On January 13, 2020, the US Department of the Treasury (“Treasury”) issued much-anticipated final regulations to implement the Foreign Investment Risk Review Modernization Act (“FIRRMA”). FIRRMA expanded the jurisdiction of the Committee on Foreign Investment in the United States (“CFIUS”), including to address certain foreign non-controlling and real estate investments in the United States. The final regulations, which will become effective February 13, 2020, generally track proposed regulations issued in September 2019 (see our Legal Update), with important changes in some areas. In addition, the final regulations largely subsume a mandatory requirement to file with CFIUS for investments in US businesses that deal in “critical technologies,” a requirement that CFIUS introduced in a pilot program implemented in November 2018 (see our Legal Update).

With respect to the acquisition of greenfield real estate, both the proposed and final rules largely focus on the proximity of the real estate to certain specified certain specified military and other US government installations. To facilitate understanding of the coverage and of the proximity of the relevant installations, CFIUS plans to make an online tool available to the public in the future. The real estate final regulations refine the proposed regulations released in September, including by adding an exception from the coverage of the rule for leases or concessions in covered ports by foreign air carriers to the extent such a transaction is in furtherance of activities as a foreign air carrier. The final regulations also exempt leases or concessions in covered ports for the purpose of engaging in the retail sale of consumer goods or services to the public.

CFIUS’s expanded jurisdiction also captures small, non-controlling investments (called “covered investments”) in “TID US businesses”—those dealing in certain critical Technologies, critical Infrastructure or sensitive personal Data. Building on the mandatory filings that were introduced in the CFIUS pilot program addressing critical technology transactions, the final regulations will also require a filing for most covered investments or transactions resulting in foreign control of a TID US business that produces, designs, tests, manufactures, fabricates or develops critical technologies that are used or designed specifically for use in specified industries. In addition, the proposed regulations had included “genetic information” within the definition of “sensitive personal data”; the final regulations refine that term to mean the results of an individual’s genetic tests while also exempting data routinely provided for research purposes.

The proposed regulations introduced the term “substantial interest” and required a mandatory filing for the acquisition of a “substantial interest” in a TID US business by a foreign person (25 percent or more) in which a foreign government had a “substantial interest” (49 percent or more). The final regulations further refine this concept, with important implications for investment funds in which a foreign government may have an interest. For investment funds with a general partner or an equivalent “manager,” a mandatory filing is not required if that general partner is not a foreign person and if any foreign persons (including foreign governments and state-owned enterprises) that are limited partners on advisory boards do not generally have the ability to control the fund or its investment decisions. Furthermore, the final regulations clarify that a foreign government is only considered to have a “substantial interest” in an entity with a general partner or managing member if it holds 49 percent or more of the interest in that “managing” entity. As a result, the final regulations provide an exemption from the mandatory filing requirement in certain circumstances if a foreign government holds solely limited partner interests.

Both sets of regulations also provide for exemptions from CFIUS’s expanded jurisdiction, and from the foreign government “substantial interest” mandatory filing requirement, for certain investors from specified excepted foreign states. CFIUS has selected Australia, Canada and the United Kingdom as these excepted foreign states, though additional states could be added in the future. The final regulations also refine the criteria that entities must meet to qualify as an “excepted investor” from these excepted foreign states. For example, in order for an entity to qualify as an excepted investor, the final regulations require that 75 percent of the members and observers of the board of directors must be US nationals or nationals of an excepted foreign state. This figure is a change from the proposed regulations, which required all members of the board of directors to be US nationals or nationals of an excepted foreign state. Additionally, while the proposed regulations required any foreign person holding 5 percent or more of the voting interests or rights to profits of an entity to be from an excepted foreign state in order for the entity to qualify as an excepted investor, the final regulations increase this limit to 10 percent.

The final regulations represent the culmination of an 18-month process to implement FIRRMA and are a substantial expansion of CFIUS’s jurisdiction to review foreign investments in the United States. As investors and US businesses consider cross-border transactions, they should carefully consider CFIUS’s role at every step of the process.