The Financial Crimes Enforcement Network’s (“FinCEN”) final rule implementing the beneficial ownership information (“BOI”) reporting requirements under the Corporate Transparency Act (“CTA”) became effective on January 1, 2024 (“Effective Date”).
The final rule requires certain U.S. domestic and foreign companies (“Reporting Companies”) to report BOI to FinCEN with respect to (i) any natural persons who directly or indirectly own or control at least 25% of, or otherwise exercise “substantial control” over, a Reporting Company (“Beneficial Owners”) and (ii) certain individuals who file corporate documents (and direct such filings) for Reporting Companies with state authorities. The collected BOI is maintained in a confidential database and only made accessible to law enforcement agencies and, with Reporting Companies’ consent, certain financial institutions for purposes of conducting customer due diligence.
While the categories of entities considered Reporting Companies are broad, the final rule contains a number of exemptions applicable to the private fund industry. Although many private funds and advisers are excused from BOI reporting, advisers should note that certain of their affiliates, as well as some entities included in fund structures, likely are required to submit BOI reports to FinCEN.
- Investment advisers registered with the SEC (“RIAs”) and venture capital fund advisers filing with the SEC as exempt reporting advisers (together with RIAs, “Exempted Advisers”) do not have to report BOI. Exempt reporting advisers relying on the private fund adviser exemption do have to report (absent another available exemption).
- RIAs’ relying advisers (i.e., affiliated advisers listed on Schedule R of an RIA’s Form ADV) (“Relying Advisers”) do not have to report BOI.
- Fund vehicles, and potentially their general partners, generally do not have to report BOI.
- Many portfolio companies likely do not have to report BOI. However, as discussed further below, other entities in a fund structure, such as blockers, aggregators and other special purpose vehicles, may have to report.
- Reporting Companies formed or registering to do business in a U.S. state in 2024 are required to submit an initial report within 90 days of being formed or registering. Beginning January 1, 2025, Reporting Companies formed or registering to do business in a U.S. state will be required to submit an initial report within 30 days of being formed or registering. Reporting Companies existing prior to the Effective Date have until January 1, 2025 to file an initial report.
Definition of Reporting Company
The final rule categorizes all Reporting Companies as either:
- a “domestic Reporting Company”, defined as a corporation, limited liability company (“LLC”) or any other entity created by the filing of a document with a secretary of state or any similar office under the laws of a U.S. state or Indian tribe; or
- a “foreign Reporting Company”, defined as any corporation, LLC or other entity formed under the laws of a foreign country that is registered to do business in any U.S. state or tribal jurisdiction by the filing of a document with a secretary of state or any similar office.
Importantly, in both cases, it is the filing of a document with the secretary of state or other similar office that results in an entity being a Reporting Company. In the adopting release, FinCEN noted that “[w]hether the ‘filing’ is deemed mandatory or voluntary… pursuant to a conversion or reorganization… made for tax, dissolution, or other purposes, or any other such consideration, is not necessarily dispositive” of an entity meeting the definition of Reporting Company. Instead, FinCEN emphasized that the only relevant consideration is whether a filing “creates” an entity. Therefore, a general partnership, for example, typically would not be a Reporting Company, nor would a non-U.S. entity that does not register to do business in the U.S.
The CTA exempts 23 categories of entities from the definition of Reporting Company (and therefore BOI reporting). Advisers should carefully consider each of their affiliated entities individually when determining whether BOI reporting is required.
Entities that are or may be exempt from BOI reporting include (but are not limited to):
- Exempted Advisers and Relying Advisers;
- general partners or managing members of PIVs (as defined below) that (i) are created under the laws of, or registered to do business in, a U.S. state and (ii) meet the conditions of applicable guidance issued by the SEC to be, and are, regulated as an investment adviser under the Investment Advisers Act of 1940, as amended (a “GP RIA”, and such act, the “Advisers Act”). Please note that this is an interpretive position recently taken by a number of peer law firms;
- certain domestic “Pooled Investment Vehicles” (“PIVs”) managed by Exempted Advisers or GP RIAs;
- controlled or wholly-owned subsidiaries of certain exempted entities (the “Subsidiary Exemption”);
- foreign entities not registered to do business in any U.S. state or tribal jurisdiction; and
- large operating companies that satisfy certain conditions.
Recently, a number of peer law firms took the position that where an exempt PIV’s important decisions are controlled by an RIA or a GP RIA (a “Controlled PIV”), such RIA or GP RIA could be viewed as indirectly controlling the ownership interests of certain of the PIV’s controlled or wholly owned subsidiaries (e.g., blocker or aggregator entities or other similar special purpose vehicles (“SPVs”)). Under this theory, the firms argued that an SPV could be treated as exempt from BOI reporting pursuant to the Subsidiary Exemption where there are no third parties (e.g., third-party investors or senior officers or individuals exercising substantial control over the SPV who are unaffiliated with the exempt RIA or GP RIA) who would otherwise be reported on the SPV’s beneficial ownership report and where the exempt RIA’s or GP RIA’s control over important decisions of the PIV gives it indirect control of the ownership interests in the SPV. However, in response to a number of inquiries relating to BOI reporting, FinCEN recently released responses to a set of Frequently Asked Questions (the “FAQ”), in which FinCEN indicated that where an entity exempt from BOI reporting controls some but not all of the ownership interests of a subsidiary, such subsidiary does not qualify for exemption from BOI reporting under the Subsidiary Exemption. FinCEN further clarified that, in order to qualify for the Subsidiary Exemption to BOI reporting, the subsidiary’s ownership interests must be fully, 100 percent owned or controlled by an exempt entity.
Entities where BOI reporting is (or, in certain cases, is likely) required include (but are not limited to):
- investment advisers, other than Exempted Advisers;
- certain private funds (e.g., real estate vehicles relying on the Section 3(c)(5)(c) exemption under the Investment Company Act of 1940, as amended (“Investment Company Act”), or funds managed by non-Exempted Advisers); and
- a subsidiary of an exempt PIV where (i) the PIV is not a Controlled PIV or (ii) one or more unaffiliated third parties own any amount of, or exercise any control over, the subsidiary’s ownership interests, unless such subsidiary independently qualifies for a separate exemption.
Additionally, foreign PIVs registered to do business in the U.S. that are managed by Exempted Advisers are not excused from BOI reporting. As discussed further below, the final rule instead makes available a limited reporting exemption to such entities.
Pooled Investment Vehicles
The final rule defines “Pooled Investment Vehicle” as any entity managed by an Exempted Adviser that (i) qualifies as an investment company under Section 3(a) of the Investment Company Act, or (ii) relies on a Section 3(c)(1) or 3(c)(7) exemption under the Investment Company Act and is (or will be) identified on an Exempted Adviser’s Form ADV (i.e., a private fund).
As noted above, a PIV domiciled in the U.S. is only required to complete BOI reporting if it is not managed by an Exempted Adviser.
For foreign PIVs, however, the final rule contains a limited reporting exemption whereby foreign PIVs are only required to report information related to an individual that exercises substantial control over it (as opposed to all Beneficial Owners). Should multiple persons meet this criteria, then only information regarding the individual with the “greatest authority over the strategic management of the entity” need be reported to FinCEN.
Under the final rule’s Subsidiary Exemption, most controlled or wholly-owned subsidiaries of one or more exempted entities are also exempt from BOI reporting.
As noted above, the Subsidiary Exemption is not expressly available to subsidiaries of exempt PIVs. Instead, the final rule requires such entities to complete BOI reporting unless a separate exemption applies. Therefore, where a PIV is exempted under the final rule, such entity’s subsidiaries may still be required to complete BOI reporting. However, in such a scenario, the CTA does contain a special rule limiting BOI reporting requirements of such subsidiaries to only the identities of their exempt Beneficial Owners.
Large Operating Companies
BOI reporting is not required for “large operating companies” that:
- maintain an operating presence in the U.S.;
- have more than 20 full-time employees in the U.S.; and
- have filed a U.S. tax return in the previous year reporting over $5 million in gross receipts or sales.
Many portfolio companies of PIVs are excused from BOI reporting under this exemption. However, SPVs are unlikely to qualify.
Where no exemptions apply, Reporting Companies are required to file BOI reports with FinCEN disclosing identifying information for (i) each of their Beneficial Owners and (ii) the individual who directly files the document that creates a domestic entity or that registers a foreign entity to do business (as well as the person directing such filing) (“Company Applicant”), including, in each case, such persons’:
- full name;
- date of birth;
- current residential or business street address; and
- a unique identifying number from an acceptable identification document.
Each Reporting Company is also required to disclose identifying information regarding itself to FinCEN, including:
- its full legal name;
- any trade name or “doing business as” name;
- its current address;
- the state, tribal or foreign jurisdiction of (i) formation for a domestic Reporting Company or (ii) initial registration for a foreign Reporting Company; and
- a tax identification number.
The final rules utilizes dual tests to determine whether an individual meets the definition of a Beneficial Owner.
Actual Ownership Test
First, an individual is a Beneficial Owner if they have “actual ownership” of a Reporting Company. As noted above, any person who directly or indirectly owns or controls at least 25% of the “ownership interests” of a Reporting Company is considered a Beneficial Owner of such entity.
Under the final rule, “ownership interests” include: equity interests, capital or profit interests, convertible interests, and options as well “[a]ny other instrument, contract, arrangement, understanding, relationship, or other mechanism used to establish ownership.”
In determining whether an individual owns or controls at least 25% of the ownership interests of a Reporting Company, such individual’s total ownership interest (directly or indirectly) shall be (i) compared to the outstanding ownership interests of the applicable Reporting Company and (ii) calculated at the present time with any options or similar interests treated as exercised.
Substantial Control Test
Second, an individual is treated as a Beneficial Owner if they exercise “substantial control” over a Reporting Company (even if they do not own or control 25% of such Reporting Company’s ownership interests) by:
- serving as a senior officer of the Reporting Company;
- having authority over the appointment or removal of any senior officer or a majority of the board of directors (or similar body) of the Reporting Company;
- directing, determining or having decision making authority or substantial influence over, important matters affecting a Reporting Company; or
- exercising any other forms of substantial control over the Reporting Company.
The final rule includes two categories of individuals in its definition of Company Applicant.
- First, the individual who directly files the document to create or register a Reporting Company is considered a Company Applicant. In the case of a domestic Reporting Company, this is the individual who directly files such company’s initial formation document. In the case of a foreign Reporting Company, this is the individual who files the document first registering the company to do business in the U.S.
- Second, the individual who is primarily responsible for directing or controlling a Reporting Company’s filing of the formation or registration document is also considered a Company Applicant under the final rule.
Importantly, Reporting Companies need to understand (i) whether they have one or two Company Applicants and (ii) who serves and should be reported as their Company Applicant(s).
Timing of Filings and Updates Thereto
Under the final rule, Reporting Companies:
- existing prior to the Effective Date have until January 1, 2025 to file an initial report;
- formed or registered to do business in the U.S. on or after the Effective Date, but before January 1, 2025, are required to submit an initial report within 90 days of being formed or registered; and
- formed or registered to do business in the U.S. after January 1, 2025, will be required to submit an initial report within 30 days of being formed or registered.
Additionally, Reporting Companies have 30 days to (i) report updates to their initial filings and (ii) correct inaccurate information included in prior filings once the Reporting Company becomes aware, or has reason to know, of the inaccuracy of information in earlier reports. As a result, Reporting Companies should consider instituting policies and procedures designed to monitor for, and ensure timely reporting of, any corrections or updates to previously filed BOI reports.
The final rule excuses reporting for Company Applicants of domestic Reporting Companies formed, and foreign Reporting Companies registered to do business in the U.S., before the Effective Date. Reporting Companies formed or registered to do business in the U.S. on or after the Effective Date are required to initially report Company Applicant BOI but are not required to update it.
What to Expect Next
The final rule was the first of three rulemakings required to implement the CTA. On December 22, 2023, FinCEN published its second rulemaking, which established the framework for BOI access and safeguarding. Through its third and final rulemaking, FinCEN intends to revise its Customer Due Diligence rule to ensure alignment with the CTA.
- 1. FinCEN is a bureau of the U.S. Department of the Treasury responsible for safeguarding the U.S. financial system from illicit use (e.g., money laundering) and promoting national security interests through the collection, analysis and dissemination of financial intelligence.↵
- 2. The final rule’s adopting release can be found here. A related fact sheet and the final rule itself can be found here and here, respectively.↵
- 3. The final rule does not contain a separate definition for “other entity”.↵
- 4. Under the final rule, FinCEN is authorized to further exempt additional entity types.↵
- 5. Specifically, this refers to the conditions set forth in the SEC Staff’s 2005 and 2012 no-action letters to the American Bar Association, which state that a special purpose vehicle is deemed to be a GP RIA (i.e., that such special purpose vehicle is deemed an investment adviser registered with the SEC) if such entity (i) was created by an RIA to act as a PIV’s general partner or managing member, (ii) designates the affiliated RIA to undertake fund management services for such PIV, (iii) is, along with its employees and persons acting on its behalf, subject to the affiliated RIA’s supervision and control and (iv) is subject to the Advisers Act and SEC examination, even if such entity has not independently registered with, or submitted a separate Form ADV to, the SEC.↵
- 6. The full FAQ release can be found here.↵
- 7. This includes exempt reporting advisers relying on the “Private Fund Adviser” exemption and state-registered investment advisers.↵
- 8. Note that a foreign PIV not registered to do business in the U.S. is not a Reporting Company.↵
- 9. Entities in a fund structure that are not listed as private funds (and therefore clients) on Form ADV are not eligible for the PIV exemption.↵
- 10. Specifically, the final rule notes that, where one or more exempt entities has or will have a direct or indirect ownership interest in a Reporting Company and an individual is a Beneficial Owner of the Reporting Company exclusively by virtue of the individual’s ownership interest in such exempt entities, the report may include the names of the exempt entities in lieu of the information otherwise required under the final rule with respect to such Beneficial Owner. Therefore, if an exempt PIV owns a Reporting Company, the filing for the Reporting Company need only include information with respect to the exempt PIV rather than such PIV’s Beneficial Owners.↵
- 11. A FinCEN identifier number or something similar (e.g., passport number or driver’s license number) is acceptable.↵
- 12. In the case of a Reporting Company with a principal place of business in the U.S., the street address of such principal place of business is required to be reported. In all other cases, the street address of the primary location in the U.S. where the Reporting Company conducts business is required to be reported.↵
- 13. An IRS Taxpayer Identification Number (TIN) (including an Employer Identification Number) is required to be reported for a domestic Reporting Company. Where a foreign Reporting Company has not been issued a TIN, a tax identification number issued by a foreign jurisdiction and the name of such jurisdiction is required to be reported.↵
- 14. For Reporting Companies that issue capital or profit interests (including partnerships), an individual’s ownership interests shall be the individual’s capital and profit interest in the entity, calculated as a percentage of the total outstanding capital and profit interests of the entity. For Reporting Companies organized as corporations (or taxed as corporations) as well as entities that issue shares, an individual’s ownership interest shall be the greater of (i) the total combined voting power of all classes of ownership interests of the individual as a percentage of total outstanding voting power of all classes of ownership interests entitled to vote, or (ii) the total combined value of the ownership interests of the individual as a percentage of the total outstanding value of all classes of ownership interests. Where neither of the above calculation methodologies can be performed with reasonable certainty, the final rule contains a catch-all provision that deems an individual to own or control 25% or more of the total ownership interests of a Reporting Company if such person owns or controls 25% or more of any class or type of ownership interest of such company.↵
- 15. The final rule’s adopting release can be found here. A related fact sheet and the final rule itself can be found here and here, respectively.↵