Private Equity Funds: Assess Your Structures and Prepare for Compliance with the Corporate Transparency Act | Dinsmore & Shohl LLP

Beginning January 1, 2024, companies incorporated or incorporated in the United States will be required to report information about their ownership to the Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S. Department of the Treasury, under the Corporate Transparency Act (“CTA ” or “the Law”). For more information, see our advance warning on this topic here.

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

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

Potential exemptions for private fund managers

A number of exemptions have been introduced to minimize the compliance burden on investment managers. However, private fund managers, commodity advisers, vehicles for collective investment in fund structures and commodity pool operators should determine whether the exemption applies to their structure.

The most relevant exemptions for sponsors of private funds are the exemptions for investment advisers registered with the Securities and Exchange Commission (SEC) under the Investment Advisers Act of 1940 (the Advisers Act) (such advisers, registered investment advisers “RIAs” , venture capital fund advisers exempt from registration under 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 (exemption from wholly owned subsidiaries). [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 Advisors (RIAs) and Private Fund Advisors

RIAs are specifically exempt from reporting obligations under the CTA by virtue of their registration with the SEC.[3]

However, this exemption from reporting to FinCEN applies only to the RIA itself and no the entities that indirectly or directly own shares in the RIA. Also, there is no exception for state registered investment advisers, so this covers only those registered with the SEC.

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

Advisers to venture capital funds

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

Commodity pool operators

Commodity pool operators (CPOs) or commodity training advisors registered with the US 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, will not be exempt from reporting under the CTA unless another exemption applies.

Entities formed to serve as general partners or managing members

Entities that are formed to serve as general partners or managing members of private funds, if they are incorporated by filing or are registered to do business in the US and are therefore considered reporting companies, may not qualify for the exemption.

Foreign funds

Non-US funds are not required to report unless they are registered to do business in a US state and are therefore considered a foreign reporting company. These entities do not qualify for the exemption from reporting pooled investment funds.

Private funds

The “pooled investment vehicle” exemption from the CTA, no include private funds or investment vehicles that rely on Section 3(c)(5)(c) of the Investment Company Act. Unless another exception 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 enterprises, pooled investment companies and entities that support a tax-exempt company, among others, are does not meet the conditions for this release.

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

Concluding considerations

  • Investment funds should prepare to comply with the law and consider their eligibility for any exemptions.
  • Although some entities are specifically exempt, most entities require an individual assessment to determine their potential CTA reporting and compliance obligations.
  • Even if an entity is exempt, portfolio companies and subsidiaries may not be.
  • A fund manager that is registered with the SEC may be exempt, although the fund itself may not be.
  • CTA compliance as a reporting company requires a robust internal process to track and continuously monitor new investors and subsequently update beneficial owner information with FinCEN.

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