The Corporate Transparency Act (CTA), enacted earlier this year by the US Congress, is set to usher in a new era of financial transparency and anti-money laundering efforts. In this article, I would like to shed light on the significant implications of this legislation for privately held entities, both in the United States and abroad.
As of January 1, 2024, the regulations under the CTA, known as the Final Rule, were enacted. These regulations outline the reporting requirements for beneficial ownership information (BOI) to be submitted to the US Treasury Department’s Financial Crimes Enforcement Network (FinCEN). The CTA and Final Rule detail which entities, both US and non-US, are obligated to report BOI, the information to be reported, and the deadlines for reporting.
In essence, Reporting Companies, encompassing certain US and non-US entities, are mandated to disclose BOI to FinCEN. This information will be stored confidentially, accessible only to law enforcement agencies and, with the consent of Reporting Companies, specific financial institutions conducting customer due diligence.
For Reporting Companies established before January 1, 2024, there is a phase-in period, requiring BOI submission to FinCEN by December 31, 2024. However, new Reporting Companies formed in 2024 must report BOI within 90 days of acceptance, while those formed on or after January 1, 2025, have a 30-day window. Additionally, any changes in beneficial ownership or exemption status must be reported within 30 days, even for companies established before 2024.
While the CTA broadly defines Reporting Companies, exemptions exist for various entities, including those relevant to the private fund industry. Private fund sponsors should note that certain affiliates and entities within fund structures may still need to submit BOI reports, even if others in the structure are exempt. Ambiguities remain regarding the implementation of exemptions in the private funds context.
Overview of Information to be Reported:
Reporting Companies are required to provide identifying information, including full legal name, trade name, current address, jurisdiction of formation, and taxpayer identification number (TIN). Beneficial owners and company applicants must submit individual BOI, comprising full legal name, date of birth, current address, and TIN or other identifying number.
- Reporting Company: A US domestic or non-US entity formed or registered to do business in a US state or tribal jurisdiction, excluding certain entities like trusts and general partnerships not created by state filing.
- Beneficial Owner: An individual with at least 25% ownership control or substantial control over the Reporting Company.
- Company Applicant: The individual filing documents to create or register the Reporting Company.
Exemptions for Private Fund Sponsors:
The CTA exempts various entities from Reporting Company status, including:
- Investment advisers registered with the SEC.
- Venture capital fund advisers exempt from SEC registration.
- Controlled or wholly-owned subsidiaries of exempted entities.
- Large operating companies meeting specific conditions
Pooled Investment Vehicles:
BOI reporting doesn’t apply to pooled investment vehicles operated or advised by exempted sponsors. A precise definition is provided for these vehicles, excluding those relying on certain sections of the Investment Company Act.
Most controlled or wholly-owned subsidiaries of exempted entities are exempt from BOI reporting. However, subsidiaries owned or controlled by an exempt pooled investment vehicle must complete BOI reporting unless another exemption applies.
Large Operating Companies:
Fund entities not qualifying for other exemptions may be exempt as “large operating companies” if they maintain a US office, have over 20 full-time US employees, and report over US$5 million in US-source gross receipts or sales.
While BOI reporting is confidential, Reporting Companies can consent to financial institutions accessing the information for customer diligence. Private fund sponsors should carefully examine their structures to determine BOI reporting requirements, considering potential impacts on structuring decisions. The complexity of the CTA and Final Rule requires a detailed analysis of each entity within a structure for compliance.
Notably, willful violations of the CTA carry significant penalties, including daily fines and imprisonment.
As private fund sponsors transition to this new regulatory landscape, it is imperative to stay informed and seek legal advice to navigate the complexities of the Corporate Transparency Act. The evolving nature of the legislation may require ongoing adjustments, and proactive measures are essential to ensure compliance and mitigate potential risks. For more information on preparing for this change in law, please contact our Asset Management and Investment Funds practice group lawyers.
Appendix A: Exemptions
A detailed list of entities exempted from Reporting Company status is provided in Appendix A, covering securities reporting issuers, governmental authorities, banks, credit unions, money services businesses, and various others. Private fund sponsors are encouraged to review the exemptions relevant to their operations.
This concise overview aims to inform fund manager clients about the key aspects of the Corporate Transparency Act and Final Rule, emphasizing the need for proactive compliance measures in this evolving regulatory landscape.
Please schedule a call with our Corporate and Securities Department to discuss these and other regulation changes.