On September 27, 2019, ten days after publishing proposed regulations related to the reform of the Committee on Foreign Investment in the United States (CFIUS), senior officials of the U.S. Department of the Treasury and representatives of CFIUS held two public briefings to provide an overview of the proposed rules to stakeholders and to respond to frequently asked questions. Although the officials declined to answer many questions during the briefings, instead directing stakeholders to submit written comments for the Committee’s careful consideration, the Treasury proactively addressed certain aspects of the proposed regulations that have generated considerable confusion, including questions related to the meaning of “substantial interest” by a foreign government and “excepted” foreign persons, among other concerns.

As described in our recent guidance, the Treasury Department issued proposed regulations on September 17, 2019 to comprehensively implement the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA) in an effort to strengthen and modernize CFIUS and to better address national security concerns arising from certain investments and real estate transactions. In its subsequent public briefings, officials fielded numerous questions regarding key concepts and terms outlined in the proposed regulations. The Treasury Department declined to answer most questions and repeatedly encouraged stakeholders to submit written comments and hypotheticals in advance of the October 17, 2019 public comment deadline to ensure consideration by the Committee as it finalizes its rules. Notably, however, the Committee provided commentary and insight into certain limited aspects of the proposed regulations, evidencing some of the areas in which stakeholders particularly have identified confusion or ambiguity in the language as drafted.

Clarifications provided during the briefings include as follows:

  • Mandatory filings and “substantial interest” by a foreign government. Filing a declaration for a transaction will be mandatory for covered transactions that result in the acquisition of a “substantial interest” in a TID U.S. Business by a foreign person in which a foreign government has a “substantial interest” – a term awkwardly defined within the proposed regulations. Officials clarified during the briefing that “substantial interest” requires two different thresholds to be met: First, the foreign government must have a 49 percent or greater voting interest, direct or indirect, in a foreign person, and second, that foreign person must have a 25 percent or greater voting interest, direct or indirect, in the TID U.S. Business. The Treasury Department added that the facts and circumstances of a transaction will determine whether the requisite thresholds are met.
  • “Grace period” will apply to certain aspects of “excepted investor” test. Under the proposed regulations, certain non-controlling investments in U.S. businesses by foreign persons from specified foreign states may be exempt from review by CFIUS. In response to considerable confusion regarding the identification of such excepted investors, the Treasury Department clarified that the exception, as proposed, requires the relevant foreign state to meet two criteria: Not only must the foreign state be identified on a list of nations to be published by CFIUS, the Committee also must have made (and published) a determination that the foreign state has established and is effectively utilizing a robust process to analyze foreign investments for national security. Notably, CFIUS intends to delay the effectiveness of this second prong, instead providing a two-year “grace period” to allow foreign states identified on the Committee’s list sufficient time to enhance their processes for review of foreign investment.
  • Different “excepted foreign state” lists possible. The Treasury Department acknowledged that, as a result of differing language under the proposed regulations for establishing “excepted foreign states” and “excepted real estate foreign states,” CFIUS may publish one list of excepted foreign states applicable to covered investments and a different list applicable to covered real estate transactions.
  • “Sensitive personal data” clarified. Officials provided certain clarifications relevant to TID U.S. Businesses that maintain or collect, directly or indirectly, sensitive personal data of U.S. citizens. “Sensitive personal data,” as defined in the proposed regulations, includes, but is not limited to, identifiable data that is maintained or collected by a U.S. business that “has maintained or collected such data on greater than one million individuals at any point over the preceding twelve (12) months” or that “has a demonstrated business objective to maintain or collect such data on greater than one million individuals and such data is an integrated part of the U.S. business’s primary products or services.” Notably, officials clarified that the measure of “individuals” under those scenarios is not limited to U.S. citizens. Officials also explained that facts and circumstances will determine whether a U.S. business has such a “demonstrated business objective,” but noted that company financial statements, pitch materials, and future customer projections may be informative in that analysis.
  • Public comments on the retention of the pilot program encouraged. The Treasury Department repeatedly emphasized that it welcomes comments on all aspects of the pilot program. Stakeholders are encouraged to submit public comments on not only the retention of the mandatory filing requirement related to investments in critical technologies, but also on the terms, definitions, structure, and challenges associated with the pilot program as a whole.