Private Investment Funds: Assess Your Structures and Prepare for Corporate Transparency Act Compliance

Beginning January 1, 2024, companies created or registered in the United States will have to report information about their ownership to the Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S. Department of the Treasury, pursuant to The Corporate Transparency Act (“CTA” or the “Act”). For more information, see our prior alert on this topic here.

The Act defines Reporting Company to include (1) a domestic reporting company, which is a corporation, a limited liability company (LLC), or other entity that was created in the United States by filing a document with a secretary of state or a similar state office, and (2) a foreign reporting company, which is a foreign company that is registered to do business in any U.S. state or Indian tribe by such a filing.[1] However, the Act exempts 23 categories of companies from the definition of Reporting Company, effectively exempting them from the CTA’s reporting requirements.

Unless an exemption applies, this definition reaches many investment managers, sponsors and other participants in the private investment space. Investment funds need to understand the CTA and evaluate their structures to determine whether they will be required to report their beneficial ownership and company applicant information to FinCEN.

Potential Exemptions for Private Fund Managers

A number of exemptions are in place to minimize the compliance burdens for investment managers. However, private fund managers, commodity trading advisers, co-investment vehicles in fund structures and commodity pool operators need to determine if an exemption applies to their structure.

The most relevant exemptions for private fund sponsors are the exemptions for investment advisers registered with the Securities and Exchange Commission (SEC) pursuant to the Investment Advisers Act of 1940 (Advisers Act) (such advisers, Registered investment advisers “RIAs”, venture capital fund advisers exempt from registration pursuant to Section 203(l) of the Advisers Act (Venture Capital Fund Advisers) and entities whose ownership interests are controlled or wholly owned, directly or indirectly, by one or more exempt entities (Wholly Owned Subsidiary Exemption). [2]

This language expressly exempts investment companies themselves, but the exemptions are narrow in scope and many other funds and their portfolio companies may be affected by the CTA’s reporting requirements.

Registered Investment Advisers (RIAs) and Private Fund Advisers

RIAs are expressly exempt from reporting obligations under the CTA because of their registration with the SEC.[3]

However, this exemption from reporting to FinCEN only applies to the RIA itself and not the entities that either indirectly or directly own interests in the RIA. Also, there is no exemption for state-registered investment advisers, so this only covers those registered with the SEC.

Further, a private fund adviser that is exempt from registration under Rule 203(m)-1 of the Advisers Act is not considered “registered” with the SEC and is likely not covered by the exemption. If such an adviser was formed by a filing done under U.S. law or is registered to do business in the U.S., it is likely to have reporting obligations under the CTA. However, foreign private fund advisers that are not registered to do business in the U.S. are not required to report to FinCEN.

Venture Capital Fund Advisers

A venture capital fund adviser as defined by Rule 203(l)-1 of the Advisers Act, is expressly exempt from reporting under the CTA, as long as it has filed the required Form ADV with the SEC.[4]

Commodity Pool Operators

Commodity pool operators (CPOs) or commodity training advisors registered with the U.S. Commodity Futures Trading Commission (CTFC) are exempt from reporting under the CTA. CPOs that are exempt under CFTC Regulation 4.13, along with other unregistered entities, would not be exempt from reporting under the CTA unless another exemption applies.

Entities Created to Serve as General Partners or Managing Members

Entities that were created to serve as general partners or managing members of private funds, if created by a filing or are registered to do business in the U.S. and are thus considered Reporting Companies, likely do not qualify for an exemption.

Foreign Funds

Funds outside of the U.S. are not required to report, unless they are registered to do business in a U.S. state and are thus considered a foreign Reporting Company. These entities do not qualify for the pooled investment vehicle reporting exemption.

Private Funds

The “pooled investment vehicle” exemption from the CTA, does not include private funds or investment vehicles that rely on Section 3(c)(5)(c) of the Investment Company Act.  Unless another exemption applies, these funds likely have reporting obligations.

Wholly-Owned Subsidiaries of Exempt Entities

There is also an exemption under the CTA for wholly-owned subsidiaries of certain exempt entities. However, subsidiaries of money services businesses, pooled investment vehicles and entities that assist a tax-exempt entity, among others, are not eligible for this exemption.

While the subsidiary exemption does apply to wholly-owned subsidiaries of registered investment companies, generally, subsidiaries of private investment funds do not qualify for the exemption. As such, alternative investment vehicles such as feeder funds are likely required to report.

Final Considerations

• Investment funds should prepare to comply with the Act and consider their eligibility for any exemptions.
• While some entities are expressly exempt, most structures require an individualized assessment to determine its potential reporting obligations and compliance with the CTA.
• Even if an entity is exempt, its portfolio companies and subsidiaries might not be.
• A fund manager who is registered with the SEC might be exempt even though the fund itself might not be.
• Compliance with the CTA as a Reporting Company requires a robust internal process to track and continuously monitor new investors and subsequently update beneficial ownership information with FinCEN.

For more information on the CTA including information on what is required to be reported, please visit: Are You Ready? The Corporate Transparency Act is Coming and Many Businesses Will be Required to Report Ownership Disclosures. The information above provides general guidelines. If you need help determining whether your structure is required to report or how to establish a process for reporting, please contact your Dinsmore attorney.