On October 10, 2018, the U.S. Department of the Treasury issued several amendments and temporary regulations expanding the authority of the Committee on Foreign Investment in the United States (CFIUS). The Foreign Investment Risk Review Modernization Act, enacted as part of the John S. McCain National Defense Authorization Act for Fiscal Year 2019, laid the framework for CFIUS’ expanded scope as congressional leaders aimed to address national security concerns within the context of foreign investment activities in the United States that have historically fallen outside of CFIUS’ purview.

Key Notes:

  • New pilot program effective November 10, 2018, applies to all foreign persons engaging in investment with certain U.S. industries.
  • Mandatory declarations now required for certain transactions; risk of civil penalty if ignored.
  • Export control compliance is essential to understand if transaction involves any critical, emerging or foundational technology.

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On October 10, 2018, the U.S. Department of the Treasury released temporary regulations expanding the authority of the Committee on Foreign Investment in the United States (CFIUS). This important first step comes after the passage of the Foreign Investment Risk Review Modernization Act (FIRRMA), enacted this past August, which laid the initial framework for the expansion of the committee’s authority. (See Trump and Trade Update dated August 16, 2018.)

FIRRMA, which passed as part of the broader John S. McCain National Defense Authorization Act for Fiscal Year 2019, received bi-partisan support as congressional leaders aim to address national security concerns within the context of foreign investment activities in the United States that have historically fallen outside of the committee’s purview.

CFIUS, an interagency body that is led by the Department of Treasury, historically reviewed investment deals that involved acquiring foreign control of a U.S. entity. FIRRMA expanded this authority to now include the mandate that the committee review certain investments in U.S. industries regardless of whether they result in a controlling stake. Treasury Secretary Steven Mnuchin announced in a press release: “These temporary regulations address specific risks to U.S. critical technology while informing the department of final regulations that will fully implement FIRRMA.”

Pilot Program Overview

In a fact sheet released by the Treasury Department, the pilot program implements certain authorities provided by FIRRMA to now “include review of certain non-controlling investments” by foreign persons in key U.S. industries and also “makes effective FIRRMA’s mandatory declarations provisions for transactions that fall within the specific scope of the pilot program.”

Other important aspects of the pilot program include:

  • The program is not country specific, but applies to all foreign persons engaging in investment with certain U.S. industries.
  • The program applies to any U.S. business that “produces, designs, tests, manufactures, fabricates, or develops a critical technology …” as defined by FIRRMA along with “emerging and foundational technologies” controlled pursuant to the Export Control Reform Act of 2018.
  • The program applies to 27 industries identified by specific North American Industry Classification System (NAICS) codes that the U.S. government has evaluated and “for which certain strategically motivated foreign investment could pose a threat to U.S. technological superiority and national security.” This full list can be found in Annex A to Part 801 of the Federal Register notice.
  • Mandatory declarations, or abbreviated notices not exceeding five pages in length, for transactions involving critical technologies must be filed within 45 days prior to a transaction’s closure date or risk a civil monetary fine up to the value of the transaction. A party may also choose to file under the standard procedures instead of through a declaration.

The full pilot program regulations can be found in the October 11, 2018 Federal Register.

The pilot program is due to begin on November 10, 2018, after a brief public comment period and will likely remain in effect until February 2020, when the final FIRRMA provisions are implemented.

President Trump has signed into law the Foreign Investment Risk Review Modernization Act (FIRRMA) as part of the National Defense Authorization Act for Fiscal Year 2019 (Title XVII of the NDAA). The FIRRMA expands the jurisdiction of the Committee on Foreign Investment in the United States (CFIUS) to address national security concerns over foreign exploitation of certain investment structures that traditionally have fallen outside of CFIUS jurisdiction. Additionally, FIRRMA modernizes CFIUS’s processes to better enable timely and effective reviews of covered transactions. Continue Reading President Trump Signs Reform Legislation Expanding CFIUS’s Authority to Review Foreign Investment in U.S. Companies

The Committee on Foreign Investment in the United States (CFIUS), an inter-agency committee headed by the Department of the Treasury, is authorized to review transactions that could result in the control of U.S. businesses by foreign persons or companies in order to determine the effect of such transactions on the national security of the United States. Once a little-known committee, CFIUS has become more widely known in the past decade amid growing concern over foreign investment in the United States, and the potential security implications of certain foreign entities owning and controlling U.S. companies and/or technology. In fact, in September 2017, President Trump took the rare step of actually blocking a transaction: the proposed acquisition of Lattice Semiconductor Corporation by Canyon Bridge Capital Partners LLC, a subsidiary of Chinese state-owned China Venture Capital Fund Corporation Limited. Such a move indicates that the parties were unable to allay the national security concerns of CFIUS’s agency members. It further highlights Trump’s “America First” outlook and the likelihood that CFIUS reviews will become more common and stringent under the Trump administration.

The recently released CFIUS 2015 Annual Report indicates the following trends:

  • In 2015, 143 transactions were reviewed by CFIUS, continuing the upward trend in the number of notices filed with CFIUS from 65 in 2009 to 143 in 2015. Further, it is believed that filings increased again in 2016 and that 2017 may be a record year with more than 200 filings.
  • In 2015, 42 percent of reviews were conducted for industries in the Manufacturing sector; 32 percent in the Finance, Information and Services Sector; 18 percent in the Mining, Utilities and Construction industries; and 8 percent in the Wholesale Trade, Retail Trade, and Transportation sectors.
  • For the fourth consecutive year, China has led foreign countries in the number of CFIUS reviews, with 29 conducted in 2015. Over the three-year period from 2013 to 2015, Chinese foreign investment underwent 74 CFIUS reviews; the next closest country was Canada with 49 reviews, followed by the United Kingdom with 47 reviews.
  • While the majority of reviews conclude with approval by CFIUS, in 2015 the parties to 11 transactions had to agree to and adopt mitigation measures to ensure that the parties remained in compliance with various agency requirements to remove any national security risks.
  • The annual report must highlight any “perceived adverse effects” of transactions reviewed by CFIUS, and the 2015 report for the first time indicates there could be national security concerns regarding potential acquisitions of U.S. companies that hold “substantial pools of potentially sensitive data about U.S. persons and businesses that … could be in any number of sectors , including, the insurance sectors, health services, and technology services.”

While not stated in the report, the statistics on the length of time a transaction is under review reveal that in 2015 there was a significant increase in the length of time transactions remained active before CFIUS. By law, CFIUS must complete a review within 90 days, with several triggers that may require a more thorough investigation during that time. Historically, most transactions have concluded within the more informal 30-day review period; however, 2015 data indicate that nearly half of the year’s 143 transactions went into the more formal 45-day investigation period.