Introduction

The Corporate Transparency Act (the “CTA”) is a new federal law that went into effect on January 1, 2024 (the “Effective Date”) and requires certain entities (a “Reporting Company”) to file a report (a “BOI Report”) with the Financial Crimes Enforcement Network (“FinCEN”) disclosing, among other things, beneficial ownership information (including names, dates of birth, residential addresses, and passport details) of individuals who either own or substantially control these entities. A willful failure to timely comply with the reporting requirements can result in civil and criminal penalties. The CTA broadly applies to most common entities formed in the U.S., as well as certain non-U.S. formed entities if they are registered to conduct business in the U.S., unless one of the CTA’s 23 exemptions apply (each an “Exemption”).

Synopsis for Fund Managers

The CTA provides an Exemption for each of: (i) an investment adviser registered with the Securities and Exchange Commission (the “SEC”) (an “RIA”); (ii) a fund manager that has filed as a venture capital fund adviser with the SEC (“VC Adviser”)[i]; (iii) an entity that is included as a “relying adviser” in an RIA’s Form ADV umbrella registration; and (iv) U.S. private funds that are exempt from registration under Section 3(c)(1) or 3(c)(7) of the Investment Company Act of 1940 (the “Investment Company Act”) and are managed by an RIA, a VC Adviser, or a “relying adviser.” Investment Advisers registered with a state are not exempt from the CTA. An Exempt Reporting Adviser (an “ERA”) is not exempt from the CTA, unless it is a VC Adviser. General partner and managing member entities of such funds and fund complexes are not expressly exempt but, under certain circumstances may qualify for an Exemption.

Notwithstanding the numerous Exemptions, the CTA will likely affect many fund managers vis-à-vis their affiliated entities who may be required to file BOI Reports. As discussed further below, in light of the complexity and nuance of the CTA’s application, as well as its breadth, the timing and content of its reporting requirements and its penalties, fund managers should consider developing appropriate internal and/or external procedures and controls to adequately prepare for these compliance obligations. The CTA’s reporting obligations are continuing and therefore fund managers should continuously assess whether the CTA applies to them, as their business evolves. 

FinCEN has published numerous materials to assist with complying with the CTA including (i) a reference guide; (ii) FAQs; and (iii) a compliance guide. If you have any questions regarding the CTA, please reach out to your CFM contact or email us here [email protected].

Discussion

Background

While the CTA appears to be ministerial or administrative in nature, it is rooted in broader national security initiatives as it was originally passed by the U.S. Congress in connection with the Anti-Money Laundering Act of 2020 and the National Defense Authorization Act of 2021 to combat money laundering, tax fraud, terrorism, and other illicit activities; therefore, fund managers should take a thoughtful and methodical approach to complying with the CTA.  

FinCEN is a bureau of the U.S. Department of Treasury whose mission is to safeguard the financial system from illicit use, combat money laundering and its related crimes, and promote national security by strategically using financial authorities and collecting, analyzing, and disseminating financial intelligence.

Compliance Timeline

A Reporting Company formed on or after the Effective Date, but before January 1, 2025, must file its BOI Report within 90 days from its formation.

A Reporting Company formed prior to the Effective Date must file its BOI Report by January 1, 2025.

A Reporting Company formed on or after January 1, 2025 must file its BOI Report within 30 days from its formation.

The BOI Report is a continuing obligation and therefore, certain events may require an updated BOI Report (discussed below) which must be filed within 30 days of the date of such events.

Reporting Companies

As described above, a Reporting Company under the CTA includes any corporation, limited liability company or other similar entity that is created by filing a document with a secretary of state or similar office under the law of a state, or formed under the law of a foreign country and registered to do business in the United States by filing a document with a secretary of state or similar office under the laws of a state.

The CTA exempts 23 categories of entities from the definition of a Reporting Company. A complete list of Exemptions can be found in the FinCEN compliance guide. Of the 23 Exemptions, the following are relevant to entities that operate in the investment management space:

1. Any broker or dealer of securities that is registered under Section 15 of the Securities Exchange Act of 1934 (the “Exchange Act”);
2. Any entity registered with the SEC under the Exchange Act;
3. An investment company under Section 3 of the Investment Company Act and registered with the SEC;
4. An RIA (please note that state registered investment advisers and ERAs that are not VC Advisers are not exempt);
5. A VC Adviser (please note that venture capital advisers under the venture capital exemption of certain states may not qualify for this Exemption);
6. Any entity registered with the Commodity Futures Trading Commission under the Commodity Exchange Act—this includes (i) futures commission merchant; (ii) introducing broker; (iii) swap dealer; (iv) major swap participant; (v) commodity pool operator; (vi) commodity trading adviser; and (vii) retail foreign exchange dealer;
7. A pooled investment vehicle that is operated or advised by an RIA or a VC Adviser, provided that the pooled investment vehicle relies on the 3(c)(1) or 3(c)(7) exemption under the Investment Company Act and is identified, or will be identified on its adviser’s Form ADV;
8. Operating companies that have (i) more than 20 full-time U.S. employees; (ii) an operating presence at a physical office in the United States; and (iii) filed U.S. federal taxes showing more than $5 million in gross receipts for the previous year; and
9. Wholly owned subsidiaries of the above, excluding wholly owned subsidiaries of pooled investment vehicles.

Investment Managers

RIAs, VC Advisers, “relying advisers” of an RIA, and U.S. private funds that are either 3(c)(1) or 3(c)(7) funds and managed by the foregoing entities are exempt from the definition of Reporting Companies and are not required to comply with the CTA. Notwithstanding the foregoing, state registered investment advisers and ERAs (excluding VC Advisers) are not expressly exempt from complying with the CTA, however, this does not preclude any such entity from qualifying for a separate Exemption. Similarly, general partner and/or managing member entities of 3(c)(1) and 3(c)(7) funds are not expressly exempt from complying with the CTA unless they fall under a separate Exemption.

Additionally, holding companies that own, in part or in whole, entities that are exempt from complying with the CTA cannot rely on the Exemption of its subsidiary and will need to comply with the CTA unless an alternative Exemption is available. This will likely affect RIAs that are structured as limited partnerships and will require the general partner of the RIA to comply with the CTA and submit a BOI Report.

Foreign Pooled Investment Vehicles

Foreign pooled investment vehicles that are registered with a U.S. state do not qualify for the Exemption for pooled investment vehicles discussed above (even if managed by an RIA or VC Adviser). However, in such cases, the CTA expressly provides for limited exemptive relief by requiring such entities to only identify the one individual who exercises the greatest control over the entity in their BOI reports.

BOI Report

BOI Reports should include information about (i) the Reporting Company, and for Reporting Companies formed after the Effective Date, information about the Reporting Company Applicant; and (ii) the Reporting Company’s Beneficial Owners.

Reporting Company Information

Reporting Companies, formed or registered to do business in the United States before the Effective Date, are required to disclose the following information as part of the BOI Report:

1. Full legal name of the company.
2. Any trade names, including all fictitious business names.
3. Principal place of business and, if that address is not in the United States, the primary location of the company in the United States.
4. Jurisdiction of formation.
5. Employer Identification Number or Taxpayer Identification Number.

Company Applicants

Reporting Companies formed or registering to do business in the United States after the Effective Date must disclose the following additional information about the person(s) who were involved in the formation of the Reporting Company:

1. Name and address of the individual who actually files (physically or electronically) the formation paperwork of the Reporting Company with the Secretary of State. This may be an individual at a service provider who assists with the entity formation.
2. Name and address of the individual who is responsible for directing or controlling such filing vis-à-vis instructing the filer to make the filing.

With respect to company applicants, the BOI Report should include their residential address unless such individual forms or registers companies in the normal course of their business.

Beneficial Ownership

In addition to providing company information, Reporting Companies must disclose all of their Beneficial Owners (as defined below). Under the CTA, a beneficial owner is any individual who directly or indirectly (i) owns or controls at least 25% of the ownership interests of the reporting company; or (ii) exercises substantial control over a reporting company (“Beneficial Owner”).

Ownership interests as used in the CTA refer to equity, stock, voting rights, profits interest, options, or any other instrument used to establish ownership.

For purposes of beneficial ownership, someone exercises substantial control over a Reporting Company if the individual (i) is a senior officer (including a general counsel); (ii) has the authority to appoint or remove certain officers or a majority of directors of the company; (iii) is an important decision maker (including senior portfolio managers and investment committee members); or (iv) has any other form of substantial control over the reporting company.

Reporting Companies are required to disclose the following information of each of their Beneficial Owners on the BOI Report:

1. Full legal name.
2. Date of birth.
3. Current residential address.
4. Identifying number (i.e., U.S. passport number; U.S. driver’s license number; or a foreign passport number if U.S. identification is not available).
5. Image of the proof of identification.

FinCEN Identifier

Individuals may request a unique identifier from FinCEN by providing the above information to FinCen. If an individual is a Beneficial Owner of multiple Reporting Companies, the FinCen identifier can alleviate the burden of repeatedly providing the individual’s identifying information for each Reporting Company. The FinCEN ID can be obtained here.

Updated BOI Reports

After filing the initial BOI Report, Reporting Companies are not required to reaffirm or renew their BOI Report on a periodic basis; however, an updated BOI Report should be filed within 30 days after the previously reported information changes—this includes, but is not limited to, the entity obtaining or using a new trade name, the addition of a new Beneficial Owner, the change of residential address of a Beneficial Owner, the change or renewal of an identification document of a Beneficial Owner, and the removal of a Beneficial Owner. Because a Beneficial Owner relates to either ownership or control, installing a new executive that can exercise control over the entity, such as a new manager, managing member, general partner or director, or removing any of the foregoing, could also require an updated BOI report.

In the event that there are inaccuracies in a BOI Report, a Reporting Company should file an updated BOI Report within 30 days after the Reporting Company becomes aware of the inaccuracy or has a reason to know of the inaccuracy.

If a company ceases to qualify for an Exemption, it must submit a BOI Report within 30 days after it no longer qualifies for such Exemption. In contrast, if a Reporting Company qualifies for an Exemption after submitting a BOI Report, that entity must submit an updated BOI Report and check the box noting its newly exempt status. With respect to investment managers, the most common scenario would be if an ERA becomes an RIA—this would require the investment adviser entity, and all 3(c)(1) and 3(c)(7) funds managed by that entity, to file updated BOI Reports within 30 days after the investment adviser becomes an RIA.

Penalties

A willful failure to report or update the beneficial owner information or willfully providing false or fraudulent beneficial owner information shall result in civil penalties equal to $500/day up to a maximum of $10,000 as well as criminal penalties up to two years in jail.

If you have any questions about your compliance obligations, or whether your company is exempt from the definition of a reporting company under the CTA, please reach out to your CFM contact or email us here [email protected].

---

[i] Any investment adviser that (i) is described in Section 203(l) of the Investment Advisers Act of 1940; and (ii) has filed Item 10, Schedule A, and Schedule B of Part 1A of the Form ADV, or any successor thereto, with the SEC. Note that investment advisers that qualify for a venture capital fund adviser exemption under the laws of specific states (i.e. California) may not qualify insomuch as their Form ADV is filed with their state regulator rather than the SEC.