For decades, the Committee on Foreign Investment in the United States (“CFIUS” or the “Committee”) has assessed the national security implications of transactions that could result in the foreign control of a U.S. business. Investments deemed to threaten U.S. national security can be blocked by the President. For this reason, review often results in the restructuring of transactions to address identified threats. In 2018, however, the Foreign Investment Risk Review Modernization Act (“FIRRMA”) authorized the Committee to expand its jurisdiction to include non-controlling foreign investments in U.S. businesses that, among other things, would give the foreign investor access to any material nonpublic technical information (i.e. intellectual property “know-how”) in the possession of the U.S. business regarding the use, development, acquisition, or release of critical technologies.
Although CFIUS review is largely voluntary, FIRRMA (with limited exceptions) requires CFIUS review of triggering investments by foreign persons in covered transactions. Such mandatory reviews include transactions involving U.S. businesses that produce, design, test, manufacture, fabricate, or develop one or more critical technologies – if an export license would be required to transfer the technology to the foreign investor. The expanded jurisdiction of the Committee reflects the understanding that, absent exception, any foreign investment that could threaten the loss of or compromise critical technologies warrants review. Given these parameters, the definition of “critical technology” is important, and serves as a “bright line” for determining when CFIUS review is prudent or, in some cases, mandatory.
This month, the National Science and Technology Council (“NSTC”) updated and revised the list of Critical and Emerging Technologies (“CETs”) – technologies “that have been identified and assessed by the National Security Council to be critical, or to become potentially critical, to the United States' national security advantage, including military, intelligence, and economic advantages.”
The original CET list identified 20 specific areas. The revised list consolidates the original list into 14 technical areas and adds five new technical areas. The consolidated list includes: advanced computing, advanced engineering materials, advanced gas turbine engine technologies (deemed to include aero-engine technologies from the original list), advanced manufacturing, advanced and networked sensing and signature management (deemed to include related medical and public health technologies from the original list), artificial intelligence, autonomous systems and robotics, biotechnologies, communication and networking technologies, human-machine interfaces, networked sensors and sensing, quantum information technologies, semiconductors and microelectronics, and space technologies and systems. These technology areas concern a variety of industries, including (but not limited to) current weapon systems manufacturing and capabilities, from aircraft to cyber warfare. The five new technology areas are rooted in the two core pillars underlying the original list: namely, to promote the national security innovation base and protect technology advantages: hypersonics, directed energy, renewable energy generation and storage, nuclear energy, and financial technologies.
The new categories reflect, among other things, a commitment by the U.S. Department of Defense to the enhancement of its hypersonics capabilities, now “one of the highest priorities in the Defense Department's modernization strategy.” The new categories are also clearly prompted by interest among defense strategists in the creation of renewable energy sources for military facilities, fleets, aircraft, and other areas. Finally, the revised list evidences efforts by the U.S. Government to improve the nation's cybersecurity apparatus, particularly as it relates to a growing number of businesses dealing in financial technologies, including digital assets. The inclusion of financial technologies reflects expectations that future wars will be fought through cyberspace.
The CET list has clear regulatory impact, and highlights the importance of understanding the proper export classification of the technology held by U.S. businesses in any foreign investment scenario. On this note, it is likely that the Department of Commerce's Bureau of Industry & Security will take steps to ensure that all of the technologies on the CET list are subject to enhanced export control regulations, if they are not already.
While the CET list is not formally called out in CFIUS regulations, the updated list offers a “bright line” test for mandatory filings – given the strong likelihood that an export license would be required to transfer any of the listed technologies to a foreign investor. Nevertheless, foreign investors should not assume that they are “home free” if they escape mandatory review. If anything, the list makes clear not only where mandatory filings are to be found, but also where voluntary filing may be the prudent course. At a minimum, when transactions implicate recognized critical technologies, it is important for foreign investors to acknowledge the clear national security priorities of the U.S. Government and to plan accordingly for CFIUS review and anticipated concerns. Well before filing, it is prudent for the transaction parties to identify potential issues and plan responses.
CFIUS runs on a time clock. Addressing risks up front can help expedite reviews and avoid last minute patchwork fixes that may have significant costs down the road. Presidential vetoes are exceedingly rare, but they are not the only downside. The failure of the parties to identify and address risks can result in onerous national security orders and/or divestment of sensitive (and valuable) technologies, and can force the withdrawal of filings to stop the clock and give the parties time to regroup. Once derailed, not all filings get back on track. For all of these reasons, a “fix it first” strategy is often advisable.
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