United States: CFIUS Issues Regulations For FIRRMA Pilot Program

On Oct. 10, 2018, the U.S. Department of the Treasury, as chair of the Committee on Foreign Investment in the United States (CFIUS or the Committee), issued interim regulations (the Regulations) setting forth the scope of, and procedures for, a pilot program authorized pursuant to the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA). FIRRMA, signed into law on Aug. 13, 2018, aims to strengthen and modernize CFIUS. The purpose of implementing the pilot program, which is expected to provide CFIUS with valuable insight that will help shape the final regulations implementing FIRRMA, is to confront the:

  • Rapid changes in certain critical technology industries;
  • Significant growth of certain types of foreign investment in enumerated industries relevant to national security; and
  • Current inability of CFIUS to review non-controlling transactions, which creates a risk of undermining U.S. technology advancements in industries with national security implications.

The pilot program, which will commence on Nov. 10, 2018 (and apply to covered transactions that have not officially closed by that date), expands the scope of transactions subject to CFIUS review to include certain investments involving foreign persons and critical technologies1 related to specific industries. The pilot program also makes effective FIRRMA's mandatory declarations provision for all transactions that fall within the specific scope of the pilot program. This pilot program will end no later than March 5, 2020.

Key Aspects of the Pilot Program

The pilot program expands CFIUS's jurisdiction to give the Committee the authority to review certain non-controlling investments (referred to in FIRRMA as "other investments") made by foreign persons2 in a U.S. business that produces, designs, tests, manufactures, fabricates, or develops a critical technology that is either utilized in connection with the U.S. business's activity in one or more pilot program industries or designed by the U.S. business specifically for use in one or more pilot program industries (i.e., "pilot program U.S. business"). These pilot program industries, a list of which is included here, were developed to include industries for which certain strategically motivated foreign investment could pose a threat to U.S. technology and national security. The types of non-controlling investments by foreign persons that are covered by the pilot program are those that would give the foreign investor:

  • Access to any material nonpublic technical information3 in the possession of the pilot program U.S. business;
  • Membership or observer rights on the board of directors or equivalent governing body of the pilot program U.S. business or the right to nominate an individual to a position on the board of directors or equivalent governing body of the pilot program U.S. business; or
  • Any involvement, other than through voting of shares, in substantive decision-making of the pilot program U.S. business regarding the use, development, acquisition, or release of critical technology.

One consequence of the pilot program is that companies that may, at some point, seek or have foreign investment (even if they do not engage in exporting or re-exporting) must classify their hardware, software, and technology/technical data (items) to determine whether such items are on the U.S. Munitions List (USML) set forth in the International Traffic in Arms Regulations (ITAR) or the Commerce Control List (CCL) set forth in the Export Administration Regulations (EAR) and consequently, whether the items constitute critical technologies, the foreign investment in which could have CFIUS review implications.

On the other hand, the application of CFIUS authority is limited over certain types of investment fund investments – namely, the pilot program creates an exemption for passive, indirect investments made through an investment fund by a foreign person in a pilot program U.S. business that afford the foreign person membership as a limited partner or equivalent on an advisory board or a committee of the fund. However, this exemption only applies in certain circumstances.4 The pilot program also exempts investments involving U.S. air carriers.

In addition, the Regulations do not apply to transactions for which the completion date is prior to the pilot program effective date (i.e., November 10) or transactions for which the parties have executed a binding written agreement or other document establishing the material terms of the transaction prior to Oct. 11, 2018. Companies must carefully analyze such timelines and how they may affect any ongoing transactions. For example, if a foreign person has executed a written agreement establishing the material terms of a proposed non-controlling investment in a pilot program U.S. business, the proposed investment will afford the foreign person access to material nonpublic technical information in the possession of the pilot program U.S. business, and the only controlled technology manufactured by the pilot program U.S. business became controlled after the pilot program effective date but prior to the date upon which the written agreement establishing the material terms of the investment was executed, then the proposed transaction is a pilot program covered investment and therefore, a pilot program covered transaction.

Mandatory Declarations

As noted above, the pilot program also requires the submission of declarations containing basic information regarding certain foreign transactions involving pilot program U.S. businesses that are within the purview of CFIUS, unless the parties elect to file a notice instead. The requirement applies to all foreign investments that fall within the scope of the pilot program.

The mandatory declarations, which are abbreviated notices that generally should not exceed five pages in length, must be filed at least 45 days prior to a transaction's expected completion date. The Committee will have 30 days to take action regarding the declaration. FIRRMA gives CFIUS the following options to resolve declarations:

  • Request that the parties file a notice;
  • Inform the parties that CFIUS cannot complete action on the basis of the declaration and that they may file a notice regarding the transaction;
  • Initiate a unilateral review of the transaction through an agency notice; or
  • Notify the parties that CFIUS has completed all action.

As part of the pilot program, CFIUS is developing an online template for parties to use for filing a mandatory declaration. Parties that are required to file with CFIUS and do not do so can be assessed a civil monetary penalty up to the value of the transaction at issue.

1 The definition of "critical technologies" currently includes: (a) defense articles or defense services included on the U.S. Munitions List set forth in the International Traffic in Arms Regulations (ITAR); (b) items included on the Commerce Control List set forth in the Export Administration Regulations (EAR) and controlled (1) pursuant to multilateral regimes, including for reasons relating to national security, chemical and biological weapons proliferation, nuclear nonproliferation, or missile technology, or (2) for reasons relating to regional stability or surreptitious listening; (c) certain nuclear facilities, equipment and material; and (d) select agents and toxins. FIRRMA expanded the definition of critical technologies to also include "emerging and foundational technologies" (controlled pursuant to section 1758 of the Export Control Reform Act of 2018), which are to be identified by a regular, ongoing interagency process.

2 The pilot program covers all foreign persons and is not country-specific.

3 The term "nonpublic technical information" means information that is not available in the public domain, and is necessary to design, fabricate, develop, test, produce, or manufacture critical technologies, including processes, techniques, or methods. Nonpublic technical information does not include financial information regarding the performance of an entity.

3 The following must be true for the investment fund exemption to apply:

  1. The fund is managed exclusively by a general partner, managing member or an equivalent;
  2. The foreign person is not the general partner, managing member or an equivalent;
  3.  The advisory board or committee does not have the ability to approve, disapprove, or otherwise control (i) investment decisions of the investment fund or (ii) decisions made by the general partner, managing member, or equivalent related to entities in which the investment fund is invested;
  4.  The foreign person does not otherwise have the ability to control the investment fund, including the authority (i) to approve, disapprove, or otherwise control investment decisions of the investment fund, (ii) to approve, disapprove, or otherwise control decisions made by the general partner, managing member, or equivalent related to entities in which the investment fund is invested, or (iii) to unilaterally dismiss, prevent the dismissal of, select, or determine the compensation of the general partner, managing member, or equivalent;
  5.  The foreign person does not have access to material nonpublic technical information as a result of its participation on the advisory board or committee; and
  6.  The investment otherwise meets the requirements made effective by the Regulations.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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