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As of January 1, 2024, the Beneficial Ownership Information Reporting Requirements (the “Reporting Rule”) issued by Financial Crimes Enforcement Network (“FinCEN”) to implement Section 6403 of the Corporate Transparency Act (“CTA”) became effective. The Reporting Rule impacts both domestic entities and foreign entities doing business in the United States. Our previous articles provided a general overview of the Reporting Rule, the CTA, and the reporting timeline. Links to our previous articles are here and here.

A private fund structure typically encompasses multiple entities of various functions, including the private fund, a general partner or managing member, the investment adviser, an upper tier entity, blocker(s), holding company(ies), and portfolio company(ies). Whether an entity in a private fund structure is reportable under the Reporting Rule depends on whether such entity is a defined “domestic reporting company” or “foreign reporting company” and whether any exemption applies.

I. Who Must Report? Definitions of a: “Domestic Reporting Company” and “Foreign Reporting Company”

Under the Reporting Rule:

II. Exemptions

Notwithstanding the above definitions, 23 categories of entities are exempt from the reporting requirements. Below we analyze possible exemptions pertinent to entities in a private fund structure.

1. Possible Exemption for a Private Fund

Pursuant to the pooled investment vehicle exemption under the Reporting Rule, a private fund is exempt from the Reporting Rule if it:

(i) Would be an investment company under section 3(a) of the Investment Company Act of 1940, as amended (the “Company Act”), but for the exclusion provided from that definition by paragraph (1) or (7) of section 3(c) of the Company Act;

(ii) Is identified by its legal name by the applicable investment adviser in its Form ADV (or successor form) filed with the Securities and Exchange Commission (“SEC”) or will be so identified in the next annual updating amendment to Form ADV required to be filed by the applicable investment adviser pursuant to Rule 204-1 under the Investment Advisers Act of 1940, as amended (the “Advisers Act”); and

(iii) Is operated or advised by a bank, a credit union, a broker or dealer, an investment company, an SEC-registered investment adviser, or a venture capital fund adviser, which is exempt from the Reporting Rule.

The above exemption is not applicable to private funds advised by exempt reporting advisers or state-registered investment advisers.

In addition, according to the CTA and FinCEN’s FAQ, if a beneficial owner owns or controls their ownership interests in a reporting company exclusively through one or more exempt entities, then the names of all of those exempt entities may be reported to FinCEN instead of the individual beneficial owner’s information. For example, if an exempt private fund invests in a nonexempt reportable portfolio company and one of its investors owns or controls, through the private fund, at least 25% of the ownership interests of the portfolio company, then the name of the private fund may be listed in the FinCEN report filed by the portfolio company, in lieu of information of the fund’s investor who is an individual.

2. Possible Exemptions for an Investment Adviser

A private fund’s investment adviser may be exempt from the Reporting Rule under various exemptions. Below are some of the most relevant exemptions.

(1) SEC-Registered Investment Adviser Exemption

An investment adviser qualifies for this exemption if it is an investment adviser as defined in section 202 of the Advisers Act and it is registered with the SEC under the Advisers Act.

(2) Venture Capital Fund Adviser Exemption

This exemption applies to any adviser that is a venture capital fund adviser described in section 203(l) of the Advisers Act and it has filed Item 10 (on control persons), Schedule A (on direct owners and executive officers), and Schedule B (on indirect owners) of Part 1A of Form ADV, or any successor thereto, with the SEC.

(3) Large Operating Company Exemption

If an investment adviser is large enough to meet all of the following criteria, it may qualify for the large operating company exemption:

• It employs in the United States more than 20 full time employees (each working an average of at least 30 hours of service per week);
• It has an operating presence at a physical office within the United States; and
• It filed a Federal income tax or information return in the United States for the previous year demonstrating more than $5,000,000 in gross receipts or sales, as reported as gross receipts or sales (net of returns and allowances) on the entity’s applicable IRS form, excluding gross receipts or sales from sources outside the United States, as determined under Federal income tax principles. If the entity is part of an affiliated group of corporations that filed a consolidated return, the applicable amount shall be the amount reported on the consolidated return for such group.

(4) Commodity Exchange Act Registered Entity Exemption

If an investment adviser is a commodity pool operator or a commodity trading advisor and is registered with the Commodity Futures Trading Commission under the Commodity Exchange Act, then this exemption applies.

(5) Broker or Dealer Exemption

If an investment adviser is also a broker or dealer and is registered under section 15 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), then it qualifies for this exemption.

(6) Subsidiary Exemption

Investment advisers may qualify for the subsidiary exemption, as set forth below.

3. Possible Applications of the Subsidiary Exemption

The subsidiary exemption under the Reporting Rule provides that an entity is exempt if its ownership interests are controlled or wholly owned, directly or indirectly, by one or more of the following relevant exempt entities:

• Investment company or registered investment adviser;
• Venture capital fund adviser;
• Insurance company;
• Commodity Exchange Act registered entity;
• Large operating company.

Notably, pooled investment vehicles are excluded from the above list of exempt entities. Therefore, subsidiaries of a private fund cannot rely on the subsidiary exemption.

However, the subsidiary exemption may be applicable to certain blocker or holding company entities in a private fund structure. For example, the ownership interests of these entities sometimes may be controlled, directly or indirectly, by a registered investment adviser. When the Reporting Rule was first published, there was uncertainty regarding whether the exempt entity needed to wholly control the ownership interests of a subsidiary, but on January 12, 2024, FinCEN issued an FAQ regarding the exemption and clarified that a subsidiary’s ownership interest must be fully, 100 percent owned or controlled by an exempt entity in order to rely on this exemption.

4. Possible Exemptions for a General Partner

A private fund’s general partner or managing member entity (a “GP Entity”) may be able to rely on the following exemptions.

(1) Form ADV Relying Adviser of an Umbrella Registration

If a GP Entity is a relying adviser of a SEC-registered investment adviser who files a single umbrella registration with the SEC in accordance with Form ADV general instruction 5, then such GP Entity would also be exempt from the Reporting Rule.

(2) Subsidiary of an Exempt Entity

If a GP Entity is a subsidiary of an exempt entity (e.g., an SEC-registered investment adviser) then the GP Entity would qualify for the subsidiary exemption.

(3) Related SPV of an SEC Registered Investment Adviser

According to the SEC staff’s 2012 No-Action Letter to the American Bar Association, a private fund’s GP Entity that is a related SPV created by an SEC-registered investment adviser may rely upon the investment adviser’s registration with the SEC and not register itself, if all of the following conditions are met:

• The investment adviser to a private fund establishes the SPV to act as the private fund’s general partner or managing member;
• The SPV’s formation documents designate the investment adviser to manage the private fund’s assets;
• All of the investment advisory activities of the SPV are subject to the Advisers Act and the rules thereunder, and the SPV is subject to examination by the SEC; and
• The registered adviser subjects the SPV, its employees and persons acting on its behalf to the registered adviser’s supervision and control, and, therefore, the SPV, all of its employees and the persons acting on its behalf are “persons associated with” the registered adviser (as defined in section 202(a)(17) of the Advisers Act).

If a GP Entity satisfies the above criteria, then it would be considered a relying adviser, and therefore exempt from the Reporting Rule under the SEC-registered investment adviser exemption.

III. Upper-Tier Entities

Importantly, upper-tier entities formed to hold interests in an SEC-registered investment adviser and/or GP Entity are not necessarily exempt from the Reporting Rule because exemptions discussed above do not “flow up” an organizational chart. Therefore, unless these upper-tier entities can rely on a different exemption, they may be required to comply with the Reporting Rule, despite owning or controlling an exempt entity for CTA purposes.

Conclusion

Private fund sponsors need to analyze closely each entity in their private fund structures to evaluate whether an exemption under the Reporting Rule is applicable. Those entities who find themselves unable to rely on an exemption (including exempt reporting advisers and their private funds, as well as upper-tier entities described in Section III) will need to focus their efforts on compliance with the Reporting Rule in the second half of 2024. Beneficial owners^[1] of a reporting company under the Reporting Rule should consider applying to FinCEN for a FinCEN identifier (a unique identifying number assigned by FinCEN) so that such beneficial owners may provide relevant reporting company(es) with their assigned FinCEN identifier instead of their personal identifying information and documents.

Tannenbaum Helpern Syracuse & Hirschtritt LLP is pleased to offer our clients assistance in filing their BOI Reports with FinCEN. For more information on this service, and CTA compliance generally, please reach out to your usual contact in the Investment Management Group.

The discussion of possible exemptions in this article is not intended to be exhaustive, nor specific to any particular private fund structure.

[1] A “beneficial owner” for purposes of the Reporting Rule is defined as any individual who, directly or indirectly, either exercises substantial control over a reporting company or owns or controls at least 25% of ownership interests of a reporting company.

For more information on the topic discussed, contact:

• Wayne H. Davis  |  davis@thsh.com  |  212-508-6705
• Haylie Gordon  |  gordon@thsh.com  |  212-508-6745
• Michele Itri  |  itri@thsh.com  |  212-508-6732
• Beth Smigel  |  smigel@thsh.com  |  212-702-3176
• Michael G. Tannenbaum  |  tannenbaum@thsh.com  |  212-508-6701