Federal Court Issues Preliminary Injunction of CTA

On December 3, 2024, the U.S. District Court for the Eastern District of Texas issued a preliminary injunction regarding enforcement of the Corporate Transparency Act (CTA) and related beneficial ownership reporting rule.¹ The Court found that the “CTA is likely unconstitutional as outside of Congress’s power” and the beneficial ownership reporting rule implementing the CTA “is likely unconstitutional for the same reasons.” As a result, both the CTA and the enforcement of the beneficial ownership reporting rule are currently enjoined nationwide.

It should be noted that the Court’s decision is with respect to the CTA in whole – it does not provide any differentiated treatment to any particular categories of reporting entities under the CTA. Accordingly, to the extent that an investment manager, its funds, their related entities or any other entities are subject to reporting under the CTA,² they are not presently required, pursuant to this ruling, to comply with the beneficial ownership reporting rule and its deadlines.

By its very nature, the Court’s injunction is preliminary. At the same time, in reaching this decision, the Court evaluated the constitutionality of the CTA and its accompanying regulations as an issue of “first impression” and concluded that plaintiffs, based on at least some of their arguments, demonstrated “substantial likelihood of success on the merits.” Hence, although the ruling is temporary, it is a good indicator of the Court’s current state of mind with respect to the issues presented to it in this case.

In light of the ruling, fund managers (and reporting companies generally) are currently not required to comply with the CTA and related beneficial ownership reporting obligations. However, there are no guarantees that the current status quo will not change on an unpredictable timeline. The government may seek an emergency appeal of the preliminary injunction and thus force the Fifth Circuit to move quickly before the January 1, 2025 filing deadline. If the Fifth Circuit decides to stay the preliminary injunction or reverse it in short course, managers/reporting companies may be required to file quickly under the CTA as planned. For that reason, until the final resolution of this matter, fund managers/reporting companies should closely follow further developments in this case, stay in touch with their CTA experts and advisors and be ready to comply with applicable CTA requirements on a moment’s notice.

^{1 The Court’s ruling is available here.}

^{2 For a primer on CTA’s applicability to investment managers, their funds, and related entities, please see Akin’s client alert “Update (2): The NY LLC Transparency Act and Corporate Transparency Act’s Impact on Private Fund Managers” (January 31, 2024).}