Pencils Down (For Now)

A few months ago, we posted about the latest regulatory regime and the impending paperwork that would follow—the Corporate Transparency Act (“CTA”). The CTA went into effect on January 1, 2024, and required certain “reporting companies” to disclose information about their “beneficial owners” to the U.S. Treasury Department’s Financial Crimes Enforcement Network.

Since the law was enacted, many folks scrambled to determine who qualifies as a “beneficial owner” or whether they are exempt from reporting. Those who were less proactive, however, ended up being rewarded (at least for now), as the U.S. District Court for the Eastern District of Texas has granted a nationwide preliminary injunction enjoining the enforcement of the CTA.

Notably, the Court’s order is not a final decision, meaning it will temporarily pause enforcement of the CTA. However, enforcement could resume if the order is overturned on appeal or if the government ultimately prevails. Reporting companies do not need to comply with the CTA’s upcoming January 1 deadline for filing beneficial ownership information reports. This is probably all most readers wanted to hear, but if you want to learn more about the Court’s decision, I’ve included a summary below.

To be granted a preliminary injunction, a party must establish:

1. A substantial likelihood of winning on the merits;

2. There is a substantial threat they will suffer irreparable harm unless an injunction is granted;

3. The threatened injury outweighs any damage that the injunction might cause the other party; and

4. The injunction will not harm the public interest.

The Substantial Threat of Irreparable Harm

The Court agreed with the Plaintiffs’ arguments that they would have to incur legal and compliance-related expenses when filing the BOI reports under the CTA and rejected the Government’s claim that such expenses were de minimis. The Court also seemingly agreed that the Plaintiffs would suffer irreparable harm (absent an injunction) in disclosing information they want to keep private under the First and Fourth Amendments under a law that exceeds Congress’s power.

Likelihood of Success on the Merits

The Plaintiffs had to establish that Congress exceeded its Constitutional authority in passing the CTA to show they were likely to succeed on the merits. The Government claimed Constitutional authority via the Commerce Clause and the Necessary and Proper Clause.

Commerce Clause

Generally, Congress has fairly broad power to enact legislation under the Commerce Clause as long as the activity falls within one of the categories Congress may regulate under its commerce power, which are (i) the channels of interstate commerce (e.g., highways, banking lines, fiber-optic cables); (ii) the instrumentalities (e.g., trains, planes, and automobiles) of interstate commerce and the persons or things in interstate commerce; and (iii) activities that substantially affect interstate commerce.

In this case, the Court found that the CTA regulates “reporting companies,” and there is no mention in the text of the CTA of the “channels” or “instrumentalities” of commerce—the CTA regulates companies. Just because some companies may use these “channels” or “instrumentalities,” the CTA “assumes that every company does use channels and instrumentalities of interstate commerce without a jurisdictional hook of any kind that would limit the CTA’s reach to only those companies who do use the channels or instrumentalities.”

The Court went on to say that the CTA isn’t regulating an activity at all—but creating an activity by requiring the filing of the BOI report.

“. . . [the CTA] seems to only regulate an entity’s existence, simply because reporting companies are, by their nature anonymous. And ‘anonymous existence’ is not an activity at all. It is a state of being. It is the natural, idle state that any entity formed by registering with a secretary of state necessarily takes on by virtue of its registrations. It is akin to a person simply being alive in their natural state . . . . That is not an activity.”

Necessary and Proper Clause

Basically, Congress can only invoke the Necessary and Proper Clause in tandem with one of its enumerated powers (i.e., the Necessary and Proper Clause isn’t its own set of Congressional powers), and the Court rejected the Necessary and Proper Clause in tandem with the (i) Commerce Clause (see above), (ii) Congress’ ability to regulate foreign affairs, and (iii) and Congress’s taxing authority.

Balancing of the Equities

The Court found that balancing of the equities ruled in favor of issuing the injunction despite the Government’s laudable goal of “ferreting out financial crime, protecting foreign commerce and national security, and bringing the United States’s money laundering laws into compliance with international standards.” Mainly, the Court noted that the deadline was approaching and it was in the public’s best interest to prevent the Government’s enforcement of the CTA until a decision on the merits could be rendered.

Hey, I am Shayn. I am the Founder of Junto Law. If you like this post, follow me on X or set a time to chat.

Disclaimer: While I am a lawyer who enjoys operating outside the traditional lawyer and law firm “box,” I am not your lawyer. Nothing in this post should be construed as legal advice, nor does it create an attorney-client relationship. The material published above is only intended for informational, educational, and entertainment purposes. Please seek the advice of counsel, and do not apply any of the generalized material above to your facts or circumstances without speaking to an attorney.