Corporate Transparency Act Considerations in the Private Funds Space

Effective as of Jan. 1, 2024, many businesses and corporate entities, both foreign and domestic, must file informational reports on their beneficial owners with the Financial Crimes Enforcement Network under the Corporate Transparency Act. Robinson Bradshaw published an article summarizing the CTA and highlighting best practices for achieving compliance, located here. The CTA requirements are complex and allow for numerous exemptions, and the availability of each exemption depends on the specific facts and circumstances.

The following analysis considers various CTA exemptions that may apply to certain entities managed or controlled by private funds and independent sponsors and to entities owned, in whole or in part, by funds or other entities in their investment structures. Please see our prior article on the CTA for more information on what entities are required to report, additional exemptions not discussed in this post, reportable information, filing deadlines, updating requirements, penalties for noncompliance and other CTA-related information.

Certain CTA Exemptions Potentially Applicable to Private Funds, Sponsors, and Other Related or Affiliated Entities

Registered Investment Advisers. Investment advisers registered as such with the SEC under the Investment Advisers Act of 1940 are exempt from reporting under the CTA. While RIAs themselves are exempt from reporting, the RIA exemption does not necessarily extend to entities that, directly or indirectly, own interests in an RIA, and such entities may need to qualify for another exemption or meet the CTA’s reporting requirements. While not directly addressed in the CTA or current regulations or guidance, the consensus among stakeholders is that “relying advisers” that are included in an umbrella registration on an RIA’s Form ADV may also rely on the RIA exemption.

Venture Capital Advisers. Venture capital advisers are exempt from reporting under the CTA if they satisfy the definition in Section 203(l) of the Advisers Act and file Item 10, Schedule A, and Schedule B of Part 1A of Form ADV with the SEC. (Advisers that solely manage private funds with U.S. assets under management of less than $150 million are exempt from registration with the SEC under Section 203(a) of the Advisers Act, but the CTA does not exempt them from the CTA’s reporting obligations.)

Pooled Investment Vehicles. Under this exemption, an entity must be an investment company under Section 3(a) of the Investment Company Act of 1940 or qualify for exemption under Section 3(c)(1) or 3(c)(7). Along with satisfying one of the two preceding criteria, the entity must be operated or advised by one of the following exempt entities, as defined under the CTA: (i) a bank, (ii) a credit union, (iii) a broker or dealer in securities, (iv) a registered investment company or registered investment adviser, or (v) a venture capital fund adviser. Finally, the pooled investment vehicle seeking exemption must be identified by its legal name by the applicable investment adviser in its Form ADV (or successor form) filed with the SEC (or be so identified in the next annual updating amendment to Form ADV required to be filed by the applicable investment adviser). Foreign pooled investment vehicles registered to do business in the United States are subject to certain limited reporting obligations.

Entities (e.g., portfolio companies) owned by an exempt pooled investment vehicle are not automatically exempt under the CTA and must have a separate exemption. Further, pooled investment funds managed by private fund advisers are not exempt from CTA reporting under the pooled investment vehicles exemption.

Large Operating Companies. Any entity with the following characteristics is treated as a large operating company and exempt from the reporting company definition: The entity must (i) employ over 20 full-time employees in the United States, (ii) have a physical operating presence in the United States and (iii) have filed, in the previous year, a federal income tax return evidencing more than $5,000,000 in gross receipts or sales on the entity’s applicable tax form. When calculating an entity’s employees, FinCEN clarified that entities must make this assessment on an entity-by-entity basis rather than on a consolidated basis across affiliates. Therefore, a single entity must individually employ 20 full-time employees in the United States, without consideration of any affiliated entities and their employees, to satisfy the first criterion for the large operating company exemption.

Subsidiaries. Subsidiaries that are controlled or wholly owned by certain exempt entities are exempt from reporting under the CTA, but, as stated above, this exemption does not apply to entities owned by pooled investment vehicles. Notwithstanding the CTA’s use of the term “control,” FinCEN has not defined that term for purposes of this exemption. However, FinCEN has stated that an exempt parent entity must control all of the ownership interests in the subsidiary. Thus, FinCEN’s position effectively transforms the exemption to require that the subsidiary be wholly controlled to qualify as a “controlled” subsidiary.

Non-RIA Managers. General partners and investment managers that are not RIAs (and do not qualify for the venture capital adviser exemption from CTA), such as investment advisers registered solely with a state commission, do not benefit from a CTA exemption by virtue of their state or other registration. Rather, these entities must seek an independent exemption, and the investment vehicles advised by these entities must also seek an independent exemption to avoid reporting company status under the CTA. However, foreign investment advisers that are not RIAs may not come within the scope of the CTA if the adviser is not formed or registered to do business in the United States.

Next Steps

Given the complexity of the CTA and exemptions from reporting obligations thereunder, private fund sponsors should thoughtfully consider their management companies, each related entity, all entities in their funds’ organizational structures and, in some instances, their private funds’ portfolio companies, and assess whether a CTA exemption applies to each. To discuss additional considerations applicable to a CTA reporting analysis, please reach out to one of the attorneys in our Fund Formation & Investment Management group.