As a first step to implementing the wide-ranging Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA) that was enacted in August 2018, the U.S. Department of the Treasury on October 10, 2018 issued an interim rule to launch a “pilot program” to expand the jurisdiction of the Committee on Foreign Investment in the United States (CFIUS) to review certain “critical technology” transactions. Treasury also issued temporary regulations that make limited changes to the existing CFIUS regulations, mostly to implement changes that became effective immediately upon passage of FIRRMA.

Pilot Program Interim Rule

A number of the provisions of FIRRMA that expand CFIUS’s jurisdiction do not become effective until Treasury passes implementing regulations or February 2020, whichever comes first. Treasury is not expected to finalize the relevant implementing regulations for several months. However, FIRRMA also authorized Treasury to create temporary “pilot programs” to allow for faster implementation of parts of the legislation that did not become effective immediately upon enactment.

Under the newly announced pilot program, CFIUS will review non-controlling investments made by foreign persons in U.S. businesses involved with critical technologies in industries specified in the pilot program rule. The pilot program also requires the filing of mandatory declarations with CFIUS for any transactions that fall within the specific scope of the pilot program – which goes beyond the minimum required by FIRRMA. The pilot program will commence on November 10, 2018, and will end no later than the date that the final FIRRMA implementing regulations are enacted.

1) Expanded CFIUS review of “critical technology” transactions

FIRRMA authorizes CFIUS to review additional, non-controlling foreign investments in U.S. businesses engaged in certain activities related to critical infrastructure, critical technology, or sensitive personal data of U.S. persons, if such investment provides (1) access to “material non-public technical information,” (2) membership or other board of director rights, or (3) other involvement in certain substantive decision-making by the company. For additional background on this provision of FIRRMA see our previous advisory here. This expanded scope of review did not go into effect immediately upon enactment of FIRRMA.

The pilot program announced yesterday implements part of this expanded review authority in the area of “critical technologies.” Specifically, it applies to investments in a U.S. business that “produces, designs, tests, manufactures, fabricates, or develops a critical technology that is” (a) utilized in connection with a “pilot program industry” or (b) designed by a U.S. business “specifically for use in one or more pilot program industry.” The regulations identify 27 industries as “pilot program industries,” including, among others, aircraft manufacturing, ball and roller bearing manufacturing, computer storage device manufacturing, semiconductor and related device manufacturing, and telephone apparatus manufacturing. A full list of industries can be found at Annex A to Part 801 of the interim rule (“Pilot Program Industries”).

“Critical technology” is defined in the CFIUS regulations and includes certain items subject to U.S. export control regimes; certain nuclear-related items, software, and technology; certain agents and toxins; and emerging and foundational technologies controlled pursuant to the Export Control Reform Act of 2018.

2) Mandatory Pilot Program Declarations

The pilot program also establishes mandatory declarations, which were introduced in FIRRMA for the first time, for transactions that are covered by the pilot program outlined above. Under these regulations, parties to transactions subject to the pilot program must submit a mandatory declaration to the Committee. These mandatory declarations will take the form of “abbreviated notices that would not generally exceed 5 pages in length,” and undergo a shortened review period. The temporary regulation establishing the pilot program specifies the information that must be included in a declaration.

The pilot program and mandatory declaration requirement covers all foreign investors and is not country-specific. As part of the declaration, the foreign investor is asked to stipulate whether the transaction is a “foreign government-controlled transaction.” However, the mandatory declaration requirement applies to all foreign investors, regardless of whether they are controlled by foreign governments – which goes beyond the minimum required in FIRRMA.

Limited Changes to CFIUS’s Regulations

Treasury also issued temporary regulations that make limited updates to CFIUS’s existing regulations. These regulations primarily implement provisions of FIRRMA that became immediately effective upon its enactment, and are intended to ensure consistency between CFIUS’s regulations and the statute. Among other things, the interim rules provide clarification on the transactions covered by CFIUS, notice and filing processes, and review and investigation procedures.

Path Ahead

The general update interim rule is effective on October 11, 2018 and the pilot program interim rule becomes effective on November 10, 2018. The pilot program considerably expands the categories of transactions subject to the mandatory filing requirement. Parties failing to make a required declaration may be assessed a civil monetary penalty up to the value of the transaction. Therefore, it will be important for foreign investors and U.S. businesses to carefully assess whether they are required to make such a filing.

As always, we will keep you abreast of additional developments in this space.