On September 17, 2019, the U.S. Department of the Treasury (Treasury) issued proposed regulations to implement the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA), which expands the jurisdiction of the Committee on Foreign Investment in the United States (CFIUS) to review foreign investments and mitigate any potential national security concerns. See Sidley’s previous update on FIRRMA here.

The proposed regulations were issued in two parts: One part covers investments in real estate, available here, while the other covers other kinds of investments, available here.  The interim pilot program rules pertaining to foreign investments in U.S. critical technology companies remain in place for the time being. See Sidley’s previous update on the FIRRMA pilot program here.

Treasury simultaneously released a number of frequently asked questions on the proposed regulations, available here, and a fact sheet, available here.

Key Takeaways From the Proposed Regulations:

1. Expanded CFIUS Jurisdiction Over Non-controlling Investments.  CFIUS already has authority to review transactions that result in control of a U.S. business by a foreign person.  FIRRMA allows CFIUS to review investments that afford a foreign person certain governance or information rights in “TID U.S. businesses” (Technology, Infrastructure, and Data), even if the foreign person does not acquire control over the business (defined as “covered investments”).  TID U.S. businesses are U.S. businesses that (a) produce, design, test, manufacture, fabricate, or develop one or more critical technologies; (b) perform certain specified functions with respect to critical infrastructure; or (c) maintain or collect, directly or indirectly, sensitive personal data of U.S. citizens.

  • “Critical Technology” is comprised of certain export controlled technology, select agents and toxins, certain nuclear-related technology, and emerging and foundational technologies. (Emerging and foundational technologies are not yet defined.  The Bureau of Industry and Security at the U.S. Department of Commerce is working on that.)
  • “Critical infrastructure” is defined in a detailed annex to the draft regulations.  The annex covers a wide range of infrastructure, including large electricity generation facilities, large pipelines, telecommunications, certain submarine cables, certain data centers and a variety of other infrastructure.
  • “Sensitive personal data” is defined to include 10 categories including e.g., certain types of financial, geolocation, biometric, genetic and health-related data.  Any U.S. business that collects or maintains genetic information is a TID U.S. business.  Outside of that context, a business that collects sensitive personal data is a TID U.S. business if it targets or tailors products or services to sensitive U.S. government agencies or to personnel or contractors thereof, or collects or maintains (or intends to collect or maintain) sensitive personal data on more than 1 million individuals. 

2. Expanded CFIUS Jurisdiction Over Real Estate Transactions.  The proposed regulations extend CFIUS jurisdiction to cover the purchase or lease by, or a concession to, a foreign person of real estate in and/or around specific airports, maritime ports and military installations, which are listed in an annex to the proposed rules.  To fall within the scope of the proposed regulations, the foreign person must be given three or more of the following property rights: (i) the right to physically access, (ii) the right to exclude others from access, (iii) the right to improve or develop or (iv) the right to affix permanent structures or objects.  The proposed regulations exclude certain transactions involving real estate in urbanized areas and urban clusters, single housing units, commercial office space in a multiunit commercial office buildings if certain use requirements are satisfied, retail trade in certain airports and maritime ports, and lands owned or held in trust for American Indians, Indian tribes, Alaska Natives and Alaska Native entities.

3. Future Exemptions to Expanded Jurisdiction.  The proposed regulations would exempt “excepted investors (or excepted real estate investor)” from the new rules extending jurisdiction to covered investments and real estate transactions.  However, as proposed, the exemptions will not be available until two years after the regulations enter into force. To qualify as an “excepted investor (or excepted real estate investor)”:

  • The investor must be a national or government of an “excepted foreign state” or a foreign entity organized (and with a principal place of business) in an “excepted foreign state” or the United States.  Treasury will designate states that are eligible to be “excepted foreign states” and, in two years, will grant excepted status to an eligible state if it determines that the state has “a robust process to analyze foreign investments for national security risks and to facilitate coordination with the United States on matters relating to investment security”; and
  • The investor’s board of directors (or its equivalent) must be comprised only of nationals of excepted foreign states or the United States, and any ownership interest in the investor held by nationals of excepted foreign states or the United States must meet specified thresholds.

4. Mandatory Declarations for Certain Transactions Involving Foreign Governments With Substantial Interest in a Foreign Person.  The proposed regulations would require a mandatory declaration (or notice) for certain covered transactions in which a foreign government has a “substantial interest” in a TID U.S. business.  A substantial interest exists where a foreign government holds 49 percent of the voting interest in a foreign person, and that foreign person in turn engages in a covered transaction to acquire 25 percent of the voting interest in a TID U.S. business.  Mandatory declarations must be submitted at least 30 days before the completion of the transaction.  Failure to submit a mandatory declaration may result in a severe monetary fine. 

5. Voluntary Declaration Process. The proposed regulations allow parties to submit a five-page declaration for any proposed covered transaction.  Previously, declarations had been available (and were mandatory) only for investments that fell under CFIUS’s interim pilot program.  Now any party may submit a declaration voluntarily in lieu of a notice.  No later than 30 days after the declaration is submitted, CFIUS must take one of the following actions: request a formal notice, invite parties to submit a formal notice, initiate a unilateral review or clear the transaction. 

6.  Unresolved Issues.  Treasury will publish a separate proposed rule regarding filing fees.  In addition, the interim pilot program rules pertaining to the review of certain transactions in critical technology companies remain in place for the time being.  CFIUS is considering whether to continue to require mandatory declarations for such investments.