year Later: There is Much More to Do

Whereas progress undoubtedly has occurred around the world and here at home (among other initiatives, enhancing our Customer Due Diligence laws so that financial institutions have to identify and obtain information on beneficial owners), there is much more to do. There have been many ideas put forth on what to do, such as making companies publish their tax returns and requiring gatekeepers like the real estate industry to determine beneficial owners and source of funds. Whatever the solutions and however slow the progress, one thing is inevitable – the world is moving in the direction of corporate owner transparency.

 

[1] https://www.theguardian.com/news/2016/apr/03/what-you-need-to-know-about-the-panama-papers

[2] https://www.occrp.org/en/panamapapers/reactions/

[3] https://www.theguardian.com/world/2016/apr/05/iceland-prime-minister-resigns-over-panama-papers-revelations

[4] https://panamapapers.icij.org/20161201-global-impact.html

[5] http://www.fcpablog.com/blog/2017/4/12/shruti-shah-on-the-panama-papers-a-year-of-gains-for-transpa.html

[6] https://www.gov.uk/government/publications/anti-corruption-summit-country-statements

[7] https://www.theguardian.com/business/2016/apr/12/overseas-territories-spared-from-uk-law-on-company-registers

[8] http://uk.reuters.com/article/uk-eu-taxavoidance-malta-idUKKBN17924H

[9] https://www.theguardian.com/business/2016/apr/12/overseas-territories-spared-from-uk-law-on-company-registers

 

This article is provided for informational purposes only and should not be considered, or relied upon, as legal advice.

Tags: International

Frequently Asked Questions about Delaware Alternative Business Entities Annual Tax Payments

Posted by Colleen DeVries on Thu, Apr 20, 2017

PiggyBankDelaware_Fotolia_85305928_XS.jpgBy Colleen DeVries, National Corporate Research, Ltd.

Delaware Limited Partnerships, Limited Liability Companies, and General Partnerships formed or registered in Delaware are required to pay an annual tax of $300.00 to the State of Delaware no later than June 1, 2017.This annual tax covers the prior calendar year of existence. There is no requirement for these entity types to file an Annual Report.

By now you should have received the paper notice from your Registered Agent reminding you of that due date and the amount due. Below are some answers to frequently asked questions to help guide you with making your franchise tax payments and ensure you maintain the good standing of your Delaware Limited Partnership, Limited Liability Company or General Partnership. 

How Do I Pay My Franchise Tax?

Payment must be made directly to the State of Delaware.

You may pay online by credit card (Visa, Master Card, American Express, Discover) at: http://corp.delaware.gov/paytaxes.shtml

Or you may send a check, made payable to “State of Delaware,” to the following address (you must include the detachable payment stub at the bottom of the Tax Notice you received):

        Regular Mail:  State of Delaware

                                  Division of Corporations

                                  P.O. Box 5509

                                  Binghamton, NY 13902-5509

 

           Overnight:      J.P. Morgan Chase

                                    33 Lewis Road

                                    Birmingham, NY 13905

                                    Attention: State of Delaware, Division of Corporations - 5509

 

 

Payments by wire are not permitted. In addition, if you are paying by check, the State of Delaware will only allow you to include payment for up to 25 entities on a single check.

How Do I Find My Entity’s Business File Number?

You will need your entity’s business file number to pay your taxes online. The entity file number may be found on the notice you received from your Registered Agent, or on the Delaware Secretary of State’s entity search portal. Simply type the name of your entity into the search screen and you will receive a summary of the information on record in Delaware, including the file number. The link for the search portal is: https://icis.corp.delaware.gov/Ecorp/EntitySearch/NameSearch.aspx.

What Happens if I Fail to Pay My Franchise Tax?

Delaware will assess a penalty of $200.00 for non-payment or late payment plus interest which will accrue on the tax and penalty at the rate of 1.5% per month.

If franchise tax payment is not made for 3 consecutive years, the Delaware entity will be deemed void on the Secretary of State’s records. However, the Delaware statutes include provisions to allow you to reinstate the entity by filing a Certificate of Reinstatement and paying all past due taxes, penalties and interest. Your Registered Agent can assist you with this filing if needed.

What if I Have Questions About My Franchise Tax?

You can contact your Registered Agent or the Delaware State Franchise Tax Unit

For information regarding the annual franchise at 302-739-3073 or visit http://corp.delaware.gov.

 

This article is provided for informational purposes only and should not be considered, or relied upon, as legal advice.

Tags: Corporate Compliance

You Make Me Feel Like a… Natural Person?

Posted by Krystal Beckner on Thu, Apr 13, 2017

Many States Require a “Natural Person” as the Communications Contact for Your Company

Registered Agent Name Natural Person for Company.jpgBy Krystal Beckner, National Corporate Research, Ltd.

You’ve formed your company! You’ve crossed your t’s and dotted your i’s. You’ve named a registered agent, and you have identified who should receive any legal documents. You’re confident that you’ve complied with all of the many statutory requirements for forming and maintaining your company. And now, you’re being told you need a “Communications Contact” and that it must be a “natural person”. What?

What is a “Natural Person”?

No, this is not a twist on the old Aretha Franklin song “You Make Me Feel Like a Natural Woman” (though you may be humming to yourself right now). Rather, a “natural person” is a living person with a name, address and phone number. Most often, this individual will be an officer, director, employee or designated agent (other than the registered agent) of the company who is authorized to receive communications from the registered agent. A natural person is required to ensure that there is a particular individual designated as the “responsible party” for the company in the event a jurisdiction needs to communicate with the entity directly.

Which States Require a “Natural Person” Communications Contact?

There are currently four states that statutorily require the designation of a “real” or “natural person” to receive communications from their agent. These include:

  • Delaware
  • Kentucky
  • Wyoming
  • And most recently, Indiana

For these states in particular, you will be required to provide your registered agent with the name of a person designated as the Communications Contact. If a name is not provided, the registered agent may be required to resign its appointment.

Staying in Compliance

These states reserve the right to inspect the records of the registered agent at any time to make sure this information has been provided and is maintained. If the registered agent is found not to be in compliance, there could be serious consequences including the revocation of the authority to serve as an agent. 

To make sure you are in compliance and don’t face an unintended resignation by your registered agent, it is recommended that you provide the name and contact information for Service of Process (SOP), Tax, Billing and Communications -- regardless of the jurisdiction. (It is perfectly acceptable to have the same individual serve in multiple capacities.) By providing the information for all of these contacts, you can ensure not only that you are in compliance, but that all legal documents, notices, communications from the state and invoices are properly directed.

Now that you know what a “natural person” is, the next time you are providing contact info to your registered agent, will you start humming an Aretha Franklin song? 

 

 

This article is provided for informational purposes only and should not be considered, or relied upon, as legal advice.

Tags: registered agent services

Florida Annual Reports Due May 1st: Avoid Substantial Late Fee by Filing on Time!

Posted by Terri Lennon on Thu, Apr 06, 2017

By Terri Lennon, National Corporate Research, Ltd.

Florida Annual Reports.jpg

All companies authorized to do business (formed or qualified) in Florida are required to file an annual report every year on or before May 1st. The state allows filing of an annual report between January 1 and May 1 of each year.  Unlike most states, the due date is the same for all companies (corporations, limited liability companies, limited partnerships and limited liability limited partnerships), regardless of the business entity type or domicile state. 

Submit Your Report on Time to Avoid a Hefty Late Fee!

The state of Florida will immediately apply a $400 non-negotiable late fee to all companies that fail to file the annual report by midnight Eastern Standard Time on May 1, 2017. In addition to the late fee, the state will automatically administratively dissolve or revoke all companies that have not filed the 2017 report by September 15, 2017.

Nonprofit corporations are not subject to the $400 late fee.

Will I Receive a Reminder That the Report is Due?

The Florida Division of Corporations sends out e-mail notification of the upcoming due date. The first notification was sent in early January to the e-mail address listed on last year’s annual report. The state continues to send an e-mail notification at the beginning of every month until the company has filed the report or May 1, 2017 has passed.

The e-mail address on file with the state may be updated by sending a request to the Corporations Division at corpaddresschange@dos.state.fl.us. The request must include the company’s Document ID Number, the exact business name and the new e-mail address.

What are the Filing Requirements?

While the requirements for the Florida annual report are essentially the same as the requirements of other states’ annual or periodic reports, those responsible for corporate compliance should note that, as indicated above, the penalty for missing the deadline for Florida is significantly higher than in most other states.

All reports need to be filed electronically at www.sunbiz.org. The state no longer accepts annual reports in paper form. 

General Information Required for Filing:

  • Document (ID) Number: This can be found on the report notice or by searching the Division of Corporations’ records.
  • Federal Employer Identification Number (FEIN)
  • Address for principal place of Business
  • Mailing address (if different than principal place of business address)
  • Registered agent name and address (a business cannot serve as its own registered agent)
  • If the CFO is listed as the registered agent, this cannot be changed since each “authorized insurer” in Florida is required by Florida Statute 48.151 to designate the Chief Financial Officer as its registered agent for Service of Process.
  • Principals’ names and addresses
  • E-mail address:  An acknowledgment confirming that the report has been accepted will be sent to the e-mail address listed on the report. This e-mail address will also receive future notification when the next annual report is due.

Cost and Payment Methods
Florida annual report fees vary based on entity type: 

  • For Profit Corporation: $150
  • Nonprofit Corporation: $61.25
  • Limited Liability Company: $138.75
  • Limited Partnership or Limited Liability Limited Partnership: $500

Payment may be made by credit card (Visa, Master Card, American Express or Discover), check or through a Sunbiz E-File Account (a pre-established Department of State payment account). Check and money order payments may only be submitted if they are accompanied by a Department of State check payment voucher.

How Long Does it Take for my Annual Report to Post on the State’s Website?

If filed online via credit card, the reports are processed and posted immediately. 

If paying by check or money order, allow 3-5 business days (longer during peak periods) for processing.

How Do I Make Changes if I Have Already Filed This Year’s Annual Report?

If the company is a corporation or LLC – you may file an amended annual report electronically.

  • Profit or Nonprofit Corporation: $61.25
  • Limited Liability Company: $50.00

If the company is a limited partnership or limited liability limited partnership, download and complete an amendment form. Mail the form and fee to the Division of Corporations.

Where Can I Find Additional Information?

If you have questions or need more information, here are some resources you can turn to:

 

This article is provided for informational purposes only and should not be considered, or relied upon, as legal advice.

Tags: Annual Reports

Which States Require Charitable Solicitation Registration for Nonprofits?

Posted by Ron Barrett on Mon, Apr 03, 2017

By Ron Barrett, National Corporate Research, Ltd.

charitable_solicitation-resized-600.jpgCharitable nonprofits frequently think they need to register to solicit donations in all 50 states.  Fortunately, not all states require this. The number of states that do require charitable solicitation registration varies in some circumstances (e.g., depending on the type of organization) and sometimes you’ll find conflicting information when searching for the exact states where this is required. In this post, we’ll clarify which states require charitable solicitation registration, along with a few notable exceptions, for most charities.  Keep in mind though, that registering to solicit is not the same as filing for a business license or qualifying to transact business in a state (i.e. qualify as a foreign nonprofit by filing an Application for Certificate of Authority to Transact Business).  With few exceptions, this is not required when a charity’s only nexus (or connection) with a state is fundraising via phone, email, direct mail or online (See our previous blog postWhat Types of Registrations are Needed When a Nonprofit is Fundraising in Multiple States?).

States That Require Charitable Solicitation Registration and Renewal
Currently, 37 states and D.C. broadly require charitable solicitation registration and renewal, unless a specific exemption applies. Exemptions vary greatly in each state, but most exempt religious organizations (e.g. churches and synagogue) and many exempt educational institutions (e.g. colleges and universities) and hospitals. However, there are frequently exceptions to the exemptions, and thus, a careful reading of each state’s requirements is needed.

States That Do NOT Require Charitable Solicitation Registration
There are 9 states that do not require charitable registration: Delaware, Iowa, Idaho, Indiana, Montana, Nebraska, South Dakota, Vermont & Wyoming. Texas has limited registration requirements that are only applicable to law enforcement, public safety and veterans organizations. Arizona requires charitable veterans organizations to register if they are solictiging money or other support in the state. Finally, Louisiana only requires registration if a charity engages paid, professional solicitors to fundraise in their state, while Missouri exempts 501c3, 501c7 and 501c8 organizations, upon application.

Summary
In summary, to comply with state charitable solicitation laws, a 501c3 charity that is not a law enforcement, public safety or veterans organization and that does not use the services of a professional solicitor and that is not otherwise in an exempt category, is required to register in 37 states and D.C., and to file a one-time exemption in Missouri. 

 

This article is provided for informational purposes only and should not be considered, or relied upon, as legal advice.

Tags: Compliance, Nonprofit, Nonprofit Compliance, Charitable solicitation registration, Due Diligence, Good Standing