The Financial Crimes Enforcement Network’s final regulations implementing the Corporate Transparency Act (CTA) took effect on January 1, 2024. These regulations are intended to help prevent and combat money laundering, terrorist financing, and other illicit activity by requiring certain companies to file beneficial ownership (BOI) reports with FinCEN using FinCEN’s online reporting portal.
Foley previously published an overview of FinCEN’s final regulations under the CTA and outlined the key regulatory changes and reporting requirements. This alert is aimed at providing our clients and contacts that are investment advisers to private investment funds with more focused guidance as they implement the CTA’s reporting requirements across their structures.
Advisers should note that any structures that include corporations, limited liability companies, or limited partnerships are potentially subject to BOI reporting requirements, unless there is an available exemption. Thus, investment advisers to private investment funds will need to consider whether entities within the advisers’ own structures will have BOI reporting obligations, as well as whether entities within their private investment fund and portfolio company structures will have BOI reporting obligations.
Who Must File BOI Reports?
Each “reporting company” that does not qualify for an exemption must file BOI reports with FinCEN.
What is a Reporting Company?
A reporting company is any entity that meets FinCEN’s definition of “domestic reporting company” or “foreign reporting company.”
A “domestic reporting company” generally is any domestic (U.S.) entity formed by filing a document with the secretary of state or any similar office under the law of a state or Indian tribe. The definition of domestic reporting company essentially covers every domestic corporation, limited liability company, and limited partnership.
A “foreign reporting company” generally is a foreign (non-U.S.) entity that registers to do business in any U.S. state or tribal jurisdiction. Foreign entities used in private investment fund structures tend not to register to do business in the U.S. unless they have offices, employees, or other active operations in the U.S. or on tribal lands. Many foreign entities used in private investment fund structures therefore will be exempt, or partially exempt, from BOI reporting obligations.
What Exemptions are Available?
Twenty-three types of entities are exempt from BOI reporting obligations (exempt entities). Advisers to private investment funds should become familiar with the exemptions described below, as these are the exemptions that, in our view, will be utilized most frequently by industry participants.
| Exemption | Entities Covered by Exemption |
| RIA Exemption | Any investment adviser registered (RIA) with the U.S. Securities and Exchange Commission (SEC). |
| Venture Capital Fund Adviser Exemption | Any investment adviser that is exempt from the requirement to register with the SEC pursuant to Section 203(l) of the Investment Advisers Act because it solely advises venture capital funds and files the required reports on Form ADV with the SEC (Venture Capital Fund Advisers). There is no corresponding exemption for Private Fund Advisers –investment advisers that are exempt from the requirement to register with the SEC pursuant to Section 203(m) of the Investment Advisers Act because their only clients are private funds and their assets under management are less than $150 million. |
| Broker-Dealer Exemption | Any broker or dealer registered under the Securities Exchange Act of 1934. |
| Pooled Investment Vehicle Exemption | Any “pooled investment vehicle” that is operated or advised by an RIA or Venture Capital Fund Adviser. For purposes of this exemption, a “pooled investment vehicle” is an entity that (a) is exempt from the requirement to register as an investment company in reliance on Section 3(c)(1) or Section 3(c)(7) of the Investment Company Act, and (b) is identified by its legal name on the adviser’s Form ADV, or will be so identified on the next annual updating amendment. |
| Large Operating Company Exemption | Any entity that satisfies each of the following criteria: (a) employs more than 20 full time employees, (b) has an operating presence at a physical office in the United States, and (c) filed a federal income tax or information return in the United States for the previous year demonstrating more than $5,000,000 in gross receipts or sales. |
| Subsidiary Exemption | Any entity whose ownership interests are controlled[1] or wholly owned, directly or indirectly, by certain – but not all – types of exempt entities. The subsidiary exemption is available to subsidiaries of RIAs, Venture Capital Fund Advisers, registered broker-dealers and large operating companies (but notably is not presumptively available to subsidiaries of pooled investment vehicles). Application of the Subsidiary Exemption is complicated. The analysis of whether a company qualifies for the subsidiary exemption does not end upon identifying a single exempt entity that controls or owns the company’s ownership interests. For example, if a company were to be controlled by more than one entity, one of which was not exempt, the subsidiary exemption may not be available. |
Special Reporting Requirement for Foreign Pooled Investment Vehicles
An otherwise-exempt pooled investment vehicle formed under the laws of a foreign country is not relieved of all reporting obligations. Rather, it must provide FinCEN with identification information of an individual that exercises “substantial control” over the pooled investment vehicle, but not information about its beneficial owners.
What Information is Reported in BOI Reports?
BOI reports are required to contain information about the reporting company itself and two categories of individuals: beneficial owners and company applicants.
In general, a beneficial owner is an individual who, directly or indirectly, owns or controls at least 25 percent of a company or has “substantial control” over the company, and a company applicant is an individual who directly files or is primarily responsible for the filing of the document that creates or registers the company.
How FinCEN’s Regulations Impact Private Investment Funds and their Advisers
Some entities within the structures of private investment funds and their advisers clearly will be exempt from BOI reporting obligations. However, while FinCEN exempts a broad range of companies from BOI reporting obligations, we anticipate that most investment advisers, whether or not registered with the SEC, will have one or more entities within their organizational structures, or the organizational structures of the private funds they advise, that will be required to file BOI reports. The types of entities that may have technical difficulty relying upon a BOI exemption include the following:
- Investment advisers that are not RIAs or Venture Capital Fund Advisers (e.g., Private Fund Advisers);
- The parent company of an investment adviser (regardless of whether the investment adviser is an RIA, Venture Capital Fund Adviser, or Private Fund Adviser);
- General partners to private investment funds, unless the general partner was formed by an RIA;
- Ultimate general partner entities of private investment fund general partners (regardless of whether the entity was formed by an RIA, Venture Capital Fund Adviser, or Private Fund Adviser);
- Investment funds that rely upon the registration exemption under Section 3(c)(5) of the Investment Company Act (funds that invest primarily in real assets);
- Joint ventures that are directly or indirectly controlled by one or more persons that are not exempt entities; and
- Entities between a private investment fund and a portfolio company, such as blockers, splitters, aggregators, and holding companies.
A BOI reporting exemption – such as the Subsidiary Exemption – may be available to many (though not all) of these types of entities; however, a final determination will require close examination of each entity’s specific ownership and control arrangements.
When are BOI Reports Due?
The deadline for filing a BOI report depends upon when a company was formed or registered.
Pre-2024 Reporting Companies. A reporting company formed or registered before January 1, 2024 will have until January 1, 2025 to file its BOI report with FinCEN.
2024 Reporting Companies. A reporting company formed or registered in 2024 will have 90 days from the time it receives actual notice that its creation or registration is effective to file its BOI report.
2025+ Reporting Companies. A reporting company formed or registered on or after January 1, 2025 will have 30 days from the time it receives actual notice that its creation or registration is effective to file its BOI report.
When Must BOI Reports be Updated?
The CTA does not require annual reporting of beneficial ownership information. However, if there is any change in the required information about the entity or its beneficial owners, the entity must file an updated BOI report no later than 30 days after the date on which the change occurred. Changes requiring an updated report include an entity’s registering a new “doing business as” name, a change in beneficial ownership (including the death of a beneficial owner), and a change in the beneficial owner’s name, address, or unique identifying number.
What are the Consequences of Non-Compliance?
Failure to file beneficial ownership information carries both civil and criminal penalties. A person who fails to comply is subject to a civil penalty of up to $500 for each day that the violation continues, fines up to $10,000 and 2 years in prison.
What Actions Should I Take?
Advisers should familiarize themselves with FinCEN’s online reporting portal and reporting procedures so that they will be prepared to timely file reports for those entities established or registered in 2024. Advisers also should start evaluating the other entities within their own organizational structures, and the organizational structures of the private investment funds they advise, to identify which of these entities will be required to file BOI reports and to collect the information to be included in the BOI reports.
[1] FinCEN’s final regulations do not define “control” for purposes of this exemption. However, as some commentators have pointed out, the regulations do provide that “substantial control” (when determining an individual’s relationship to a potential reporting company) may be found where an individual serves as an senior officer, has the authority to appoint or remove senior officers, the majority of the board of directors, has substantial influence over important business, financial or corporate decisions or has similar direct or indirect substantial control (See 31 CFR 1010.380(d)(1)(i)).
