With many companies focused on analyzing transactions for applicability of the Committee on Foreign Investment in the United States’ (CFIUS or Committee) pilot program mandatory declaration requirements, transacting parties should not lose sight of the need to continue to analyze deals under traditional CFIUS standards.

Acting under the authority provided in the Foreign Investment Risk Review Modernization Act (FIRRMA), CFIUS published rules on October 10, 2018, establishing a pilot program implementing several provisions of FIRRMA, effective on November 10, 2018. The pilot program established FIRRMA’s mandatory declaration requirement for transactions concerning US businesses in particular industries and involved with “critical technologies.” While the scope of entities and transactions covered by the mandatory declaration requirement is large, it is not exhaustive. The pilot program regulations identified 27 North American Industry Classification System (NAICS) codes as those businesses to which the mandatory declarations would apply. In order to qualify for the mandatory declaration requirement, the business would also have to be producing, designing, developing, testing, manufacturing, or fabricating a critical technology used in one of those designated industries.

While designed to identify and obtain declarations from startups and smaller investments, the mandatory declaration requirement, and the analysis needed to determine whether a transaction is subject to the pilot program, has had an unintended consequence of focusing transacting parties on the mandatory declaration requirements, at the expense of the traditional risk analysis needed to determine whether a voluntary notice should be submitted. For parties not used to analyzing their transactions for CFIUS purposes, the emphasis on determining whether mandatory declarations are required can result in overlooking the traditional CFIUS risk analysis. With FIRRMA’s expansion of CFIUS emphasis and jurisdiction, that analysis is more necessary than ever before. Transactions not within the mandatary declaration requirement should be reviewed to determine whether a voluntary notice is advisable. That analysis continues to require consideration of the traditional national security and risk factors that were the focus of a CFIUS analysis before FIRRMA.

FIRRMA was not intended to pare back CFIUS’s jurisdiction; to the contrary, one of the goals of FIRRMA is to expand CFIUS’s reach and increase the number and types of transactions subject to the Committee’s reviews. While mandatory declarations are currently required only for certain pilot program transactions, the risk of an unreported transaction being investigated by CFIUS has not changed. That risk may actually be greater as the transactions that CFIUS reviews increase in scope and number, and additional CFIUS assets are added within the agencies. As a result, transacting parties should continue to consider voluntary notices for the same reasons they should always have done so: to gain certainty, eliminate risks of potential adverse CFIUS action—including having a transaction blocked—and guard against CFIUS inquiries late in the transaction process impacting transaction timing.

The pilot program regulations added a new dynamic to the CFIUS analysis. Now, transacting parties face at least a three-step analysis:

  • Determine whether the transaction requires a mandatory declaration, because the failure to file a required mandatory declaration could be subject to penalties up to the amount of the transaction. 31 CFR 801.409.
  • If a mandatory declaration is required, assess whether it is advantageous to file a voluntary notice instead of a mandatory declaration. Sections 801.401(b) and 801.501 allow parties subject to the mandatory declaration requirement to opt, instead, to file a joint voluntary notice.
  • If a mandatory declaration is not required, analyze whether a voluntary notice should be submitted. This analysis should follow the pre-FIRRMA analysis and consider (a) the risks of not filing a voluntary notice (i.e., whether if no notice is filed CFIUS will request/require a notice); and (b) if CFIUS does request a voluntary notice and reviews the transaction, whether it is likely to (i) block the transaction, or (ii) require material mitigation that will impact the terms of the transaction.

Only after considering all of these options is the CFIUS analysis complete and the risk fully determined. Transacting parties not subject to the mandatory declaration requirements, but who fail to consider the possibility that their transaction may still raise national security concerns, may still find themselves subject to CFIUS interest and a request for a voluntary notice, with the ultimate result the same as it always has been: CFIUS action detrimental to the transaction, or at the very least disruptive to the economics and/or scheduling of the transaction.

Moreover, with the increased funding for CFIUS resources, Committee inquiries are likely to increase, both as a result of more personnel and as a result of parties failing to recognize that their transactions raise national security concerns even though they are not subject to the mandatory declaration process.