National Small Business United Lawsuit

National Small Business United, a business advocacy group, has filed a complaint in federal court in Alabama, seeking to have the Corporate Transparency Act declared unconstitutional.

The lawsuit, filed in the U.S. District Court for the Northern District of Alabama, argues that the Corporate Transparency Act is "a law enforcement dragnet of sweeping proportions." (Ct. Para. 4.) It claims that "The statute compels self-identification of private individuals seeking to engage in - or to continue engaging in - lawful, federally unregulated commercial and non-commercial activity under State laws allowing them to form an entity, whether or not such activity affects interstate, foreign or Indian commerce."

The Complaint (Para. 7) makes six separate arguments on constitutional grounds:

1. The CTA infringes on the States' sovereign powers over the formation and governance of entities under State law.

2. The CTA does not regulate commerce. Rather, it imposes obligations on the States and State entity filers at the moment of entity formation, which is an entirely ministerial act, not a "commercial activity" over which Congress can assert its power to "regulate Commerce." U.S. Const. art. I, Sec. 8, cl.3.

3. The CTA's application to all entities formed under State law sweeps in entities engaged solely in activities confined to the territory of the State in which they are formed and entities that do not engage in any commercial activity at all.

4. The CTA infringes upon individuals' rights to apply for, form, own and provide for the self-governance of entities under State law.

5. By compelling the disclosure of "sensitive" personal information for law enforcement purposes under penalty of criminal sanctions for non-compliance, and, in certain cases, allowing federal and foreign government agencies to access such sensitive information regarding U.S. persons without U.S. court authorization, the CTA enables "unreasonable searches and seizures" of the "right of the people to be secure in their persons, houses, papers, and effects" with no prior suspicion of wrongdoing, in violation of the Fourth Amendment. . . . . These aspects of the CTA also violate the privilege against self-incrimination and privacy rights protected by the Fifth and Ninth Amendments.

6. The CTA is unconstitutionally vague because its definitions of "applicant" and "beneficial owner" have no evident analogues in relevant State entity laws, provide insufficient notice of who is subject to its criminal sanctions for noncompliance, and vest too much interpretive discretion in the federal government.

At its heart, the Complaint claims that the CTA is unconstitutional because it requires every reporting company to report its beneficial ownership, even if the reporting company is not engaging in interstate commerce of the kind that is subject to Congressional jurisdiction by virtue of the Constitution's "commerce clause."

The courts have used the commerce clause for decades, however, to increase Congressional jurisdiction over activities that are antecedent to commerce or that are required to facilitate commerce.

For example, in Swift & Co. v. United States (1905), the Supreme Court held that a price-fixing scheme among Chicago meat-packers constituted a restraint of interstate commerce—and was therefore illegal under the federal Sherman Antitrust Act (1890)—because the local meatpacking industry was part of a larger "current of commerce among the States."

In the Heart of Atlanta hotel case, the Supreme Court ruled that the 1964 Civil Rights Act, which prohibited racial discrimination in housing, was constitutional because housing and the ability to rent a hotel room were necessary for the functioning of interstate commerce.

Similarly, the Supreme Court held in Gonzales v. Raich held that enforcing the federal Controlled Substances Act (1970) against the intrastate noncommercial possession, production, and use of medical cannabis (medical marijuana) (which was legal under California state law) was permitted under the commerce clause because such activities could substantially affect the supply of and demand for marijuana in the illicit interstate market.

Although the issues have not yet been fully briefed before the court in Alabama, it is difficult to see how the plaintiff can hope to prevail on the arguments presented so far.

About The Author

Jonathan Wilson is the co-founder of FinCEN Report Company with 31 years of experience in corporate, M&A and securities matters. He is the author of The Corporate Transparency Act Compliance Guide (to be published by Lexis Nexis in the summer of 2023) and the Lexis Practical Guidance Practice Note on the Corporate Transparency Act.

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