FinCen Implements the Corporate Transparency Act

The U.S. Department of the Treasury’s Financial Crimes Enforcement Network (the “FinCen”) has issued the final rule with regard to Beneficial Ownership Information Reporting (the “BOI Rule”) promulgated under the Corporate Transparency Act (the “CTA”). The BOI Rule finalizes the beneficial ownership reporting requirements with respect to “Reporting Companies,” including the information required to be reported to FinCen and the reporting timeline.  The BOI Rule is effective as of January 1, 2024 (“Effective Date”).

What qualifies as a Reporting Company?

Reporting Companies include (1) any corporation, limited liability company, or entity created by the filing of a document with an secretary of state in any state of the United States or any Indian tribe or similar office and (2) any corporation, limited liability company or other entity formed under the law 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 the secretary of state or any similar office under the law of a U.S. state or Indian tribe.

Compliance Timeline

The deadlines for Reporting Companies to file their initial beneficial ownership report with FinCen are:

1. Domestic Reporting Companies formed before the Effective Date:  January 1, 2025.
2. Foreign Reporting Companies that become Reporting Companies before the Effective Date:  January 1, 2025.  
3. Domestic Reporting Companies formed on or after Effective Date but before January 1, 2025:  within 90 days of such formation.
3. Foreign Reporting Companies that become Reporting Companies on or after Effective Date but before January 1, 2025:  within 90 days of becoming a foreign Reporting Company. 

All domestic Reporting Companies formed on or after January 1, 2025 or foreign Reporting Companies that become Reporting Companies on or after January 1, 2025 are required to file their initial beneficial ownership reports within 30 days of formation or becoming a foreign Reporting Company, as applicable

Who is a Beneficial Owner?

A “beneficial owner” is  any natural person who either, (1) directly or indirectly, exercises substantial control over a Reporting Company or (2) owns or controls at least 25 percent of the ownership interests of a Reporting Company.”  The BOI Rule defines those exercising “substantial control” of a Reporting Company as those (i) who serve as senior officers of the Reporting Company, (ii) with the authority to appoint or remove senior officers or a majority of the board of directors (or similar body) of a Reporting Company, and (iii) who direct, determine, or have substantial influence over decisions of the Reporting Company.

Who is a Company Applicant?

Each (i) domestic Reporting Company formed on or after the Effective Date and (ii) each foreign Reporting Company that becomes a Reporting Company on or after the Effective Date (each, a “New Reporting Company”) is required to report its Company Applicants as well as its Beneficial Owners.  There are two categories of Company Applicants under the BOI Rule.  All New Reporting Companies must identify the natural person that formed the domestic Reporting Company or that registered the foreign Reporting Company, as applicable (the “Direct Filer”) as a Company Applicant.  The second category of Company Applicant is only applicable to a New Reporting Company when a natural person other than the Direct Filer is primarily responsible for directing or controlling the formation or registration, as applicable, of the New Reporting Company. All Company Applicants must be natural persons. Companies or legal entities cannot be Company Applicants.

Reportable Information

The following information is required with respect to each Reporting Company:

• Legal name;
• Any trade names, doing business as names;
• Current street address of its principal place of business in the U.S.;
• Its jurisdiction of formation or registration; and,
• Its taxpayer identification number.

The following information is required from each Reporting Company with respect to its Beneficial Owners and Company Applicants:

• Individual’s name;
• Date of birth;
• Residential address for Beneficial Owners or, in the case of a Company Applicant that forms or registers any New Reporting Company in the course of such Company Applicant’s business, the street address of such business; and,
• Identifying number from an acceptable identification document such as a passport or U.S. driver’s license and the name of the issuing state or jurisdiction or the identification document.

Exemptions Most Relevant for Private Funds and their Advisers

For advisers and private funds already subject to ownership reporting to the SEC (such on Form ADV), the new rules will generally provide certain exemptions to beneficial ownership reporting and most advisers and private funds will not be required to comply with the BOI Rule.  Specifically, the BOI Rule provides relief to the following private funds and their investment advisers:

1. investment advisers registered with the SEC and their affiliated general partners;
2. private funds (which are funds relying on exemptions from the requirement to register as an investment company pursuant to Section 3(c)(1) or 3(c)(7)[1] under the Investment Company Act) that are managed by SEC-registered investment advisers and identified by name on the adviser’s Form ADV; and
3. venture capital fund advisers (advisers relying on the venture capital adviser exemption under the Investment Advisers Act and filing as an Exempt Reporting Adviser (ERA)).

A few items to note regarding these exemptions:

1. Pooled investment vehicles that are formed in the US and are operated or advised by investment advisers who (i) rely on the “Private Fund Adviser” exemption from SEC registration under Section 203(m) of the Investment Advisers Act because they advise solely private funds that have a total of less than $150 million in assets under management in the United States, (ii) state-registered investment advisers; and (iii) foreign investment advisers, are not expressly exempt from the definition of Reporting Company.
2. The definition of “pooled investment vehicle” does not capture investment vehicles that rely on exemptions other than Section 3(c)(1) or Section 3(c)(7), vehicles relying on, for example, Section 3(c)(5)(C) of the Investment Company Act, such as certain real estate funds, are NOT expressly exempt from the definition of Reporting Company and may be required to file a BOI report.  
3. Investment advisers and their general partner affiliates that are not registered with the SEC will likely be required to file a BOI report, unless another exemption is available.
3. Subsidiaries of exempt pooled investment vehicles are not automatically exempt from the BOI Rule and must be examined individually to see if another exemption is available for them.

Other Meaningful Exemptions

            There are a total of 23 exemptions from the BOI Rule, some of which are listed below:

1. Entities registered pursuant to the Commodity Exchange Act;
2. Large Operating Companies;
3. Subsidiaries of certain exempt entities (importantly, as discussed above, subsidiaries of exempt pooled investment vehicles are not per se exempt);
4. Registered investment companies; and
5. Tax-Exempt Entities.

Failure to Report

The willful failure to report complete or updated beneficial ownership information to FinCen, or the willful provision of or attempt to provide false or fraudulent beneficial ownership information may result in a civil or criminal penalties, including civil penalties of up to $500 for each day that the violation continues, or criminal penalties including imprisonment for up to two years and/or a fine of up to $10,000. Senior officers of an entity that fails to file a required BOI report may be held accountable for that failure.

Conclusion

Understanding how the BOI Rule will apply to a particular entity will require analysis. It is important to establish a compliance process soon in order to determine whether an entity is a Reporting Company and, if so, what information about its beneficial owners will be required.

For more information on the BOI Rule and FinCEN you can visit https://www.fincen.gov/boi.

If you have any questions about this alert and, particularly, the BOI Rule’s impact on private funds  and their advisers and general partners, please do not hesitate to reach out to David Fitzgerald (Partner) at 212.573.8428 or via email at dfitzgerald@sadis.com. 

General inquiries about the BOI Rule can also be directed to Danielle Epstein-Day (Partner) at 212-573-8416 or vial email at depstein@sadis.com.