Beginning 10 November 2018, the United States will impose prior approval requirements for foreign investments in certain US businesses involving “critical technologies.” This is the first time the United States will require that parties notify the government of transactions since the creation of the US foreign investment review regime in 1988. Up to this point, notifications to the Committee on Foreign Investment in the United States (“CFIUS”) have been voluntary, although CFIUS has authority to take the initiative to require parties to file for approval where CFIUS deems a transaction may raise national security considerations. The new requirement is part of a pilot program authorized under the Foreign Investment Risk Review Modernization Act of 2018 (“FIRRMA”) and implemented by interim regulations issued by the US Department of Treasury on 10 October 2018.

Non-Controlling Investments Subject to CFIUS Jurisdiction

The pilot program expands CFIUS’ jurisdiction to review certain “critical technology” transactions in which the foreign investor acquires less than a controlling interest but gains access to material nonpublic technical information, membership or observer rights on the board of directors, or involvement in substantive decision making regarding “critical technologies.” CFIUS previously had authority to review only investments through which a foreign person could assume “control” of a US business. The pilot program does not cover certain indirect investments by a foreign person through an investment fund where the fund is managed exclusively by a general partner who is a US person.

Critical Technology Transactions Subject to Mandatory Declarations

The mandatory declarations and expanded jurisdiction apply to foreign investments in any US business that produces, designs, tests, manufactures, fabricates, or develops “critical technologies” that are (1) “utilized in connection with the US business’s activity” in certain listed industries; or are (2) designed by the US business specifically for use in one or more of those listed industries. The 27 listed industries are drawn from the North American Industry Classification System (“NAICS”), a classification developed for use by US statistical agencies, and include chemicals and petrochemicals manufacturing, electronic computer and computer storage device manufacturing, aerospace manufacturing, and R&D in nanotechnology and biotechnology, among many others.

“Critical technologies” under the pilot program are:

a) defense articles or defense services included on the United States Munitions List;

b) items included on the Commerce Control List that are controlled for national security, chemical and biological weapons proliferation, nuclear nonproliferation, or missile technology, or regional stability reasons, or for reasons relating to surreptitious listening;

c) certain specially designed and prepared nuclear equipment, parts and components, materials, software, and technology regulated by the Department of Energy;

d) certain nuclear facilities, equipment, and material regulated by the US Nuclear Regulatory Commission;

e) select agents and toxins regulated by the Centers for Disease Control and Prevention; and

f) “emerging and foundational technologies” controlled under the Export Control Reform Act of 2018, which have not yet been identified.

Parties to a transaction covered by the pilot program are required to submit a mandatory declaration to CFIUS. Parties that fail to file a declaration where it is required can be assessed a civil monetary penalty up to the value of the transaction. The declaration should in theory be short (approximately five pages), but the regulations require virtually all the same information required for a full notice to CFIUS, except for personal identification information of the buyer’s shareholders, officers, and directors. Parties must file the declaration with CFIUS at least 45 days prior to the expected completion date of the transaction. Once CFIUS formally accepts the declaration, CFIUS will have 30 days to approve the transaction or require a full CFIUS notice. The regulations apply to transactions that will be completed after 10 November 2018, unless the parties executed a binding written agreement or other document establishing the material terms of the transaction, or taken certain other steps specified in the interim regulations, prior to 11 October 2018.

Notably, the regulations do not yet implement several other important elements of FIRRMA, including mandatory declarations for a broader range of transactions involving state-affiliated investors (and related waiver provisions for state-affiliated foreign investors that satisfy certain conditions), and the extension of CFIUS’ jurisdiction to certain non-controlling investments in US businesses involving critical infrastructure or that maintain or collect sensitive personal data of US citizens.

Key Implications

The FIRRMA provisions implemented by CFIUS through the pilot program were driven primarily by national security concerns with Chinese investments. The pilot program provisions will, however, impact investments by all types of foreign investors, from any country, at least for the time being – until CFIUS specifies criteria to limit their application to certain categories of foreign investors, as set out in FIRRMA.

Although the mandatory declaration requirement only reaches foreign investments in certain US businesses involving “critical technologies,” the introduction of civil monetary penalties up to the value of the transaction for failure to file the required declaration should prompt foreign investors to elevate CFIUS risk assessments in their hierarchy of transactional due diligence and regulatory priorities.