Are Venture Capital Fund Advisers Exempt From The Corporate Transparency Act?
There are 23 separate exemptions from the CTA's beneficial ownership reporting requirement. The exemptions are listed in order in FinCEN's Final Rule at 31 CFR 1010.380 and take effect on January 1, 2024.
CTA Exemptions Generally
In general, the CTA exempts companies that already report their beneficial ownership to the U.S. government under a separate legal framework. FinCEN's Final Rule addresses each exemption separately in subsection 1010.380(c)(2).
Exemption Number 11 - Venture capital fund adviser
Subsection 1010.380(c)(2)(xi) of the Final Rule exempts:
(xi) Venture capital fund adviser. Any investment adviser that:
(A) Is described in section 203(l) of the Investment Advisers Act of 1940 (15 U.S.C. 80b-3(l)); and
(B) Has filed Item 10, Schedule A, and Schedule B of Part 1A of Form ADV, or any successor thereto, with the Securities and Exchange Commission.
Definition of Investment Adviser
The Investment Advisers Act of 1940 (15 USC 80b-2(a)(11)) defines "investment adviser" as:
any person who, for compensation, engages in the business of advising others, either directly or through publications or writings, as to the value of securities or as to the advisability of investing in, purchasing, or selling securities, or who, for compensation and as part of a regular business, issues or promulgates analyses or reports concerning securities; but does not include (A) a bank, or any bank holding company as defined in the Bank Holding Company Act of 1956 [ 12 U.S.C. 1841 et seq.] which is not an investment company, except that the term "investment adviser" includes any bank or bank holding company to the extent that such bank or bank holding company serves or acts as an investment adviser to a registered investment company, but if, in the case of a bank, such services or actions are performed through a separately identifiable department or division, the department or division, and not the bank itself, shall be deemed to be the investment adviser; (B) any lawyer, accountant, engineer, or teacher whose performance of such services is solely incidental to the practice of his profession; (C) any broker or dealer whose performance of such services is solely incidental to the conduct of his business as a broker or dealer and who receives no special compensation therefor; (D) the publisher of any bona fide newspaper, news magazine or business or financial publication of general and regular circulation; (E) any person whose advice, analyses or reports relate to no securities other than securities which are direct obligations of or obligations guaranteed as to principal or interest by the United States, or securities issued or guaranteed by corporations in which the United States has a direct or indirect interest which shall have been designated by the Secretary of the Treasury, pursuant to section 3(a)(12) of the Securities Exchange Act of 1934 [ 15 U.S.C. 78c(a)(12) ], as exempted securities for the purposes of that Act [ 15 U.S.C. 78a et seq.]; (F) any nationally recognized statistical rating organization, as that term is defined in section 3(a)(62) of the Securities Exchange Act of 1934 [ 15 U.S.C. 78c(a)(62) ], unless such organization engages in issuing recommendations as to purchasing, selling, or holding securities or in managing assets, consisting in whole or in part of securities, on behalf of others; (G) any family office, as defined by rule, regulation, or order of the Commission, in accordance with the purposes of this subchapter; or (H) such other persons not within the intent of this paragraph, as the Commission may designate by rules and regulations or order.
Applying this definition to the exemption in Section 1010.380(c)(2)(xi) of the Final Rule requires careful analysis. The definition begins with a broad description that includes "any person who, for compensation, engages in the business of advising others, either directly or through publications or writings, as to the value of securities or as to the advisability of investing in, purchasing, or selling securities, or who, for compensation and as part of a regular business, issues or promulgates analyses or reports concerning securities."
The definition then excludes eight separate sub-categories of persons who advise others as to the advisability of investing in securities, such as (1) banks, (2) professionals like lawyers, accountants, engineers and teachers, (3) brokers and dealers, (4) publishers, (5) advisers in respect of federal governmental securities, (6) statistical rating organizations, (7) family offices and (8) other persons who are designated as excluded by regulations.
Investment Capital Fund Adviser
To satisfy the exemption in Section 1010.380(c)(2)(xi) of the Final Rule, the reporting company may both fall within the definition of "investment adviser" and have filed both (1) Item 10, Schedule A, and (2) Schedule B of Part 1A of Form ADV, or any successor thereto, with the Securities and Exchange Commission.
Schedule A to Item 10 of Form ADV is a disclosure required by the SEC from investment advisers that are controlled by another person. If the applicant is subject to the control of another person, the applicant must disclose that person's identity and other information to the SEC.
Schedule B of Part 1A of Form ADV requires disclosure of certain indirect owners of the applicant. In Schedule B, the applicant must disclose each entity that owns 25% or more of a class of voting security of the applicant, continuing "up the chain of ownership" by "listing all 25% owners at each level."