December 16, 2013
Private Equity and M&A Alert
Author(s): Alexandra Lopez-Casero
U.S. businesses in which a non-U.S. entity or individual owns a 10% or more direct or indirect voting interest should submit periodic reports to the Bureau of Economic Analysis (BEA), an agency of the U.S. Department of Commerce. BEA provides closely watched data about the U.S. economy, including the U.S. gross domestic product and consumer spending. It also tracks foreign direct investment in the U.S. through quarterly, annual and 5-year surveys. Participation has so far been mandatory for all U.S. businesses that are 10% or more owned by a non-U.S. entity or individual. Exemptions exist below certain financial thresholds, but companies must submit abbreviated filings to claim an exemption. Although the BEA reporting requirements have been in place for years and businesses can be fined up to $25,000 for non-compliance, many U.S. businesses are not aware of them. BEA reporting is also relevant for U.S. private equity funds with foreign investors that own a 10% or more direct or indirect voting interest.
Newly formed U.S. businesses should file an initial Form BE-605 if a non-U.S. entity or individual owns a 10% or more direct or indirect voting interest (or an equivalent interest in an unincorporated business). BEA refers to this 10% or more interest as a “Direct Investment.” Existing U.S. businesses should also file an initial Form BE-605 when a non-U.S. entity or individual acquires a Direct Investment. A separate form should be filed for each foreign parent with a Direct Investment in the underlying U.S. business. U.S. businesses with a majority voting interest of more than 50% in other U.S. businesses should file a consolidated report. Reports are due 30 days after the end of the quarter when the formation or acquisition that triggered the filing requirement took place. For example, if a foreign parent forms a U.S. company on December 15, 2013, the U.S. company would need to submit Form BE-605 by January 31, 2014.
First time filers whose (1) total assets, (2) sales or gross operating revenues and (3) net income or loss were each equal to or less than $60 million (positive or negative) for the most recent 12-month period may only file the exemption portion of Form BE-605. U.S. businesses that have not been in existence for a full 12-month period must project these amounts for the first full year of operations to determine whether they can claim the exemption.
Quarterly reports (also through Form BE-605) are due 30 days after the end of each calendar or fiscal quarter, except the report for the fourth quarter, which may be filed within 45 days. The exemption threshold is again $60 million. Following an initial Form BE-605 filing, a U.S. business does not need to proactively claim the exemption from quarter to quarter as long as it continues to meet the stated exemption criteria.
An annual report (Form BE-15) covering a reporting company’s fiscal year that ended during the previous calendar year is due by May 31 of the following year (or by June 30 for reporting companies that use BEA’s eFile system). There are different BE-15 forms that should be filed depending on the size of the Direct Investment(s) and whether certain financial thresholds are met. U.S. businesses may only file the exemption portion of Form BE-15 if (1) the foreign person’s voting interest falls below 10%, (2) the U.S. business is fully consolidated or merged into another U.S. business or (3) if the U.S. business’s total assets, annual sales or gross operating revenues and annual net income (loss) were each equal to or less than $40 million (positive or negative) for the most recent financial reporting year. As with the quarterly filings, following an initial annual filing, a U.S. business does not need to proactively claim the exemption every year as long as it continues to meet the stated exemption criteria.
Finally, there is also a 5-year benchmark report (Form BE-12). This is BEA’s most comprehensive survey of foreign direct investment in the U.S.; it is filed in lieu of the then applicable annual report. The last benchmark year was 2012. The next benchmark year will be 2017. The current threshold amount for the 5-year filing is $60 million, but generally it is adjusted upward every five years. Businesses that are below the threshold must file an exemption form to be exempt from filing a full report.
U.S. businesses with Direct Investments that have not yet filed BEA reports should familiarize themselves with the BEA forms and filing requirements. The forms are available at BEA’s website, which also contains FAQs and other useful information: http://www.bea.gov/surveys/fdiusurv.htm.
Under a new rule that BEA will implement in 2014, participation in the 5-year benchmark report (Form BE-12) is mandatory for all U.S. businesses with Direct Investments. But participation in the quarterly and annual surveys technically will only be mandatory for U.S. businesses that BEA has notified. Companies should be careful not to view this as an “out” of the filing obligations. BEA mails notifications to large numbers of companies as it learns of transactions through other government agencies, the business press and other sources. BEA views the mere mailing of a letter to an address that BEA deems to be a company’s business address as a “notification,” regardless of whether the address is still current and whether the addressee actually receives the letter. BEA has been notifying companies all along of the BEA filing requirements. But many companies do not realize that they have been notified, either because the letter is lost, misplaced or not properly understood. The best approach, particularly for U.S. companies with a sizeable Direct Investment, is to proactively file—rather than to risk an enforcement action—if BEA later claims that it had in fact notified the company. The next filing deadline for initial and quarterly reports is January 31, 2014.
BEA also tracks U.S. direct investment abroad. A separate alert will cover the filing requirements that apply to those investments.
The foregoing has been prepared for the general information of clients and friends of the firm. It is not meant to provide legal advice with respect to any specific matter and should not be acted upon without professional counsel. If you have any questions or require any further information regarding these or other related matters, please contact your regular Nixon Peabody LLP representative. This material may be considered advertising under certain rules of professional conduct.
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