The Corporate Transparency Act (the CTA), which became effective on January 1, 2024, requires non-exempt legal entities to disclose beneficial ownership information to the Financial Crimes Enforcement Network of the Department of the Treasury (FinCEN). The CTA’s intent is to generate a database of information to assist law enforcement with detecting and combatting illegal business transacted through shell entities.
For non-exempt entities formed before January 1, 2024, beneficial ownership reporting is due on January 1, 2025.[i] For non-exempt entities formed between January 1, 2024 and December 31, 2024, beneficial ownership reporting is due within 90 days of formation.[ii] For entities formed on January 1, 2025 or later, beneficial ownership reporting is due within 30 days of formation.[iii]
The CTA provides for 23 exemptions, the following of which may be relevant to private investment funds and related companies:
- Investment Advisers. Any investment adviser as defined in Section 202 of the Advisers Act and registered with the Securities and Exchange Commission (SEC) under the Advisers Act.[iv]
- Investment Companies. Any investment company as defined in Section 3(a) of the 1940 Act and registered with the SEC under the 1940 Act.[v]
- Pooled Investment Vehicle. Any company that would be an investment company but for the exclusions in Section 3(c)(1) or 3(c)(7) of the 1940 Act and that is identified by name by the applicable investment adviser in its Form ADV filed with the SEC (or will be identified in the next annual update) and that is operated or advised by a bank, credit union, broker-dealer, SEC-registered investment adviser or investment company, or venture capital fund adviser, as each of those entities is defined in Regulation BO.[vi]
- Large Operating Companies. Any entity that employs more than 20 full-time employees in the U.S., has an operating presence at a physical office in the U.S. and has filed federal income tax returns for the previous year demonstrating more than $5 million in gross receipts or sales.[vii]
- Subsidiaries. Any entity whose ownership interests are controlled or wholly owned, directly or indirectly, by one or more exempt company, except in the case of the subsidiaries of “pooled investment vehicles” and “inactive” entities.[viii]
Considering the limitations of the above exemptions, there will still be instances in which entities within the private funds space will be subject to beneficial ownership reporting, such as state-registered investment advisers, exempt reporting advisers (who are not venture capital fund advisers), and the private funds which they advise. Any related entities, such as a general partner, may also be subject to beneficial reporting. In the event no exemption applies, to avoid significant penalties[ix], the entity must register with FinCEN and provide the name, address and a copy of a driver’s license or passport for each beneficial owner as well as basic corporate information about the entity.[x]
Beneficial owners are individuals who exercise substantial control of a non-exempt company or who own at least 25% of the ownership interests of such company.[xi] “Substantial control” means any senior officer or an individual who directs, determines or has substantial influence over important decisions made by a non-exempt company.[xii]
[i] 31 CFR § 1010.380(a)(1)(iii).
[ii] 31 CFR § 1010.380(a)(1)(i)(A).
[iii] 31 CFR § 1010.380(a)(1)(i)(B).
[iv] 31 CFR § 1010.380(a)(2)(x).
[v] 31 CFR § 1010.380(a)(2)(x).
[vi] 31 CFR § 1010.380(a)(2)(xviii).
[vii] 31 CFR § 1010.380(a)(2)(xxi).
[viii] 31 CFR § 1010.380(a)(2)(xxii).
[ix] Penalties include $591 per day fines and possible jail time. 31 CFR § 1010.380(g).
[x] 31 CFR § 1010.380(b)(1).
[xi] 31 CFR § 1010.380(d).
[xii] 31 CFR § 1010.380(d)(1).
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