The Situation: The U.S. Department of the Treasury ("Treasury") proposed regulations that expand the jurisdiction of the Committee on Foreign Investment in the United States ("CFIUS" or the "Committee") to review foreign investments in U.S. businesses. Interested parties have until October 17, 2019, to comment on the proposed regulations.

The Result: The proposed regulations, which implement the Foreign Investment Risk Review Modernization Act ("FIRRMA"), revise the process for review of foreign investments and reflect the U.S. government's evolving view of what sectors of the U.S. economy (such as real estate, life sciences, and data collection or maintenance) raise national security concerns and will be subject to heightened scrutiny.

Looking Ahead: Companies in a growing number of industries must consider CFIUS implications when negotiating deals with foreign investors, and should seek experienced counsel early in the life of a deal to assist in navigating complex CFIUS regulations.

On September 17, 2019, Treasury requested comments on proposed regulations ("Proposed Rules") that expand the Committee's jurisdiction to review foreign investments in U.S. businesses and outline its authority to review real estate transactions. These Proposed Rules establish the regulations that will implement most of FIRRMA. The Proposed Rules ("Provisions Pertaining to Certain Investments in the United States by Foreign Persons" and "Provisions Pertaining to Certain Transactions by Foreign Persons Involving Real Estate in the United States") reflect CFIUS's evolving view of U.S. national security and will result in additional scrutiny for foreign investments in many industries traditionally not associated with national security.

Now more than ever, companies should consider how the CFIUS rules apply when negotiating deals between companies that have a U.S. presence and any foreign investors; FIRRMA may subject such transactions to CFIUS's jurisdiction and potentially mandatory CFIUS review. Failure to comply with the regulations could result in steep penalties or the president requiring a foreign investor to divest its interest in a U.S. business. The Proposed Rules, along with forthcoming expanded export controls, International Emergency Economic Powers Act ("IEEPA")-based supply chain regulations, and constantly evolving economic sanctions, indicate a rising tide of national security and foreign policy-related regulatory risks for cross-border business activity.

FIRRMA was enacted into law in August 2018. Last fall, Treasury promulgated regulations implementing certain provisions of FIRRMA, including initiating a "Pilot Program" that requires mandatory CFIUS notifications for foreign investments involving U.S. companies with critical technology, which we have previously discussed in previous Commentaries ("Anything to Declare? CFIUS to Mandate Declarations from "Critical Technology" Businesses Soon" and "Key Takeaways from the First Two Months of Mandatory CFIUS Declarations"). The Proposed Rules provide the framework to further implement FIRRMA and, among other things, provide CFIUS with authority to review certain noncontrolling investments in certain companies, and mandate when foreign-government investors will be required to notify CFIUS prior to closing a deal.

Below is a discussion of a few key concepts contained in the Proposed Rules, including: (i) what types of U.S. businesses fall within CFIUS's expanded jurisdiction; (ii) instances when a foreign government's interest in a noncontrolling investment will require a mandatory notification to the Committee; (iii) CFIUS's jurisdiction over foreign investments in certain types of U.S. real estate; and (iv) the proposed mechanism by which foreign investors with sufficient ties to certain foreign states may be excepted from the CFIUS process. Interested parties have until October 17, 2019, to submit written comments concerning the Proposed Rules, including the existing regulations that were not affected by FIRRMA but were repromulgated as part of the Proposed Rules.

Technology, Infrastructure, and Data U.S. Businesses

FIRRMA provides CFIUS with jurisdiction over an expanded set of "covered investments," which, under the Proposed Rules, include certain direct or indirect investments that provide a foreign person with noncontrolling ownership interests in U.S. businesses that: (i) undertake certain activities involving critical technologies; (ii) involve critical infrastructure; or (iii) maintain or possess sensitive personal data. As noted above, CFIUS previously established the Pilot Program relating to both controlling and noncontrolling critical technology investments. The Proposed Rules now collectively refer to these businesses as "TID U.S. businesses," with the acronym "TID" referring to Technology, Infrastructure, and Data.

For TID U.S. businesses, the traditional, pre-FIRRMA CFIUS jurisdictional threshold—whether a foreign person is acquiring control—has been replaced with a lower, more complex threshold. Under the Proposed Rules, CFIUS would have the ability to review investments in TID businesses that afford a foreign person: (i) access to material nonpublic technical information; (ii) membership, observer, or nomination rights for the board (or equivalent body) of the U.S. business; or (iii) any involvement, other than through voting of shares, in substantive decision-making.

Critical Technologies and the Pilot Program. The Pilot Program, effective November 10, 2018, imposed a mandatory CFIUS notification requirement for controlling and certain noncontrolling investments in U.S. businesses that produce, design, test, manufacture, fabricate, or develop one or more critical technologies for use in connection with, or that were specially designed for use in, certain enumerated industries. The Proposed Rules maintain the definition of "critical technologies" introduced in the Pilot Program, which includes certain "emerging and foundational technologies" to be designated pursuant to the Export Control Reform Act. While the Proposed Rules do not amend the Pilot Program review process, Treasury indicated that it is inviting comments concerning the mandatory notification requirement for certain transactions involving critical technologies.

Critical Infrastructure. While CFIUS broadly interprets the concept of critical infrastructure under its traditional control-based jurisdiction, the Proposed Rules adhere to FIRRMA's requirement that noncontrolling investments will be subject to CFIUS's jurisdiction under more narrow circumstances. Under this approach, a U.S. business will be considered a TID U.S. business for critical infrastructure purposes only if it performs one of the specified functions that is paired with an enumerated type of covered investment infrastructure. The types of infrastructure covered are diverse, spanning the energy, telecommunications, finance, utilities, manufacturing, and transportation sectors.

Sensitive Personal Data. The Proposed Rules suggest that the type of data of concern includes data that "may be exploited in a manner that threatens to harm national security." CFIUS is concerned about data that includes personal identifying information, such as an individual's name, physical address, email address, Social Security number, phone number, or other information that identifies a specific individual. Under the Proposed Rules, CFIUS would have jurisdiction over a noncontrolling investment by a foreign person in a U.S. business that collects such data only if that U.S. business also: (i) "targets or tailors" its products or services to sensitive U.S. government personnel or contractors; (ii) maintains or collects such data on more than one million individuals; or (iii) demonstrates a business objective to maintain or collect such data on more than one million individuals, and such data is an "integrated part" of the U.S. business's primary products or services. If a U.S. business is deemed to engage in such activities, and the data relates to certain financial, health, communication, geolocation, biometric identification, or government-sensitive information typically held by government contractors, the U.S. business would be classified as a "TID U.S. business" under the Proposed Rules. Importantly, the Proposed Rules also include any U.S. business that collects or maintains records relating to U.S. citizens' genetic information, such as genetic tests or individual or family disease or disorder histories, regardless of whether the U.S. business engages in any of the activities described above.

Foreign Government Substantial Interest Test Requiring Mandatory Notifications

The Proposed Rules outline the contours of the mandatory notification requirement for foreign government investments contained in FIRRMA. A mandatory filing will be required for transactions where a foreign government holds a "substantial interest" in the foreign person that obtains a "substantial interest" in a TID U.S. business. Under the Proposed Rules, a foreign government has a substantial interest in the foreign person if it holds a 49% direct or indirect interest, whereas a foreign person will obtain a substantial interest in a TID U.S. business if it obtains at least a 25% direct or indirect interest. Foreign-government limited partner investors will be considered to have a substantial interest in a partnership if they hold 49% or more of the voting interest in the general partner, or if they hold 49% or more of the voting interest of the limited partners.

Real Estate

For the first time in the history of the Committee, FIRRMA granted CFIUS authority to review real estate transactions not involving investment in a U.S. business. CFIUS will be authorized to review "the purchase or lease by, or a concession to, a foreign person of private or public real estate that" is: (i) "located within, or will function as part of, an air or maritime port"; (ii) "in close proximity to a United States military installation or another facility or property of the United States Government that is sensitive for reasons relating to national security"; (iii) "could reasonably provide the foreign person the ability to collect intelligence on activities being conducted at such an installation, facility, or property"; or (iv) "could otherwise expose national security activities at such an installation, facility, or property to the risk of foreign surveillance." The real estate Proposed Rule provides four lists of military bases and grants the Committee jurisdiction to review real estate transactions occurring within a specified distance of each military base, depending on which list the base is included. Under this provision, filings for such covered real estate transactions will be voluntary.

Excepted Investors and Excepted Foreign States

The Proposed Rules also set forth specific criteria for exempting from CFIUS jurisdiction noncontrolling covered investments by certain foreign investors with sufficiently close ties to an excepted foreign state. An excepted foreign state must first be designated on a list separately published and maintained on the Treasury website. The Committee will then determine whether each designated foreign state maintains a sufficiently robust process to assess foreign investments for national security risks and to facilitate coordination with the United States on matters relating to investment security. The factors CFIUS will use to make such determinations will be separately published and maintained by Treasury. The Proposed Rules indicate that the Committee may delay this determination to afford eligible foreign states "time to enhance their foreign investment review processes and bilateral cooperation."

An excepted investor must maintain a substantial connection to an excepted foreign state, such as nationality of the ultimate owner, place of incorporation, or principal place of business. Each member or observer of the board of the investor also must be a national of an excepted foreign state. A foreign investor is ineligible for excepted status if the investor, or the investor's parent or subsidiary, has submitted a material misstatement or omission in a prior CFIUS notice or declaration or has violated a material provision of a mitigation agreement, or otherwise violated U.S. laws, regulations, or executive orders.

Three Key Takeaways

  1. The Proposed Rules implement FIRRMA's expansion of CFIUS's jurisdiction over certain foreign investments in U.S. businesses operating in a wide variety of sectors in the U.S. economy.
  2. Parties to a transaction involving foreign investment should consult counsel early in the deal process to evaluate whether the transaction may result in a voluntary or mandatory CFIUS filing, even if the transaction does not result in foreign control.
  3. Interested stakeholders should comment on the Proposed Rules and the Pilot Program before October 17, 2019, and should monitor the Treasury website for further announcements and separately published guidelines relating to the Proposed Rules.