The Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA), among other things, authorizes the Committee on Foreign Investment in the United States (CFIUS or the Committee) to establish pilot programs to carry out certain provisions of the statute that did not go into effect when the law was enacted.  CFIUS is the multi-agency panel that reviews foreign investments to assess their impact on national security.  Investments deemed a threat may be restructured or mitigated to address CFIUS objections.  Transactions where the threat cannot be mitigated may be blocked by the president -- if not withdrawn and abandoned.

On October 10, following FIRRMA’s lead, the Department of the Treasury published interim regulations that will establish a pilot program expanding CFIUS review to include specific non-controlling foreign investments in U.S. businesses that are involved in critical technologies.  Qualifying controlling and non-controlling investments in “Pilot Program U.S. Businesses” must, at minimum, be reviewed by CFIUS under short-form declarations.  After a 30-day review of a short-form declaration, CFIUS can clear the transaction, initiate a unilateral formal review, request a formal filing, or decline action on the declaration and invite a formal filing.  Parties also have the option of bypassing the declarations process altogether in favor of a formal filing.

The pilot program applies to all qualifying transactions, and is not triggered by the identity of the investor.  It does not apply only to foreign government-controlled investors, nor does it apply only to investments from non-allied “countries of concern.”  It applies across-the-board.  It covers qualifying controlling investments – and it also applies to any non-controlling investment that would give a foreign investor:

  • Access to material nonpublic technical information in the possession of the U.S. business;
  • Membership or observer rights on the board or equivalent governing body of the U.S. business, or the right to nominate a director or member of the governing body;
  • Any involvement, other than through voting of shares, in “substantive decisionmaking” of the U.S. business regarding the use, development, acquisition, or release of critical technology.

An appendix to the interim regulation identifies some 27 qualifying “pilot program industries” by NAICS codes, a wide-ranging group that includes (among many others) aircraft manufacturing, optical instrument and lens manufacturing, radio and television broadcasting and wireless communications equipment.” 

CFIUS has always had authority to review controlling investments.  FIRRMA added non-controlling investments to the Committee’s purview if they involved certain key businesses – among them critical technologies – and also created the short-form (roughly 5 page) declaration.  Most observers view the declaration process as a way to resolve quickly low risk transactions involving trusted investors and/or low risk targets.  The pilot project is intended as a “test run” for this process – and to bring in more troubling (and often non-controlling) investments that might otherwise escape review pending the publication of final regulations. 

The interim regulations take effect November 10, and are open to comment until then.  They may remain in effect until the implementing regulations are published – no later than March 5, 2020.  Treasury also used this opportunity to publish interim regulations implementing the provisions of FIRRMA that took effect on enactment (e.g., 45-day initial reviews).  These are effective October 11, 2018.

For a copy of the pilot program regulations contact any member of the Stroock CFIUS/Compliance/National Security Group click here.

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