Ignored Piece of Legislation

Under the International Investment and Trade in Services Survey Act of 1976 (the “Act”), a U.S. enterprise in which a foreign entity directly or indirectly acquires a 10-percent or more voting interest must file reports with Bureau of Economic Analysis ("BEA"), an agency of the U.S. Department of Commerce. The regulations encompass a wide range of legal structures, such as mergers, acquisitions, asset purchase and stock acquisitions. Though the Act is in effect since 1976, the compliance with these filings has been made mandatory since 2003, whereby penalties were prescribed for non-compliance (ranging from US $2,500 to US$25,000) and imprisonment for up to one year in case of willful failure to file.

Despite this law being in force for than half a decade, many foreign companies establishing a business in the U.S. or the existing U.S. companies having its voting interest held by a foreign entity are not filing these mandatory periodic filings with the BEA. It is disquieting to note that such a pivotal piece of legislation has been flagrantly ignored because many lawyers and other intermediaries in a transaction are not aware of such regulations and continue to believe the compliance is elective in nature. In fact, the Act casts an obligation simultaneously upon the intermediaries[1] along with the Company to make filings under their own name. It is therefore imperative that lawyers are aware of these regulations and are able to advise their clients on the consequences for ignoring this piece of legislation.

For the sake of brevity, the report includes the following forms:

a. Initial reports (Form BE-13)- This report is filed for reporting on a foreign person's direct or indirect acquisition, of a U.S. business enterprise.[2] This report must be filed within 45 days after the transaction is concluded. Such a report must be filed if, (1) “the total assets of the newly created or acquired entity are more than $3 million, (2) the cost of the transaction is more than $3 million, or (3) the transaction involves the acquisition of 200 or more acres of U.S. land.”[3]

However, if the above listed thresholds are not met in a given transaction, then Form BE- 13 Supplement C (exemption form), claiming exemption to file BE-13 should be filed by a U.S. enterprise.

This report requires the Company to provide information such as type of transaction, identification of U.S. business enterprise, financial and operating data of the U.S. enterprise, industry classification, identification of foreign parent and ultimate beneficial owner and the cost of investment.

b. Quarterly reports (Form BE-605) - U.S. business enterprise in which a foreign person had a direct and/or indirect voting ownership interest of at least 10 percent at any time during the quarter is required to file this report every quarter. However, the U.S. enterprise is not required to report if the total assets, annual sales or gross operating revenues, and annual net income of the U.S. enterprise/U.S. affiliate are $30 million or less.

A U.S. enterprise/affiliate that meets the exemption criteria stated above must file a Certification of Exemption. The quarterly reports require the Company to disclose the information about the U.S. Company, information of the foreign parent and foreign affiliates of the foreign parent company, foreign parent’s direct equity share in the U.S. Company, etc.

c. Annual reports (Form BE-15) - The U.S. company/affiliates is required to file this report if a foreign person owns or controls a ten-percent-or-more voting interest, as of the end of the fiscal year. Depending upon the total value of the assets, sales or gross operating revenues, or net income, the Company would have to file either form BE-15 (long form) or form BE-15 (short form). The annual report requires the Company to disclose information about its total revenues, total assets, income, liability, cost, expenses, details about its affiliation with foreign group, etc.

d. Quinquennial reports (Form BE-12) - The quinquennial BE-12 Benchmark Survey is a comprehensive survey which is conducted once every 5 years. Depending upon the total value of the assets, sales or gross operating revenues, or net income, the Company would have to file either file BE-12 (long form) or BE 12 (short form). However, if the threshold limits are not met as prescribed in the above forms, then the Company may file an exemption as provided in the Form BE- 12 Mini.

The Act lays down that reports filed with BEA are confidential and may be used for analytical and statistical purposes only. The reports cannot be used for purposes of taxation or investigation by the U.S. government.

Though the underlying objective of the Act is to collect information on foreign investment in the United States, a detailed and complicated filing may only deter the companies from filing as the compliance cost of such regulations may be more than the civil penalties prescribed by the Act. The law has its own shortcomings and redundant objectives (topic for the next entry on this blog). None the less, this is not to say that companies are not subject to rigid and potentially burdensome regulatory filings.
[1] Intermediary include an intermediary, a real estate broker, business broker, and a brokerage house- who assists or intervenes in the sale to, or purchase by, a foreign person or a U.S. affiliate of a foreign person, of a 10 percent or more voting interest in a U.S. business enterprises, including real estate.
[2] It also includes establishment of a new entity and/or purchase of the operating assets.
[3] Report published by the Bureau of Economic Analysis (April 2008), U.S. Department of Commerce, Economics and Statistics Administration.