If you are a venture capital and/or investment fund manager, you need to familiarize yourself well with the Corporate Transparency Act. As of January 2024, fund managers, decision-makers, and limited partners with 25% or more ownership in the entity will have to file FinCEN beneficial ownership reports. Failure to do so can result in fund managers facing criminal penalties of up to $10,000 in fines and two years in prison. As mentioned, these reports will be required beginning in January 2024, so in remembrance of the classic adage, “an ounce of prevention is worth a pound of cure,” managers should prioritize learning about this new law and collecting the requisite information in 2023.
The National Defense Authorization Act of 2021 directed the Department of the Treasury to implement the Corporate Transparency Act, which was enacted to prevent nefarious actors from laundering money through U.S. “front” companies and allows FinCEN to hold such criminals accountable. As money tends to course quickly and consistently through investment funds, they are perfect candidates for to become illegal money laundering entities, which is why regulators are likely to watch them very carefully. Clearly, it will be extremely important for fund managers to submit accurate and complete Corporate Transparency Act (CTA) reports, to defer unwarranted suspicion from your organization.
In order to comply with the Corporate Transparency Act, nearly all U.S. companies must disclose their beneficial owners by filing an initial Beneficial Ownership Information (BOI) report with FinCEN. Additionally, companies must file updated BOI reports with every adjustment in essential information, like an office or beneficial owner’s home address changing.
This filing has the potential to be a time- and cost-intensive process. In fact, FinCEN estimates that complex entities like investment funds will require 20-plus hours to prepare their filings and possibly spend thousands of dollars in legal fees to have attorneys take the helm. While law firms are one option to help you comply with the CTA’s BOI reporting mandate, TurboCTA will be able to simplify the process once FinCEN’s system goes live. Our software aims to reduce the time from 20 hours to just one hour for initial report filing! It can also update reports in only a few clicks, using prior filing information.
What Venture Capital and Investment Funds Need to Know about FinCEN’s Beneficial Ownership Filing
By answering four simple questions, we can help you understand this BOI compliance requirement.
- Does my company need to file?
- What company information will we need to file?
- Who is considered a “beneficial owner“?
- What information will each beneficial owner need to file?
Does my venture fund need to file a BOI report under the Corporate Transparency Act?
The answer to this question is: almost definitely. In fact, you will likely need to file more than one based on your structure. Management companies and related investment partnership organizations are considered independent reporting companies and therefore must file separate reports. The new law considers any organization which doesn’t meet the size requirements that would exempt them from “large operating company” status or qualify for any other specific industry exceptions to be a “reporting company.” Again, reporting companies must file BOI reports to avoid criminal penalties.
Venture capital funds don’t typically fall under any of FinCEN’s listed exemptions because revenue doesn’t primary drive their business and their employee numbers tend to be lower, relatively speaking. The CTA exempts “large operating entities” companies that already operate in regulated industries, organizations with over $5M in annual sales revenue, and those with 21 or more full-time employees from filing BOI reports. Most venture funds don’t meet these parameters.
You should also note that capital returns, capital call monies going into the fund’s accounts, and dividends paid to the fund do NOT count toward the $5M in gross sales revenue required to qualify for the exemption. Also, while a few large venture funds may have 21 or more full-time employees, they are not exempt from filing unless they also meet the sales revenue condition.
Venture funds are usually privately held and have little regulatory oversight—especially if less than 150MM dollars are under management. Therefore, they generally don’t qualify for any industry-specific exemptions. Only the following types of organizations qualify for the remaining BOI reporting exemptions:
- Securities issuers
- Domestic governmental authorities
- Domestic credit unions
- Depository institution-holding companies
- Money transmitting businesses
- Brokers or securities dealers
- Securities exchange or clearing agencies
- Other Securities Exchange Act of 1934 entities
- Registered investment companies and advisers
- Venture capital fund advisers (This exemption does not extend to funds or their managers.)
- Insurance companies
- State-licensed insurance producers
- Entities registered under the Commodity Exchange Act
- Accounting firms
- Public Utilities
- Financial market utilities
- Pooled investment vehicles
- Tax-exempt entities
- Entities assisting tax-exempt entities
- Large operating companies
- Certain exempt entities’ subsidiaries
- Inactive businesses
The CTA’s objective heightens FinCEN’s interest in investment fund companies because criminals can use them to filter ill-gotten gains through the U.S. financial system to “clean them up.” The investment fund’s business model is ripe for abuse by illicit actors as a means to bypass fiscal regulations and use the money for purposes other than those for which the fund was intended.
You may be inclined to think of CTA filings as an invasion of corporate privacy, but that isn’t what drives this legislation. Rather, FinCEN is taking a trust-but-verify approach to protect all honest businesses with good intentions. The data FinCEN collects will not be accessible to the general public. In fact, it would take something like a federal law enforcement investigation for anyone to get their hands on it. FinCEN’s only goal is to compile and maintain an accurate database of who is operating the reporting company in case they later engage in criminal activity. Legitimate companies don’t need to worry about their information surfacing as long as they file their reports on time and accurately.
What information will I file about my venture fund on the BOI reports?
Venture fund CTA filings typically include multiple beneficial ownership reports because a management company (such as an LLC) usually controls the partnerships’ operations. Therefore, each management company and partnership files their own report under the CTA. For instance, if a single management LLC manages a fund’s two partnerships, three total reports need to be filed—one for the LLC and one each for the two partnerships.
All filings begin with sharing the corporation, LLC, partnership, or other entity’s information. The following company information must be included:
- Entity’s legal name
- Any relevant DBAs
- The primary business operations’ address.
- The Federal Employee Identification Number (EIN)
Although most of the above information is pretty straightforward, pinpointing the primary business operations’ address can be a little trickier. Many venture funds don’t have a central hub for their operations, and some don’t even have offices. Therefore, these entities must carefully consider which address fulfills the requirement. In other words, where does most of your business take place? Is it the fund manager’s office? The location where the due diligence team works? The address you submit should be wherever you conduct most of your business operations, even if it’s only by a slim majority. The idea is that FinCEN needs an address to visit where they can talk to someone in charge if they need to investigate the entity’s activities. For that reason, you can’t use a virtual address, a P.O. Box, or a registered agent address. The only exception is for foreign funds that register in the U.S. but don’t have a physical presence here. These organizations can use a registered agent address because it would be their best—and perhaps their only—U.S. address.
Who should be included on my fund’s BOI report?
Every entity is a little different, but as a reporting company, once you understand FinCEN’s guidelines, you’ll know who to include. Those guidelines stipulate that the following individuals must be on the report:
- Individuals who own 25% or more* of a reporting company.
- Individuals who exert substantial control* over a reporting company’s decisions.
- Individuals who assist in forming the reporting company** (for those created in 2024 or beyond).
*Under this law, owners, or those who exert substantial control over the reporting company, are referred to as “beneficial owners.”
**Those individuals who assist in forming the reporting company but don’t own or manage it are called “company applicants.”
The Corporate Transparency Act’s goal is to help FinCEN know who is behind each reporting company. Although many limited partners in a fund may own their interests through a business or LLC, the entities themselves aren’t reported; rather, the individuals who own the entity should be included on the report. For example, if George owns ACE INVESTMENTS LLC and ACE invests in the fund, George’s name would be included on the beneficial ownership report, not ACE INVESTMENTS.
Now, let’s explore venture fund beneficial ownership filings’ finer points, beginning with the management company.
Management companies comprise a group of people who control how an investment fund makes, manages, and disposes of investments. Therefore, anybody working at the management company who has a say in such affairs should be listed on the BOI report. Officers, directors, or other high-ranking individuals should be included as well. Sometimes, a passive partner owns part of a management company and collects a portion of the interest the entity accrues. These passive partners are only included on the BOI report if they own at least a 25% interest (or greater) in the entity, even if they lack substantial control to make decisions.
Next, the fund will need to file another BOI report for each partnership the management company oversees. Limited partners generally hold their ownership interest in these partnerships, and because they don’t have decision-making authority, they don’t need to be included on the report. Of course, if limited partners do have a 25% or greater ownership interest they are thereby considered beneficial owners and must be included in the BOI report.
Venture fund partnerships have another unique feature to consider when they file CTA reports. Because the management company makes decisions on behalf of the fund, they meet the CTA’s “substantial control” parameters. Therefore, anyone listed on the management company’s beneficial ownership report should also be on the partnership’s report.
“Substantial control” is a broad term by design. It’s meant to cover any and all individuals who make important decisions for a reporting company. FinCEN released three specific control indicators that define substantial control. These indicators include any individual who:
- Serves as a reporting company’s senior officer or equivalent (CEO, COO, CTO, CIO, CFO, Director, Manager, etc.).
- Has the power to appoint or remove a reporting company’s senior officers or members of the board.
- Provides direction and makes decisions for, or exercises substantial influence over, the reporting company’s important matters.
FinCEN also published an additional condition that requires companies to disclose any individuals who privately exert control over the entity. To avoid criminal repercussions, fund managers should disclose all individuals who even may qualify. After all, no penalty is imposed for over-reporting.
Several additional rules also apply to individuals who have at least 25% ownership in a reporting company. Broadly speaking, beneficial ownership includes individuals who may attempt to evade reporting through complicated ownership structures like convertibles, warrants, and options. FinCEN’s non-exhaustive list identifies the following types of ownership as qualifying toward the 25% level:
- Equity in the reporting company
- Capital or profit interests (including partnership interests)
- Convertible instruments
- Warrants or rights
- Other options or privileges to acquire equity, capital, or other interests
Clearly, convertible instruments qualify a person for beneficial ownership, which means venture funds that hold large notes in their portfolio companies may need to report the fund’s beneficial owners as owners on the portfolio company’s BOI report as well. Therefore, portfolio companies should be aware that, to stay in compliance, they should report major convertible note holders if the conversion value would likely exceed 25% ownership based on current valuations.
Fund managers are welcome to reach out to TurboCTA via the contact form for help tracking convertible note values and keeping their venture funds and related portfolio companies compliant. Our automated solutions address this specific need and share fund BOI information with portfolio companies as needed for their filings.
Finally, funds created after 2024 must also include their company applicant information on the report. Company applicants generally work at the law firms that help form the reporting company. These individuals don’t control the entity or hold ownership, but FinCEN still requires their inclusion on the beneficial ownership reports.
What information should a fund manager collect from each beneficial owner?
As with any compliance filing, you should collect the requisite information as soon as possible instead of waiting for the 2024 deadline. FinCEN has published the following requirements for beneficial ownership filings:
- Full legal name
- Date of birth
- Current residential address
- The unique identifying number from an acceptable official document such as a state ID, driver’s license, or passport.
Remember, all beneficial owners are individuals—you can’t list companies as beneficial owners on CTA reports. All owners must submit their full legal name and date of birth. Additionally, each owner must provide their current U.S. residential address. If they have multiple residences, they should list the one where they live most of the time. FinCEN has banned companies from reporting office addresses, virtual addresses, or P.O. boxes for this requirement. Only owners who live out of the country full-time may provide an overseas address.
Beneficial owners must also provide their ID number and an image of the identifying document. ID documents may be driver’s licenses, passports, or state ID cards. Foreign IDs are only allowed if the beneficial owner isn’t a U.S. citizen, doesn’t live in the U.S., and doesn’t have a U.S.-issued ID document.
What does it cost to file a BOI report?
Estimates of BOI filing times include:
- Time needed to learn the regulations
- Time needed to collect information
- Time needed to file or pay an attorney to complete filings
FinCEN’s published estimates assume approximately 25 million organizations will need to file, at a countrywide cost of $23B. These numbers break down to an initial filing cost of approximately $920 per organization. Since venture funds are on the more complicated end of the reporting company range, it’s reasonable to estimate that their filing costs could reach up to $2,500 per entity or $5,000 total for the joint management company and partnership structure, based on law firm pricing. Updated reports will probably cost approximately 25% of this initial filing amount, and you can expect to update frequently as details change.
Visit TurboCTA to learn more about venture fund solutions and to streamline all parts of this process, reducing time and cost across the board.