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Venture Capital Fund Beneficial Ownership Information Reports – What investment funds need to know about FinCEN and the corporate transparency act

Venture capital and investment fund managers need to be intimately familiar with the corporate transparency act and the related beneficial ownership reports that investment funds will need to file beginning in January 2024. Fund managers can face criminal penalties for failing to disclose themselves, other decision-makers, and limited partners with 25% or more ownership of the partnership entity on FinCEN’s new beneficial ownership reports. Failing to file a report or submitting false information can lead to listed penalties of $10,000 fines and up to 2 years in prison, based on the latest statement from FinCEN. Although these reports start in January 2024, collecting information and learning about the new law should be a management priority during 2023’s fiscal year.

This new filing requirement comes from the passage of the National Defense Authorization Act of 2021. This law directs the Department of the Treasury to oversee the implementation of a new law called the Corporate Transparency Act, enacted to prevent money laundering through U.S. companies and allow FinCEN to hold criminals accountable for abuses of the U.S. financial system. The rapid flow of money in and out of investment funds makes this type of entity ripe for illicit activity from a regulator’s perspective, thereby increasing the importance of fund managers submitting complete and accurate CTA (Corporate Transparency Act) reports.

The corporate transparency act requires nearly all U.S. companies to disclose their beneficial owners through an initial Beneficial Ownership Information Report (BOI report) filed to FinCEN in 2024. In addition to the initial filing, companies must update their filings by filing updated BOI reports whenever fundamental information changes, such as an office moving to a new address or an owner’s home address changing. FinCEN estimates these reports to require 20+ hours for complicated entities such as venture investment funds and incur legal fees in the thousands for hiring attorneys to navigate this process. Law firms are one of many options for compliance with the Corporate Transparency Act’s Beneficial Ownership Reporting. TurboCTA will provide easy online filing once FinCEN’s system goes live to simplify this process. Our software strives to limit the time needed to just an hour for initial report filing while supporting updating reports in just a few clicks from prior filings.

What venture capital and investment funds need to know about FinCEN’s Beneficial Ownership Filings

The beneficial ownership reporting process can be broken down into four simple questions to help understand this new compliance requirement.

  1. Does my company need to file?
  2. What company information will need to be filed?
  3. Who is considered a “beneficial owner”?
  4. What information will need to be filed for each beneficial owner?

Does my Venture Fund need to file a beneficial ownership report under the Corporate Transparency Act?

Almost certainly, yes, and typically more than one based on the structure of venture capital organizations. Management companies and related investment partnership entities must file separate reports as unique reporting companies. Any entity that doesn’t meet the sales and staff levels for the “large operating company” exemption or qualify for one of the other specific industry exemptions is defined as a “reporting company” under the new law. Reporting companies must file BOI reports or face criminal penalties, similar to neglecting to file a tax return.

Venture capital funds do not typically fall under any of the exemptions listed by FinCEN due to their lack of revenue as a primary business driver and lower employee count as compared to most other types of companies. The law exempts “large operating entities” and other entities already in regulated fields. Companies with over $5M in annual sales revenue and 21 or more full-time employees are exempt from filing beneficial owner reports as they are considered large operating companies under the CTA. Most venture funds will not meet these exemption thresholds.

Keep in mind that returns on capital, capital call funds entering the fund’s accounts, and dividends paid to the fund do not count towards the $5M in gross sales revenue required as part of the qualification for the exemption. In addition, some larger venture funds may have 21 or more full-time employees, but this alone is not grounds for an exemption from filing without also meeting the sales revenue requirement.

Venture funds are mostly privately held entities with limited regulatory oversight – especially those with less than 150MM under management – so they will also typically not qualify for any industry-specific exemptions. The remaining exemptions to BOI reporting are given only to the following types of companies:

  1. Securities issuers
  2. Domestic governmental authorities
  3. Banks
  4. Domestic credit unions
  5. Depository institution-holding companies
  6. Money transmitting businesses
  7. Brokers or securities dealers
  8. Securities exchange or clearing agencies
  9. Other Securities Exchange Act of 1934 entities
  10. Registered investment companies and
  11. advisers
  12. Venture capital fund advisers (this exemption does not extend to funds or their managers)
  13. Insurance companies
  14. State-licensed insurance producers
  15. Commodity Exchange Act registered entities
  16. Accounting firms
  17. Public Utilities
  18. Financial market utilities
  19. Pooled investment vehicles
  20. Tax-exempt entities
  21. Entities assisting tax-exempt entities
  22. Large operating companies
  23. Subsidiaries of certain exempt entities
  24. Inactive businesses

The objective of the corporate transparency act makes investment funds reporting companies of relatively high interest to FinCEN, as malicious actors can use these entities to deposit large sums of money into the U.S. financial system for retransmission. To an illicit actor, this business model could be abused to circumvent monetary controls and direct funding towards purposes other than investments in early-stage companies.

CTA filings should not be viewed as an invasion of corporate privacy but rather a trust-but-verify approach driven by FinCEN. Data collected under the CTA is only accessible in rare situations, such as federal law enforcement investigations. FinCEN’s goal is to know who is operating the reporting company in the case the entity later engages in malicious activity. Legitimate companies have no cause for concern if their reports are filed on time and accurately.

What information will I file about my Venture Fund on the Beneficial Ownership Reports?

Venture fund corporate transparency act filings are unique because they will typically lead to the filing of multiple beneficial ownership reports. Fund structures most often feature a management company, such as an LLC, controlling the operations of one or more partnerships. Each management company and partnership will file a separate report under the CTA. For example, if a fund has two partnerships managed by a single management LLC, three total reports would be filed. One for the LLC and one for each of the two partnerships.

All filings begin with sharing the entity information for the corporation, LLC, partnership, or other entity. FinCEN’s beneficial owner reports request the following company information:

  • Legal name of the entity.
  • Any DBAs the business uses.
  • Primary business operations address.
  • Federal Employee Identification Number (EIN)

All of the above information should be readily accessible to a venture fund; however, selecting the primary business operations address for the report requires some consideration. With many venture funds operating in a relatively decentralized manner, and even some without offices, funds should carefully choose the address where most of their business takes place. This address could be the primary fund manager’s office, the location where the due diligence team works, or whatever is most fitting as the address where more business operations occur than any other address. FinCEN’s goal is to have an address they could visit to speak to someone from the investment fund should they need to follow up with the company. Therefore, FinCEN does not allow using a virtual address, P.O. box, or registered agent address. One exception exists only for foreign funds that register in the U.S. but do not have a physical presence in the U.S. These may use a registered agent address as this would be their best U.S. address.

Who should be included on my fund’s beneficial ownership information report

This depends on the entity, but understanding FinCEN’s guidelines is the easiest way to understand who a reporting company should include. FinCEN requires the following individuals to be on the report:

  • Any owner of equity or similar ownership interest that possesses 25% or more ownership* of a reporting company.
  • Any individual capable of exerting substantial control* over the decisions made by a reporting company.
  • Any individual that assists in forming the reporting company** (only for entities created in 2024 or beyond).

* Owners or those capable of exerting substantial control over the reporting company are referred to as “beneficial owners” under the law.

**Those who only assist in the formation of the reporting, but do not go on to own or manage the company, are referred to as “company applicants.”

The goal of the Corporate Transparency Act is to aid FinCEN in knowing the people behind a reporting company. Although many limited partners in a fund may own their interests through a business or LLC, these entities should be disregarded when filing the report, and the individuals that own the entity should be included on the fund’s report instead. For example, if John owns ACME HOLDINGS LLC and ACME invests in the fund, the fund would file with John on the BOI report, not ACME.

With those rules understood, we can dive into the nuance of venture fund BOI filings, starting with the management company as the first reporting company.

Management companies consist of a group of people that collectively determine the direction of the investment fund in making, managing, and disposing of investments. Accordingly, any individual working at the management company with a voice in these matters should be included in the BOI report, in addition to any officer, director, or similar high-ranking individual. Occasionally, a passive partner may own a portion of the management company and collect part of the carried interest earned by this entity. Passive partners must also be included if they own an interest of 25% or greater but lack substantial control to make decisions.

Next, the fund will file a further BOI report for each partnership managed by the management company. Limited partners typically hold the ownership interest in these partnership entities, and these partners lack decision-making power, thereby lacking the substantial control requirement that would cause their inclusion in the report. Nevertheless, limited partners with a 25% or greater ownership interest in the partnership must be included in the BOI report as this threshold qualifies them as beneficial owners. 

Venture fund partnerships also have another unique element to account for when filing Corporate Transparency Act reports. Because the management company makes decisions on behalf of the fund, the same individuals from the management company’s BOI report should also be on the partnership’s report because these individuals all meet the “substantial control” requirement.

Substantial control is a very broadly defined term designed to encompass all individuals that affect important decisions on behalf of a reporting company. The three specific control indicators released by FinCEN define substantial control and include any individual – 

  1. Serving as a reporting company’s senior officer or equivalent, such as CEO, COO, CTO, CIO, CFO, Director, Manager, etc.
  2. Having the authority to appoint or remove a reporting company’s senior officers or members of the board.
  3. Providing direction and determination, making decisions for, or exercising substantial influence over the reporting company’s important matters.

An additional requirement was also published requiring disclosing those who privately exert control over the entity. Fund managers should obey the spirit of this law and disclose all individuals who may qualify to avoid potential criminal penalties.

Several additional rules also apply to those who hold 25% of more ownership in a reporting company. FinCEN broadly defines how beneficial owners can carry their ownership to encompass individuals attempting to evade reporting using complicated ownership structures such as options, convertibles, and warrants. FinCEN’s list includes, but is not limited to, the following types of ownership qualifying towards the 25% threshold:

  • 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

As you can see above, convertible instruments are a qualifier for beneficial ownership. This means that venture funds holding large notes in their portfolio companies could lead to the fund’s beneficial owners appearing as owners on the portfolio company’s BOI report. Therefore, it would be prudent to make portfolio companies aware of this fact so they stay in compliance by reporting major convertible note holders, where the conversion value would likely exceed 25% ownership based on current valuations.

Fund managers can reach out to TurboCTA via the contact form for solutions to help track convertible note values to keep venture funds and related portfolio companies in compliance. TurboCTO has automated solutions planned to address this specific need and share fund BOI information with portfolio companies as needed for their filings.

Finally, new funds created after 2024 must include their company applicant information on the report. Company applicants are individuals that work at law firms that help form the reporting company. These individuals do not go on to control the entity or hold ownership, but FinCEN will need them included in the BOI reports.

What information should a fund manager collect from each beneficial owner?

As with any compliance filing, it is best to collect the information needed ahead of time and not wait for the 2024 deadline. FinCEN has published the following requirements for BOI filings listing the exact information needed from each beneficial owner:

  1. Full legal name
  2. Date of birth
  3. Current residential address
  4. The unique identifying number from an acceptable official document such as a state I.D., driver’s license, or passport.

Remember, all beneficial owners must be individuals. Companies cannot be listed as beneficial owners on Corporate Transparency Act reports. Full legal name and date of birth are required from all owners. In addition, each owner must provide their current U.S. residential address. Should they have multiple residences, they should provide the address where they live most of the time. FinCEN has banned the use of office addresses, virtual addresses, or P.O. boxes for these reports. Only owners lacking a U.S. address and living entirely out of the country may provide an overseas address.

Beneficial owners must also provide their I.D. number and an image of the identification document. I.D. documents may be passports, driver’s licenses, or state I.D. cards. Foreign IDs are only allowed if the beneficial owner is not a U.S. citizen, does not live in the U.S., and does not possess a U.S.-issued identification document.

What does it cost to file a beneficial ownership information report?

Estimates of beneficial information 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.

The estimates published by FinCEN assume approximately 25 million entities need to file at the cost of $23B country-wide. These metrics break down to an initial filing cost of approximately $920 per entity. With venture funds on the more complicated end of the reporting company spectrum, it is reasonable to say that these filing costs, based on law firm pricing, could be $2,500 per entity or $5,000 total for the joint management company and partnership structure. Updated reports would likely cost approximately 25% of this initial filing amount, and updates would be needed frequently as detail change.

TurboCTA has solutions for venture funds to streamline all parts of this process and reduce time and cost across the board:

  • Our systems help you determine who should be on the report.
  • The platform retains records to simplify updated report filing.
  • We handle record-keeping to offload compliance burden.
  • Our prices are less than $100 per BOI report filed.