FinCEN Suspends Enforcement of CTA Against U.S. Citizens and Domestic Reporting Companies
Article highlights:• Treasury Dept. will no longer enforce CTA reporting requirements against U.S. citizens and domestic companies• Future rule changes expected to limit reporting requirements to foreign entities• March 21, 2025, filing deadline no longer relevant for U.S. businesses
The Corporate Transparency Act (CTA) has taken yet another dramatic turn. As previously reported, the final nationwide injunction against enforcement of the CTA was lifted on February 17th. Days later, FinCEN announced another 30-day extension of the filing due date, making the new deadline March 21, 2025. However, on March 2, 2025, the Treasury Department announced it would suspend enforcement of the CTA’s beneficial ownership information (BOI) reporting requirements for U.S. citizens and domestic reporting companies, even if those companies failed to meet the previously extended March 21st filing deadline. The agency said that it intends to issue new rulemaking proposals to focus the CTA’s enforcement solely on “foreign reporting companies.” It remains to be seen whether enforcement would include foreign individuals/entities holding ownership interests in domestic reporting companies — as presumably intended by the original law.
What does this mean?Because FinCEN will not enforce the CTA reporting rules against domestic businesses, the March 21 deadline for BOI filings is effectively no longer relevant for most entities. The Treasury Department has not yet provided a timeline for issuing its proposed rule changes. However, even though the Treasury has decided not to enforce the CTA right now, the underlying statute remains in effect — meaning Congress will still need to take some action to repeal or modify the existing law. How and when that might happen remains to be seen.
We will continue to monitor and provide updates as new information becomes available. In the meantime, for those who still have questions about their reporting obligations, stay up to date by monitoring the Chuhak Newsroom regularly or contact a member of our CTA team for the latest guidance.
The Salaried Members Rules and the ‘Significant Influence’ Test – Does the BlueCrest Case Affect Me (As a Partner) or My Firm?
Salaried Members Rules
Limited liability partnerships or “LLPs” are common corporate vehicles utilised by the financial services sector to establish UK investment management operations and other financial businesses and, more recently, implement carried interest structures or act as fund investment/feeder vehicles. The most contentious aspect, and the subject of this client alert, has been the use of LLPs as business operating vehicles. As well as being more flexible than limited companies, in that it is easy to admit members and for them to leave the LLP, they are also commercially competitive since members (colloquially referred to as “partners”) of LLPs benefit from self-employed tax status.
When the Limited Liability Partnership Act 2000 introduced LLPs, it was relatively straightforward to become a member and benefit from self-employment status for tax purposes. The principal tax benefit was that partnership profit drawings are not subject to the employer’s national insurance contributions (NICs), currently 13.8 percent and rising to 15 percent on 6 April 2025, which applies to employee and director remuneration.
The Salaried Members Rules (Rules) were introduced in 2014 to tackle what HM Revenue and Customs (HMRC) perceived as widespread avoidance of employer NICs via “disguised employment” through LLPs. The Rules are intended to ensure that members of LLPs who provide services on terms more like those employees rather than self-employed partners are treated as employees for tax purposes.
Under the Rules, LLP members are deemed to be “disguised employees” of an LLP if an individual meets all three of the following conditions:
Condition A – 80 percent of the member’s profit share is “disguised salary,” i.e., remuneration that is fixed, or variable without relation to the overall profits of the LLP, or not in practice affected by those profits;
Condition B – the member does not have significant influence over the affairs of the LLP; and
Condition C – the member’s capital contribution to the LLP is less than 25 percent of their “disguised salary.”
If all the conditions are met, the member will be treated as a disguised employee or “salaried partner,” subject to the normal income tax and NICs deductions under Pay As You Earn (PAYE). Critically, the LLP itself will be obliged to pay the employer’s NICs with respect to that “disguised employee” or salaried partner.
On the other hand, if an individual fails any one or more of the above conditions, they will be treated as a partner (i.e., as self-employed) for tax purposes, and no employer’s NICs will be payable by the LLP, so somewhat counter-intuitively, it is a “good thing” to fail a condition if the aim is to be taxed as self-employed.
HMRC v BlueCrest Capital Management (UK) LLP
The interpretation of the Rules has been the subject of ongoing disagreement between industry and HMRC. One principal area of contention related to Condition B which relates to the “significant influence” over the affairs of the partnership. Given that the LLP legislation does not define the meaning of “significant,” HMRC has been issuing fairly extensive guidance setting out its view of the concept mainly via practical examples. However, on several occasions, HMRC has subsequently amended its guidance, which has generally created a disadvantage for the taxpayer.
The first time that the interpretation of Condition B came before the English courts was in the case of HMRC v BlueCrest Capital Management (UK) LLP. BlueCrest sought to claim that a number of its members should not be taxed as employees, while HMRC sought to invoke the “salaried member” legislation to claim that they should be. It is fair to say that in both tax tribunals, the taxpayer prevailed in its challenge of HMRC’s guidance on Condition B, including that influence over the LLP’s affairs did not mean the LLP as a whole.
The case was most recently heard by the Court of Appeal (CoA), which considered the scope of Condition B. The CoA focused on whether an individual member has “significant influence” over the affairs of the LLP and whether Condition B could be failed if the member only had influence over a part of the affairs of the LLP (as opposed to the whole affairs of the LLP). The CoA stated that significant influence over the whole affairs of the LLP is likely to be had in cases where the individual is part of the strategic decision-making function of the LLP. By contrast, if the individual only has influence over the financial matters of the LLP, for example, then this is likely to be controlled only over part of the LLP, and therefore, Condition B would not be failed.
The CoA judgment stated that Condition B would only be failed if (i) a member has significant influence over the whole affairs of the LLP; and — critically — (ii) that authority must be rooted explicitly in the LLP agreement itself.
This decision overturned that of the lower courts by confirming that the scope for failing Condition B is much narrower than previously thought. Notably, the CoA rejected the parties’ agreed interpretation of Condition B, which was that significant influence could include de facto influence outside the provisions of the LLP agreement. In other words, the CoA ignored the position which — notwithstanding disagreements as to certain aspects — both industry and HMRC had been labouring under via the HMRC guidance since the legislation came into force. The case has now been remitted to the First Tier Tribunal for another review of the facts in light of the CofA’s construction of Condition B, and BlueCrest has requested leave to appeal to the Supreme Court. As a result, this issue likely has a long way to go before it is finally resolved.
What Should LLPs Do In the Meantime?
This case will be particularly important for those LLPs who have relied on failing Condition B in their assessment of whether the LLP’s members are true members.
In our experience, professional services firms have tended to rely predominantly on failing Condition A or C, so this decision may not require you to revisit your assessment of the Rules. However, if failure of Condition B has been central to your analysis (as is often the case of larger investment management firms), we recommend the following next steps:
Review your LLP agreement to understand how significant influence is articulated in the agreement;
Consider whether it is possible or necessary to rely on either Condition A or C being failed instead of Condition B; and/or.
Consider whether any shares or partnership interests have been issued to LLP members in any investment vehicles because “salaried member” treatment could turn these into employment-related securities (which may have different tax treatment).
Thinking of Selling Your Med Spa? Here Are Six Things to Do to Prepare
Numerous legal, regulatory and operational issues will arise when selling a med spa. Proper preparation by ensuring the business is regulatory compliant, assembling the right group of professionals and documents will save time and costs and ensure that the transaction is as smooth as possible.
Ensure your business is properly organized and licensed
You should ensure that the business complies with applicable law from a structural and regulatory standpoint. Illinois follows the legal doctrine known as the “corporate practice of medicine,” which requires that a facility that provides medical services be owned solely by a physician or a physician-owned entity. It is important to analyze the scope of services being provided by your med spa to determine if you are compliant with Illinois law.
If a med spa is not organized in a compliant manner, it could cause issues for the med spa from a legal and regulatory standpoint and raise flags for the purchaser. In such a case, it would be prudent to restructure the entity to comply with applicable law. Such restructuring may include creating a management service organization (MSO) structure, in which a new non-medical MSO is created to perform all non-clinical services with respect to the med spa entity. These non-clinical services may include human resource matters, marketing, payroll, billing, accounting, real estate issues, etc. It is important that any MSO arrangements, including compensation structures, be carefully structured to comply with applicable law. The MSO structure is critical for any med spa with a non-physician owner that intends to render services that may constitute the practice of medicine.
Review the business’s governing documents
It is crucial that the med spa’s governing documents are complete and accurate. A sophisticated purchaser will review the business’s articles of organization or incorporation, operating agreement or bylaws and timely filed annual reports. A purchaser will raise issues and have concerns if a med spa cannot provide complete and accurate corporate records.
The owner of a med spa with multiple shareholders or members selling the business via an asset sale should review the bylaws or operating agreement to confirm the percentage of owners that must agree to the sale in order for it to occur. The sale of all or almost all of the business assets is a standard situation that requires majority consent.
A business owner intending to sell via a stock or membership interest sale should review all governing documents to confirm whether there are drag-along or tag-along rights. A drag-along right allows the majority shareholder of a business to force the remaining minority shareholders to accept an offer from a third party to purchase the entire business. There have been situations where a minority shareholder objects to the sale and prevents it altogether. A tag-along right is also known as “co-sale rights.” When a majority shareholder sells their shares, a tag-along right will allow the minority shareholder to participate in the sale at the same time for the same price for the shares. The minority shareholder then “tags along” with the majority shareholder’s sale. Any drag-along or tag-along rights provided in the business’s governing documents should be addressed as soon as possible to ensure such rights are provided and to deal with any disputes.
Retain an attorney at the onset of the transaction
After a med spa is offered for sale, a purchaser may prepare and submit a letter of intent (LOI) for the med spa’s review and approval. A LOI is a legal document that sets forth the form of the transaction (whether it’s an asset or stock sale), purchase price, manner of payment, deposit terms, transaction conditions, due diligence terms and timeline, choice of law and other relevant terms of the sale. Business owners often make the mistake of not engaging an attorney until after the LOI has been signed. By failing to retain an attorney to negotiate the LOI, a business owner may be stuck with unfavorable terms or may have missed the opportunity to ask for something valuable at the onset, including taking into account tax implications of the proposed deal structure.
Engaging an attorney can save significant costs and time because imperative business issues can be discussed and agreed upon in the early stages and if the parties cannot come to an agreement, they can go their separate ways as opposed to wasting time, costs and the efforts involved with both negotiating a purchase agreement (PA) and conducting due diligence. Using an attorney will also ensure that the LOI contains a timeline or expiration so that if the sale is not completed by a certain time, the med spa can move onto another interested party without issue. The LOI will continue to be a material part of the entire transaction even as the PA is negotiated. If something is agreed upon in the LOI and one party tries to differ from the LOI terms during the PA negotiation, the other party will point to the LOI for support — often successfully.
Gather information on financials and assets
One of the most important and lengthy parts of any business sale is due diligence. Due diligence is the process in which the purchaser requests to review various documents, data and other information in order to familiarize itself with the business’s operations, background and to identify potential liabilities or issues related to the business or transaction’s closing. The results of the due diligence process can cause the purchaser to react in a variety of ways, from requesting more documents, a reduction of the purchase price or terminating the transaction altogether. Some of the critical documents a purchaser will request access to include the med spa’s tax returns, income statements, balance statements, a list of accounts receivable, accounts payable, a list of inventory and a list of personal property and equipment. A med spa owner can do itself a huge favor by gathering such documents and saving them electronically in an organized fashion. This way they can be easily sent to the purchaser or uploaded to a data site. The med spa and/or med spa owners will also have to make representations and warranties based upon the accuracy and completeness of such documents so it is in the med spa’s best interest to have organized and complete files.
Gather existing contracts
Another standard due diligence request from a purchaser is to review all of the med spa’s existing contracts, purchase orders, vendor and supplier agreements. The purchaser will want to determine, among other things, what work is ongoing and what liabilities and expenses it can expect. A med spa owner considering a sale should gather and save all of such agreements electronically and in an organized manner so they can be easily uploaded for the purchaser’s review.
Consider third party consents
The business’s existing agreements will need to be reviewed to see if they are assignable or able to be terminated as the purchaser will likely want to assume some and terminate others. Therefore, it is imperative that a med spa identify and understand the assignment, change of control and termination provisions of all existing contracts so that they can plan ahead and be prepared to take action at the appropriate time. A med spa owner should review existing agreements, including leases for such provisions, to identify whether an agreement can be assigned or terminated and, if so, what is required for each assignment or termination.
Typically, an agreement requires a certain number of days’ notice to the third party or the third party’s written consent to assign the contract from the med spa to the purchaser. For stock sales, the med spa should identify whether the existing agreements have change of control provisions. If consent of the third party is required then it may be prudent for the med spa to contact the third party as soon as possible to determine whether the other party is willing to consent, subject to coordination with the purchaser and appropriate confidentiality protections. For contracts that a purchaser may not want to assume, a med spa should review the termination provisions and identify if there are any fees or penalties for termination. Closings can be delayed over a med spa’s failure to receive an important third party consent. This issue arises often with landlords that do not wish to consent to the assignment of the lease from the med spa to the purchaser.
U.S. Consumer Privacy Laws Taking Effect in 2025 and Ensuing Compliance Complexities
The United States continues to operate without a comprehensive federal consumer privacy law as the American Privacy Rights Act remains subject to further amendments and uncertainty. Consequently, nineteen states enacted comprehensive consumer privacy legislation, of which eight are becoming or have become effective in 2025, and some existing state privacy laws have been amended since their enactment. This fragmented approach creates compliance complexities and operational considerations for organizations operating at state and national levels.
Comprehensive consumer privacy laws taking effect in 2025
Effective date
State comprehensive consumer privacy laws
January 1, 2025
• Delaware Personal Data Privacy Act• Iowa Consumer Data Protection Act• Nebraska Data Privacy Act• New Hampshire Senate Bill 255
July 1, 2025
• Tennessee Information Protection Act
July 31, 2025
• Minnesota Consumer Data Privacy Act
October 1, 2025
• Maryland Online Data Privacy Act
General requirements across each law
Each state law mandates distinct, jurisdiction-specific obligations on regulated organizations, which generally include the following:
Consumer rights: Each state law grants consumers certain privacy rights. While consumers’ privacy rights vary from state to state, consumers may be granted the right, subject to certain exceptions, to: (1) access, correct and delete data that an organization collects from or about them; (2) opt-out of further data processing; (3) the right to data portability and to direct the transfer of their personal information; and (4) the right to restrict and limit the use and disclosure of sensitive personal information.
Organizational compliance obligations: Each state law also imposes certain obligations on regulated entities acting as a data controller (i.e., an entity that controls the purpose and means of processing personal data) and data processors (i.e., third parties that process data under the direction and control of data controllers, such as service providers or vendors). Regulated organizations acting as data controllers may be obligated to, among other things, respond to consumer privacy requests, implement reasonable technical and organizational security measures, provide consumers with a notice of privacy practices and a mechanism through which consumers may opt out of data processing.
Key compliance considerations
In light of the complexities highlighted above, organizations should reflect on the following compliance considerations:
Whether your organization’s corporate policies are compliant with new privacy legislation.
With several new legislative updates, organizational corporate policies, such as privacy policies and privacy notices, may become dated and/or noncompliant with the most recent and looming updates. It is recommended practice for organizations to routinely evaluate their corporate policies to ensure compliance with any updated regulatory requirements and implement changes to the extent necessary.
Whether your organization is equipped to respond to consumer privacy requests.
Responding to consumer privacy requests may be problematic for organizations operating across multiple states due to variance among consumer privacy rights, related nuances and exceptions. Organizations should evaluate the various privacy rights and exceptions, if any, in states in which they operate and establish a playbook to implement an efficient and effective response.
Whether your organization is exempt from compliance.
Some privacy laws provide for entity-level and data-level exemptions, subject to certain nuances. An entity-level exemption generally exempts an organization based on the type of entity. For example, some states include an entity-level exemption for not for profit corporations or entities regulated by certain federal laws, such as the Health Insurance Portability and Accountability Act (HIPAA). A data-level exemption exempts certain data that is subject to regulation under certain federal laws, such as HIPAA and the Gramm-Leach-Bliley Act.
In addition, some states have an operational threshold that an organization must meet or exceed to be subject to the relevant act. For example, in Delaware, an organization must (1) do organization in the state or produce products or services that are targeted to Delaware residents, and (2) one of the following must apply: (i) control or process personal data of 35,000 or more consumers, excluding personal data controlled or processed solely for the purpose of completing a payment transaction or (ii) (a) control or process personal data of 10,000 or more consumer and (b) derive more than 20% of its gross revenue from the sale of personal data.
Organizations should evaluate whether they may be exempt from certain state laws and, if so exempt, how that might impact their corporate policies and go-to-market strategies.
Federal Circuit Expands Scope of Activities That Can Establish a ‘Domestic Industry’ Under Section 337
On March 5, the US Court of Appeals for the Federal Circuit issued a decision in Lashify, Inc. v. International Trade Commission, No. 23-1245, vacating in part the International Trade Commission’s (ITC) determination that Lashify failed to satisfy the economic prong of the Section 337 domestic industry requirement and affirming in part the finding that Lashify failed to satisfy the technical prong of the domestic industry requirement.
This ruling expands the types of activities that a complainant can use to establish a domestic industry, including domestic sales, marketing, warehousing, quality control, and distribution activities.
Background
Lashify, Inc. filed a Section 337 complaint at the ITC, alleging that importers infringed three patents (one utility and two design patents) covering artificial eyelash extensions. The ITC found no Section 337 violation because Lashify failed to establish a domestic industry. For the economic prong, the ITC excluded Lashify’s evidence about expenses relating to sales, marketing, warehousing, quality control, and distribution. Without that evidence, the ITC held that Lashify failed to establish a “significant employment of labor or capital” domestically under 19 U.S.C. § 1337(a)(3)(B). The ITC excluded many expenses such as warehousing, quality-control, and distribution because there were “no additional steps required to make these products saleable” upon arrival into the United States, and because the quality-control measures were “no more than what a normal importer would perform upon receipt.” Further, the ITC excluded sales and marketing expenditures because “Lashify did not meet its burden to establish significant qualifying expenses in other areas.” Lashify appealed.
Federal Circuit Decision
Economic Prong of the Domestic Industry Requirement
The Federal Circuit vacated the ITC’s ruling that Lashify failed to establish a domestic industry under 19 U.S.C. § 1337(a)(3)(B) because the ITC improperly excluded Lashify’s expenditures on sales, marketing, warehousing, quality control, and distribution. The court explained that Section 337(a)(3)(B) requires a “significant employment of labor or capital” without any limitation of the type of activities that could constitute labor or capital. The statute does not exclude sales, marketing, warehousing, quality control, or distribution activities, nor does it require such activities to be tied to employment or manufacturing considerations.
The court further clarified that there is no requirement that a stock of accumulated goods be manufactured domestically. As long as the activities relate to providing the goods or services in demand in a domestic economy, they can be counted toward the domestic industry requirement. The court also cited with approval its previous decision in Wuhan Healthgen Biotechnology Corp. v. International Trade Commission, No. 2023-1389 (Fed. Cir. Feb. 7, 2025), which held that smaller market segments can still be significant and substantial enough to meet the domestic industry requirement.
The ruling marks a departure from the ITC’s longstanding approach of excluding certain types of expenditures as insufficient to establish a domestic industry absent domestic manufacturing. The Federal Circuit’s reasoning opens the door for more Section 337 actions by companies that design products in the United States but manufacture them abroad, as long as they make significant domestic investments in activities such as marketing and distribution.
Technical Prong and Claim Construction
The court affirmed the ITC’s construction of the claim term “heat fused,” holding that the artificial hairs in Lashify’s products must be “joined by applying heat to form a single entity.” Based on this construction, the court upheld the ITC’s finding that Lashify’s products, which use a heated adhesive instead of actually using heat to bond hairs, did not meet the technical prong.
Key Takeaways
Expanded Scope of Domestic Industry: The decision clarifies that Section 337 complainants may rely on investments or expenses in sales, marketing, warehousing, quality control, or distribution activities to establish a domestic industry. This expands the types of activities, investments, or expenses that a complainant may use in satisfying the economic prong of the domestic industry requirement.
No Absolute Dollar Requirement: The decision reinforces the notion that the economic prong analysis considers whether investments or expenses are significant and substantial enough relative to the company’s US footprint, and not the absolute dollar values of the investments themselves.
Potential Impact on Foreign Companies: The decision is not limited to US companies. It potentially allows a foreign company to satisfy the domestic industry requirement if it invests in US distribution and marketing efforts.
Common Privacy Pitfalls in M&A Deals
Many expect that deal activity will increase in 2025. As we approach the end of the first quarter, it is helpful to keep in mind privacy and data security issues that can potentially derail a deal. We discussed this in a webinar last week, where we highlighted issues from the buyer’s perspective. We recap the highlights here:
Take a Smart Start Approach: Often when privacy “specialists” are brought into deals, it is without a clear understanding of the goal of the deal and post-acquisition plans. Keeping these in mind can be crucial to conducting appropriate and risk-based diligence. (Along with having a clear understanding of the structure of the deal.) Questions to ask include the extent to which the target will be integrated into the buyer. Or, whether privacy assets (mailing lists) are important to the deal.
Conducting Diligence: Diligence can happen on a piece-meal basis. There are facts about the target that can be discovered even before the data room opens. What information has it shared about operations and products on its website? Has there been significant press? Any publicly-announced data breaches? What about privacy or data security related litigation? When submitting diligence question lists, keep the scope of the deal in mind. What are priority items that can be gathered, and how can that be done without overwhelming the target?
Pre-Closing Considerations: There are some obvious things that will need to happen before closing, like reviewing and finalizing deal documents and schedules. There may also be privacy-specific issues, such as addressing potential impediments to personal information transfers.
Post-Closing Integration: In many deals, the privacy and cybersecurity team is not involved in the integration process. Or, a different team handles these steps. Issues that might arise- and can be anticipated during the deal process- include understanding the data and processes that will be needed post integration, and the personnel who can help (whether at the target or buyer).
Putting It Into Practice: Keeping track of the intent of the deal and the key risks can help the deal flow more smoothly. This checklist can help with your next transaction.
New Jersey and New York Lawmakers Propose New Limits on Restrictive Covenants
For years, New York and New Jersey legislators have proposed various measures that would prohibit or restrict employers from using non-compete agreements that may restrict employees’ future employment opportunities. This GT Alert discusses two bills, New York Senate Bill S4641 and New Jersey Senate Bill S1688, which propose changes to the landscape of restrictive covenants in these states.
New York Senate Bill S4641
On Feb. 10, 2025, the New York Senate introduced S4641 in response to Gov. Hochul’s veto of a prior non-compete bill (S3100A) in December 2023. Bill S4641 would add Section 191-d to the New York Labor Law, prohibiting employers from requiring any “covered individual” to enter into a non-compete agreement. The bill defines a “covered individual” as any person other than a “highly compensated individual” who, with or without an employment agreement, performs work or services for another person, “in a position of economic dependence on, and under an obligation to perform duties for, that other person.” “Highly compensated individuals” are those who are paid an average of at least $500,000 per year.
The bill would also prohibit use of post-employment non-compete agreements with regard to “health care professionals, regardless of the individual’s compensation level. Most health care providers who are licensed under New York law may fall under S4641’s definition of “health related professionals.” The law would permit employers to enter into agreements, even with covered individuals or a health care professional, which (1) establish a fixed term of service and/or exclusivity during employment; (2) prohibit disclosure of trade secrets; (3) prohibit disclosure of confidential and proprietary client information; or (4) prohibit solicitation of the employer’s clients.
The bill would also permit non-compete provisions as part of agreements to sell the goodwill of a business or to dispose of a majority ownership interest in a business, by a partner of a partnership, member of a limited liability company, or an individual or entity owning 15% or more interest in the business. Such non-compete agreements would still need to meet the common law test as to reasonableness in time and geographic scope, a necessity for protection of legitimate business interests, and lack of harm to the public.
S4641 would create a private right of action, allowing covered individuals who are subject to a prohibited non-compete agreement to file claims in court. If the employer is found to have violated the new Section 191-d, a court may void the non-compete agreement, prohibit the employer from similar conduct going forward, and order payment of liquidated damages, lost compensation, compensatory damages and/or reasonable attorneys’ fees and costs to the employee. The bill caps liquidated damages at $10,000 per impacted individual but permits a court to award liquidated damages to every claimant.
New Jersey Senate Bill S1688
In New Jersey, the Senate Labor Committee is considering S1688, which was initially introduced in January 2024. This bill, if passed, would amend the New Jersey Law Against Discrimination (NJLAD), N.J.S.A. 10:5-12:7, and 10:5-12:8 to clarify that the prohibition of certain waivers in employment agreements includes non-disclosure and non-disparagement provisions that would limit an employee’s right to raise claims of discrimination, retaliation, or harassment. The bill would also amend N.J.S.A. 10:5-12:7(c) to remove the original carve out for collective bargaining agreements, meaning the prohibition of waivers relating to discrimination, retaliation, or harassment claims would apply in the collective bargaining context as well as individual employment agreements.
Conclusion
These proposed bills demonstrate states’ continued efforts to limit employers’ use of restrictive covenants. Prior efforts to formalize such restrictions have been mostly unsuccessful, but the New Jersey and New York legislatures still seek to narrow the scope of the restrictions.
SEC Expands Nonpublic Review Process for All Companies Intending to Issue Securities
On March 3, 2025, the Securities and Exchange Commission’s Division of Corporation Finance announced that it has enhanced its accommodations for companies submitting draft registration statements for nonpublic review. The enhancements, which took effect immediately, arrive as the SEC recalibrates its regulatory approach under new leadership, signaling a broader shift toward enhancing capital formation by accommodating a broader range of issuers and transactions.
Here are the key changes, and we provide additional detail and each enhancement’s expected impact below:
nonpublic review now available for follow-on offerings;
underwriter names now not required initially in a draft registration statement;
greater flexibility for de-SPAC transactions and subsequent offerings; and
foreign private issuers now have more options as well.
What is the nonpublic SEC Staff review process?
The SEC Staff’s nonpublic review process allows eligible issuers to submit a confidential draft registration statement to the SEC Staff before making a public filing. This process helps companies refine their disclosures by addressing SEC Staff comments and delay public scrutiny until they are ready to proceed with their offering or listing.
Originally introduced under the Jumpstart Our Business Startups Act of 2012 (JOBS Act) for Emerging Growth Companies (EGCs), the SEC Staff expanded the process in 2017 to include all issuers conducting initial public offerings (IPOs) and extended the accommodation to an issuer’s initial Exchange Act Section 12(b) registration statements.
What do the SEC Staff’s expanded accommodations mean for companies?
The latest changes build on the 2017 expansion of the availability of the nonpublic review process and now allow a broader range of issuers, for a broader range of transactions, to take advantage of nonpublic SEC Staff feedback before filing publicly.
What are the key changes and their impact?
Nonpublic Review Now Available for Follow-On OfferingsThe SEC Staff will now accept nonpublic draft submissions for subsequent securities offerings or Exchange Act registration, even if more than 12 months have passed since the issuer became an SEC-reporting company. Now, every company, regardless of when its IPO took place, gets the benefit of reducing market speculation before finalizing its intended transaction by privately submitting a draft registration statement for nonpublic review.
Omission of Underwriter Names in Initial DraftsCompanies may now omit underwriters’ names in their initial draft registration statement submissions, provided they include them in subsequent submissions and public filings. This change gives issuers more flexibility in structuring underwriting syndicates without prematurely signaling deal participants to the market.
Greater Flexibility for De-SPAC Transactions and Subsequent OfferingsWhen a SPAC, as a publicly traded entity, moves to finalize its de-SPAC transaction by acquiring a private company, it typically files a Form S-4 registration statement. Historically, if this filing took place more than a year after the SPAC’s IPO, it had to be submitted publicly from the outset. However, under the updated guidance, such registration statements may now qualify for nonpublic review (provided they meet certain criteria). Additionally, any operating company that became publicly traded through a de-SPAC transaction, regardless of its structural framework, can now submit a Form S-1 for nonpublic review within its first year as a public company, irrespective of the date of the original SPAC’s IPO.
Foreign Private Issuers Now Have More OptionsForeign private issuers registering securities under Section or 12(g) of the Exchange Act (on Forms 10, 20-F or 40-F) may now submit draft registration statements for nonpublic SEC Staff review. Now, a foreign private issuer preparing to list under Section 12(g) may privately submit its draft Form 20-F for SEC Staff review, delaying public disclosure while refining regulatory compliance. Such issuers may still choose between expanded accommodations or the existing EGC procedures if they qualify.
What else should issuers consider?
Consistent with prior guidance, the SEC Staff noted the following three points as well in the announcement:
Expedited Processing Requests: The SEC Staff is willing to consider “reasonable requests” to expedite processing for draft and filed registration statements. Issuers with tight deal timelines should engage the SEC early to discuss review timing.
Financial Information Flexibility: Companies do not need to delay submitting a nonpublic draft registration statement if certain financial information is incomplete, provided they reasonably believe the omitted data will not be required at the time of public filing.
No More Revised Draft Filings After SEC Comments: After the SEC Staff provides comments on a nonpublic draft registration statement, issuers must respond via a public filing, rather than through another confidential draft submission. Companies should prepare for transparency once SEC feedback is received.
What should companies do next?
Assess eligibility: If your company is considering an IPO, a follow-on offering or a de-SPAC transaction, determine whether taking advantage of these changes could offer strategic benefits.
Evaluate timing considerations: The ability to engage privately with the SEC Staff can help issuers control disclosure timing, but SEC review periods and investor expectations should still be factored into transaction planning.
Engage legal counsel early: Navigating SEC review timelines, disclosure requirements and capital market strategies requires careful planning and legal expertise. Consult experienced securities counsel to optimize your approach.
Important Reminder: Nonpublic does not mean permanent confidentiality
While the SEC Staff’s nonpublic review process provides issuers with the ability to submit draft registration statements privately, companies should remain aware that all nonpublic draft registration statement submissions must be made public at least two business days before the registration is finalized and becomes effective. Moreover, the SEC Staff will publicly release all comment letters and issuer responses no earlier than 20 business days after effectiveness of the registration statement. Companies should ensure that any information disclosed in nonpublic filings is prepared with the expectation of eventual public disclosure. Advance planning on investor relations and market positioning remains essential.
Court Applies Internal Affairs Doctrine Even Though Statute Refers Only To Directors
Courts are wont to say that Section 2116 of the California Corporations Code codifies the internal affairs doctrine. See Villari v. Mozilo, 208 Cal. App. 4th 1470, 1478 n.8 (Cal. Ct. App. 2012)(“Corporations Code section 2116 codifies [the internal affairs doctrine] in California.”). I have long held the position that this is only partially true. Section 2116 provides:
The directors of a foreign corporation transacting intrastate business are liable to the corporation, its shareholders, creditors, receiver, liquidator or trustee in bankruptcy for the making of unauthorized dividends, purchase of shares or distribution of assets or false certificates, reports or public notices or other violation of official duty according to any applicable laws of the state or place of incorporation or organization, whether committed or done in this state or elsewhere. Such liability may be enforced in the courts of this state. (emphasis added)
The statute makes no reference to officers. Thus, it would seem reasonable to conclude that it does not apply to officers. Courts, however, seem to miss the obvious omission of officers from the statute, as illustrated in a recent ruling by U.S. District Court Judge Janis L. Sammartino in Lapchak v. Paradigm Biopharmaceuticals (USA), Inc., 2025 WL 437904 (S.D. Cal. Feb. 7, 2025). In that case, Judge Sammartino ruled that Delaware law applied to the individual defendant even though the plaintiff failed to allege that the defendant was a director of the corporation. In fact, neither party even alleged that the corporation was incorporated in Delaware, but the court did some online checking. Finally, it is unclear from the ruling whether the individual defendant was even an officer of the corporation.
As I have previously contended, officers are agents of the corporation whilst directors qua directors are not. In many cases, their duties and responsibilities may be governed by contractual choice of law provisions and local agency and employment laws. In any event, a plain reading of Section 2116 reveals that officers have no place in it.
Corporate Transparency Act Enforcement Suspended Once Again!
On March 2, 2025, the U.S. Treasury Department announced it would not enforce any penalties or fines associated with the Beneficial Ownership Information (“BOI”) reporting rule, a key requirement under the Corporate Transparency Act (“CTA”).
In a press release, Treasury officials confirmed they would not impose fines on U.S. citizens or domestic reporting companies, effectively pausing the reporting obligations for the time being.
Relief for Domestic Businesses
Under the original CTA guidelines, most companies with fewer than 20 full-time employees and less than $5 million in annual revenue—as well as community associations—would have been required to file their BOI reports with the Financial Crimes Enforcement Network (FinCEN).
After weeks of legal back-and-forth, with temporary injunctions followed by stays of those injunctions, a U.S. District Court ultimately stayed the nationwide injunction, extending the compliance deadline to March 21, 2025. Now, with the Treasury’s latest move, domestic businesses are temporarily off the hook from meeting the CTA’s reporting requirements, offering much-needed breathing room for companies struggling with compliance.
A Shift in Focus: Foreign Companies Under Scrutiny
Perhaps the biggest takeaway from the Treasury’s announcement is a shift in enforcement priorities. Moving forward, the agency plans to limit BOI reporting obligations to foreign reporting companies, signaling a departure from the previous broad enforcement approach. Treasury officials said they intend to issue new regulations to formally adjust the CTA’s scope, concentrating efforts on international entities rather than U.S.-based businesses.
While the full implications of this change remain to be seen, the decision is expected to ease compliance concerns for American companies. Meanwhile, foreign businesses should prepare for heightened scrutiny as the Treasury reshapes its corporate transparency policies.
CFTC Acting Chairman Pham Announces Effort to Quickly Resolve Recordkeeping and Reporting Investigations and Pledges Additional Guidance on Self-Reporting and Cooperation
During her keynote address at the Futures Industry Association’s International Futures Industry Conference, BOCA50, CFTC Acting Chairman Caroline D. Pham announced a new effort to encourage market participants to resolve open investigations regarding minor compliance violations with no customer harm, in order to free up Division of Enforcement (the “Division”) resources to focus on market abuse and fraud. This effort is another in a series of steps Acting Chairman Pham has taken since her appointment to provide transparency and due process in the agency’s law enforcement function,[1] and to address the CFTC’s shift in “its enforcement program to focus on registration and compliance instead of the CFTC’s mission to prevent fraud, manipulation, and abuse in our markets.”[2]
Under the new effort, over the next two weeks, the Division of Enforcement (the “Division”) is inviting market participants that have previously self-reported to the Division minor compliance violations, such as recordkeeping or reporting violations, to present (1) an update on the market participants’ remediation and improvement plan since the self-report, and (2) a reasonable settlement offer. Importantly, the Division will only consider such a proposal only if the violations do not involve customer harm, market abuse, concerns with transparency or fraudulent conduct. If the Division determines that a market participant meets these conditions, the Division will analyze civil monetary penalties for similar conduct over the last 10 years and propose an expedited settlement with a reasonable civil monetary penalty, based on the circumstances of the case.
Additionally, Acting Chairman Pham indicated that the Division’s recent guidance regarding self-reporting and cooperation[3] is only the first step in the Division’s effort to provide regulatory clarity to market participants, and that the CFTC plans to issue additional guidance in the coming weeks that address how matters are referred to the Division from other CFTC operating divisions, including criteria for how those referral decisions will be made.
[1]See Katten’s coverage of the CFTC’s Guidance on Self-Reporting and Cooperation here: https://natlawreview.com/article/clearer-skies-ahead-cftc-enforcement-divisions-new-advisory-opens-doors-self
[2]See Statement of Commissioner Caroline D. Pham on Swap Data Reporting Settlement Order and the Examination Process (Oct. 1, 2024), available at https://www.cftc.gov/PressRoom/SpeechesTestimony/phamstatement100124.
[3]See CFTC Div. of Enforcement, Advisory on Self-Reporting, Cooperation, and Remediation (Feb. 25, 2025) available at https://www.cftc.gov/media/11821/EnfAdv_Resolutions022525/download.
Texas Federal Court Holds that Dodd-Frank Act Whistleblower Protection Law Does Not Authorize Jury Trials [Video]
On February 20, 2025, Judge Horan held in Edwards v. First Trust Portfolios LP that a Dodd-Frank whistleblower retaliation plaintiff is not entitled to a jury trial. This opinion underscores the importance of bringing additional claims that can be heard by a jury, including a Sarbanes-Oxley (SOX) whistleblower retaliation claim.
Aaron Edwards filed suit against his former employer, First Trust, alleging that he was terminated in retaliation for raising concerns about a gift program. Edwards claimed that First Trust’s practice of only awarding gifts to financial advisors at the end of the year who sold the most First Trust products during that year constituted an illegal sales contest under SEC regulations. He brought claims under the whistleblower protection provisions of SOX, the Dodd-Frank Act, and the Consumer Financial Protection Act (CFPA). After Judge Horan denied First Trust’s motion for summary judgment, First Trust moved to strike Edwards’ jury demand for his Dodd-Frank retaliation claim.
In contrast to an express provision in SOX clarifying that a SOX plaintiff “shall be entitled to trial by jury,” the whistleblower protection provision of the Dodd-Frank Act does not expressly provide for a right to a jury trial, so this dispute hinges on whether Dodd-Frank Act retaliation remedies are legal or equitable in nature (if the remedies are legal, then there is a right to a jury trial under the Seventh Amendment). Per the Supreme Court’s decision in SEC v. Jarkesy, the key factor determining “whether a monetary remedy is legal is if it is designed to punish or deter the wrongdoer, or, on the other hand, solely to restore the status quo.” 603 U.S. 109, 123 (2024).
A prevailing whistleblower in a Dodd-Frank whistleblower retaliation action is entitled to reinstatement, double back pay with interest, and litigation costs, including attorneys’ fees. Edwards argued that double back pay damages are legal in nature because they “go beyond restoring the status quo to deter and punish Dodd-Frank violators” and that Dodd-Frank’s doubling of back pay transmutes it from an equitable to legal remedy because it “serves to deter future misconduct by litigants.”
First Trust, however, asserted that under Fifth Circuit precedent, Dodd-Frank retaliation remedies, including reinstatement and back pay, are equitable in nature. Relying on a Georgia district judge decision, Judge Horan held that reinstatement and back pay are generally recognized as equitable remedies and that the automatic doubling of back pay does not change it from an equitable remedy to a legal one. See Pruett v. BlueLinx Holdings, Inc., No. 1:13-cv-02607-JOF, 2013 WL 6335887 (N.D. Ga. Nov. 12, 2013).
Since Edwards is already trying his SOX claim before a jury, and the motion to strike was filed close to trial, Judge Horan held that a binding jury will be empaneled for Edwards’s SOX claim and the same jury will serve as an advisory jury for Edwards’s Dodd-Frank claim.
Strategic Considerations: Why a Whistleblower Should Bring Both SOX and Dodd-Frank Whistleblower Retaliation Claims
Where a whistleblower that suffered retaliation qualifies for protection both under SOX and the Dodd-Frank Act, we recommend bringing both claims uto maximize the potential recovery. There are four advantages to bringing a SOX claim in addition to a Dodd-Frank claim:
Uncapped special damages: The Dodd-Frank Act authorizes economic damages and equitable relief but does not authorize non-economic damages. In contrast, SOX authorizes uncapped “special damages” for emotional distress and reputational harm.
Exemption from mandatory arbitration: SOX provides an unequivocal exemption from mandatory arbitration, but Dodd-Frank claims are subject to arbitration.
Preliminary reinstatement: If an OSHA investigation concludes that an employer violated the whistleblower protection provision of SOX, OSHA can order the employer to reinstate the whistleblower. However, there is some dispute as to whether an OSHA order of reinstatement is enforceable. See, e.g., Gulden v. Exxon Mobil Corp., 119 F.4th 299 (3d Cir. 2024).
Favorable causation standard: A far more generous burden of proof (“contributing factor” causation under SOX, rather than “but for” causation under Dodd-Frank).
There are four advantages to bringing a Dodd-Frank claim in addition to a SOX claim:
Double back pay: Dodd-Frank authorizes an award of double back pay (double lost wages) plus interest, whereas SOX authorizes ordinary back pay with interest along with other damages. Both statutes authorize reinstatement and attorney fees.
Longer statute of limitations: Whereas the statute of limitations for a SOX retaliation claim is just 180 days, the statute of limitations for a Dodd-Frank retaliation claim is a minimum of 3 years after the date when facts material to the right of action are known or reasonably should have been known by the whistleblower.
Broader scope of coverage: SOX whistleblower protection applies primarily to employees of public companies and contractors of public companies. The Dodd-Frank prohibition against whistleblower retaliation applies to “any employer,” not just public companies.
No administrative exhaustion: In contrast to SOX, Dodd-Frank permits a whistleblower to sue a current or former employer directly in federal district court without first exhausting administrative remedies at DOL.
Whistleblower Protections for SEC Whistleblowers
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