The United States Corporate Transparency Act (the “CTA”) was passed by the United States Congress in early 2023 to improve financial transparency and increase the effectiveness of anti-money laundering efforts. However, the CTA will also impose several obligations on millions of entities (each, a “Reporting Company”), including private fund advisers and the private funds they advise (subject to certain exceptions as outlined below) to continuously report certain “beneficial ownership information” (such information, “BOI”, and the reports containing the BOI, the “Reports”) with the United States Department of Treasury’s Financial Crimes Enforcement Network (“FinCEN”), which has passed the Beneficial Ownership Information Reporting Rule (the “Reporting Rule”) in order to implement the CTA.
Specifically, “beneficial owners” (each, a “Beneficial Owner” for purposes of BOI are solely defined as individuals who, directly or indirectly, either: (i) exercise substantial control over a Reporting Company or (ii) own or control at least 25 percent of the ownership interests of a Reporting Company. Persons exercising substantial control over a Reporting Company include those individuals who (i) are senior officers, (ii) possess the ability to appoint or remove any senior officer, or (iii) have substantial influence over important decisions made by the Reporting Company (as further explained in detail below).
These reporting obligations will take effect starting on January 1, 2024 (with a grace period extending the compliance deadline until December 31, 2024 for entities formed on or before January 1, 2024), which will outline:
- Which US and non-US entities must report BOI (“Which Entities are Required to Report?”);
- What BOI that must be included in Reports (“What Information is Required to be Reported?”);
- When Reports are due (“When to File the Reports?”); and
- How to file the BOI and Reports (“How to File to the Reports?”).
(1) Which Entities are Required to Report?
Domestic and Foreign Reporting Companies
A “domestic reporting company” is defined under the Reporting Rule as any entity formed under the laws of the United States, including the laws of any U.S. State (defined under the Reporting Rule to include any U.S. territory, commonwealth or possession) that is: (i) a corporation, (ii) a limited liability company, or (iii) a company created by the filing of a document with a Secretary of State or any similar office under the law of a State (including limited partnerships).
A “foreign reporting company” is defined under the Reporting Rule as any entity registered to do business in any U.S. State by filing a document with a Secretary of State or any similar office under the law of a State.
These definitions, at first glance, will encompass all entities typically formed to operate funds: (i) domestic corporations, LLCs, and limited partnerships and (ii) foreign entities who are registered to do business in a particular United States jurisdiction.
Entities Exempt from Definition of Reporting Company
There exist 23 exemptions from the definition of “reporting company” for purposes of the Reporting Rule. However, as applied to private fund advisers, there are likely 6 main exemptions under which private fund advisers and the funds they advise may potentially be able to rely:
- Investment advisers (“SEC RIAs”) registered with the Securities and Exchange Commission (“SEC”) pursuant to the United States Investment Advisers Act of 1940 (the “Advisers Act”);
- Venture capital fund advisers (“VC Advisers”) exempt from registration pursuant to Section 203(l) of the Advisers Act;
- Commodity pool operators (“CPOs”) and commodity trading advisers (“CTAs”) registered with the Commodity Futures and Trading Commission (“CFTC”) pursuant to the Commodity Exchange Act of 1936, as amended (the “CEA”);
- Any pooled investment vehicles (“Exempt Funds”) operated or advised by, among others, SEC RIAs or VC Advisers, (but not registered CPOs or CTAs) that are either (i) registered investment companies or (ii) vehicles relying on the 3(c)(1) or 3(c)(7) exemption provided by the United States Investment Company Act of 1940, as amended (the “Investment Company Act”) (and identified as such on the exempted adviser’s Form ADV);
- Controlled or wholly owned subsidiaries of certain exempted entities (as further detailed below); and
- Large operating companies that (i) maintain an operating presence at physical office in the United States; (ii) have more than 20 full-time employees in the United States; and (iii) Have filed a United States tax return in the previous year reporting over $5,000,000 in United States-source gross receipts or sales.
Thus, investment advisers who do not fall under the exemptions described above (and, by extension, the funds they manage), including all advisers registered with a State securities authority or exempt reporting advisers either with the SEC or a State securities authority, are required under the Reporting Rule to file Reports with FinCEN, unless another exemption provided under the Reporting Rule applies independently to such adviser (or their funds).
It is important to note that even if a fund is advised by an SEC RIA or VC Adviser, if the fund is relying on the exemption from registration under Section 3(c)(5) of the Investment Company Act for funds investing primarily in real estate and related interests (including mortgages), such fund will still be considered a Reporting Company, unless another exemption provided under the Reporting Rule applies independently to the fund.
As a further note, subsidiaries wholly owned or controlled by an Exempt Fund, such as blocker entities or portfolio companies, do not fall under the exemption provided for in (4) above and are considered Reporting Companies, unless another exemption provided under the Reporting Rule applies independently to the entities. However, subsidiaries wholly owned or controlled by SEC RIAs, VC Advisers, CPOs, or CTAs do qualify for such exemption.
Finally, a limited reporting exemption applies to foreign Reporting Companies that would otherwise be Exempt Funds. These Reporting Companies do not have to report information about Company Applicants or certain Beneficial Owners (as defined and further described below) but do have to report at least one Beneficial Owner who exercises substantial control over the Reporting Company.
(2) What Information is Required to be Reported?
Reporting Companies
Reporting Companies are required to provide the following information about themselves:
- full legal name;
- any trade name or “doing business as” name;
- complete current US address (i.e. the company’s principal place of business in the United States);
- State or foreign jurisdiction of formation;
- for foreign Reporting Companies, State of first registration; and
- United States Internal Revenue Service Taxpayer Identification Number (“TIN”), including any Employer Identification Number).
For item (vi) in the case of foreign Reporting Companies, if the Reporting Company has not been issued a TIN, the Reporting Company must report (i) a tax identification number issued by a foreign jurisdiction and (ii) the name of such jurisdiction.
Reporting Individuals
Every Beneficial Owner (and, if applicable, Company Applicant) (each as defined below) will be required to provide the following information about themselves:
- full legal name;
- date of birth;
- complete current address, which will typically be the Beneficial Owner’s residential street address (please see the following sentence for an exception to this rule); and
- a unique identifying number and issuing jurisdiction from, and image of, one of the following non-expired documents:
- United States passport;
- driver’s license issued by a U.S. State;
- identification document issued by a U.S. State or U.S. local government; or
- if the Beneficial Owner has none of the above, a foreign passport.
For item (c) in the case of Company Applicants who form or register a Reporting Company in the course of their business, such as paralegals, such Company Applicants should instead report the business street address of the Reporting Company, which is not required to be in the United States. Further, if an individual (either a Beneficial Owner or a Company Applicant) has obtained a FinCEN identifier and provided it to a Reporting Company, the Reporting Company may include such FinCEN identifier in its report instead of the above information requested about such Beneficial Owner or Company Applicant.
Beneficial Owners
“Beneficial owners” (each, a “Beneficial Owner”) are defined as individuals who, directly or indirectly, either: (i) exercise substantial control over a Reporting Company or (ii) own or control at least 25 percent of the ownership interests of a Reporting Company.
Individuals exercising substantial control over a Reporting Company include those who:
- Are senior officers, such as a President, Chief Financial Officer, General Counsel, Chief Executive Officer, Chief Operating Officer, Director, Manager, General Partner or those performing similar functions as such officers, regardless of their official title;
- Possess the ability to appoint or remove any senior officer or have majority of the board of directors or similar body; or
- Direct, determine, or have substantial influence over important decisions made by the Reporting Company, including regarding the Reporting Company’s business, finances, or structure.
The above determinants of substantial control are not exhaustive; anyone who exercises “substantial control,” given the facts and circumstances of a particular case, will be deemed to be a Beneficial Owner.
For purposes of determining ownership interest for the above 25 percent ownership test, ownership interests may include (ii) equity, stock, or voting rights; (ii) a capital or profit interest; (iii) convertible instruments; (iv) options or other non-binding privileges to buy or sell any of the foregoing; and (v) any other instrument, contract, or other mechanism to establish ownership. For the avoidance of doubt, a limited partner or member owning 25 percent or more of the ownership interests of the Reporting Company, even if not granted voting rights by virtue of their ownership interests, will still be considered a Beneficial Owner.
Company Applicants
Please note: the following section does not apply to either (i) domestic Reporting Companies formed before January 1, 2024 and (ii) foreign Reporting Companies registered to do business in the United States before January 1, 2024.
Domestic Reporting Companies formed on or after January 1, 2024 and foreign Reporting Companies registered to do business in the United States on or after January 1, 2024 are required to report information about their Company Applicants. “Company applicants” (each, a “Company Applicant”) are defined as individuals who are either: (i) “direct filers” or (ii) direct or control the filing action. “Direct filers” are defined as those who either (i) directly filed the document that created a domestic Reporting Company or (ii) directly filed the document that first registered a foreign Reporting Company. Individuals who are considered to have directed or controlled the filing action (i.e. individuals who are primarily responsible for directing or controlling the filing of the creation or first registration document) are also considered Company Applicants for purposes of the Reporting Rule.
(3) When to File the Reports?
Initial Reports
If the Reporting Company already exists as of December 31, 2023 or before, the Reporting Company must file its initial Report by January 1, 2025.
If the Reporting Company is created or registered to do business in the United States on or after January 1, 2024 and before January 1, 2025, the Reporting Company will have 90 calendar days after receiving actual or public notice that the Reporting Company’s creation or registration is effective to file its initial Report.
If the Reporting Company is created or registered on or after January 1, 2025, the Reporting Company will have 30 calendar days after receiving actual or public notice that the Reporting Company’s creation or registration is effective to file its initial Report.
Ongoing Reports
If there is any change to the required information about the Reporting Company or its Beneficial Owners in a Report, the Reporting Company must file an updated Report no later than 30 days after the date on which the change occurred. A Reporting Company is not required to file an updated Report for any changes to previously reported personal information about a Company Applicant. If an inaccuracy is identified in a Report, the Reporting Company must correct such inaccuracy no later than 30 days after the date the Reporting Company became aware of the inaccuracy or had reason to know of such inaccuracy.
(4) How to File the Reports?
All Reporting Companies must file Reports electronically through a secure filing system, located here. FinCEN has recently published detailed instructions and other technical guidance on how to complete the Report form, and such instructions and guidance are available at this link, including detailed guidance (in PDF format) on how to file the form, accessible here. Further, in order to file the Report, you can either (i) download a PDF version of the Report form here (Adobe Reader required) and submit such form here or (ii), alternatively, directly file the Report online here without using a separate PDF document.
Penalties for Non-Compliance
As a note, the penalties for willfully violating the CTA are significant, in that failing to make an initial Report or update an existing Report or providing false or fraudulent Reports can result in a daily $500 fine up to a maximum of $10,000 and 2 years’ imprisonment. Therefore, it is important that all Reporting Companies be aware of these rules and proactively take steps to comply in order to avoid such penalties.
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