In 2018, the U.S. Congress enacted the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA), a law that substantially expands the reach of the Committee on Foreign Investment in the United States (CFIUS). CFIUS is the U.S. Department of the Treasury-led interagency committee that advises the president on the national security implications of foreign investments in the U.S. economy. While FIRRMA is not yet fully in effect, as the Treasury Department is still working on regulations that will implement the law and that likely will not become final until February 2020, it is very clear that FIRRMA means that far more transactions will now likely be subject to CFIUS review. As Israeli investors consider investments in the United States, the question of whether a proposed transaction presents a CFIUS issue must now be an early action item on the due diligence checklist.

CFIUS has its roots in the 1970s, when President Gerald Ford established the committee to respond to fears that OPEC investments in the U.S. economy were threatening national security. While these fears eventually passed, Japanese investments in the 1980s sparked new fears, resulting in congressional passage of the Exon-Florio law, which granted the president the power to block proposed or pending foreign "mergers, acquisitions, or takeovers" that threatened to impair national security. Then, in the wake of 9/11, congressional fears shifted back to Arabs culminating in the political firestorm caused by Dubai Ports World's proposed takeover of the U.S. maritime terminal operations of P&O Ports. Responding to this fear, Congress enacted the Foreign Investment and National Security Act of 2007 (FINSA), which broadened CFIUS jurisdiction to include transactions involving critical infrastructure and established the CFIUS process that is known today.

Now, there is a new concern Chinese efforts to use investments and acquisitions to obtain cuttingedge U.S. technologies such as semiconductors in order to better compete with the U.S. militarily, overtake us economically, undermine U.S. cyber networks, compromise critical infrastructure, spy on U.S. government installations and steal the personal data of Americans. Because of these very real fears, and even before the enactment of FIRRMA, both the Obama and Trump administrations used CFIUS to block or discourage a number of Chinese investments involving U.S. companies, including several involving semiconductors (Lumileds, Aixtron and Lattice). Both administrations also used CFIUS to prevent or require major divestments in transactions involving personal information (Moneygram), critical infrastructure (COSCO/Orient Overseas) and real estate near sensitive U.S. government facilities (Waldorf Astoria, HNA Manhattan). And fears of China also motivated the Trump Administration to use CFIUS to block Broadcom's hostile takeover of Qualcomm out of concerns that Broadcom might hurt Qualcomm's leadership in the development of 5G technology, thereby opening the door for Chinese firm Huawei to win the contest for global 5G domination.

Passed by bipartisan House and Senate majorities, FIRRMA is the next step in the evolution of CFIUS. What are the key takeaways for Israeli investors seeking to invest in U.S. companies?

First: For many transactions, the basics of pre-FIRRMA law remain and will remain in place. CFIUS will still come into play for any acquisition that would result in control of a U.S. business by a foreign person, and where that transaction might impact U.S. national security. These concepts are broadly and expansively defined under the law, so as to give CFIUS and the president maximum flexibility in acting to protect the American public.

For example, "control" does not just mean majority ownership. Rather, the law expansively defines it more broadly to include the direct or indirect power to "determine, direct, or decide important matters affecting an entity." So, in many cases, the purchase of a minority stake by a foreign investor can be viewed by CFIUS as tantamount to foreign "control." So Israeli investors should not believe that by acquiring only 49 percent of a U.S. business, they can escape CFIUS review.

A "U.S. business" is broadly defined to include any "person engaged in interstate commerce in the United States," even persons or companies based elsewhere, but with a branch, subsidiary or other significant operations in the U.S. For example, an Israeli-owned company with a U.S.-based branch or subsidiary would likely be deemed a "U.S. business" for CFIUS purposes. So, as a result, a Chinese investment in the Israeli parent company would likely trigger a need for United States CFIUS review, where the investment conceivably impacts U.S. national security. Conversely, per the Treasury Department's longstanding regulations, if a U.S. business has an Israeli subsidiary that is majorityowned and therefore controlled by the U.S. business, that Israeli company is also deemed part of the U.S. business, and not deemed a "foreign" person or entity under CFIUS. So if that majority U.S.owned and controlled Israeli subsidiary invests in a different U.S. business, it likely would not be deemed a foreign investor under CFIUS.

And finally, the concept of whether a foreign investment impacts "national security" is equally broad and amorphous with the law stating that, in determining whether to block or require modification of a potential foreign investment, the president may consider a wide variety of factors relevant to U.S. national security. Those factors may include U.S. defense and foreign policy needs, whether the transaction could impact U.S. technological leadership in areas impacting national security and whether the transaction relates to U.S. critical infrastructure, among many others.

So, in sum CFIUS jurisdiction has always been extraordinarily broad, and FIRRMA has made it even broader, as discussed in further detail below.

In most circumstances (except those listed below), CFIUS is a voluntary process, so parties to such a transaction can roll the dice and hope CFIUS doesn't come calling. But usually that's bad advice, as there is no statute of limitations to the president's power to unravel a transaction. So, if the parties decide not to make a voluntary CFIUS filing, there is nothing to stop CFIUS from knocking on their door, even many years after a transaction has closed.

So the better idea where a transaction involving a foreign person might impact national security is to employ CFIUS counsel to submit a detailed notice to CFIUS before closing, asking the committee to review the transaction. It is, of course, possible that, upon review of the proposed transaction, CFIUS may have concerns and advise the president to block it or work with the parties to mitigate those concerns through divestment, management controls or other measures. But if CFIUS clears the transaction, the transaction will be given a "safe harbor" from future CFIUS review. And, except in rare cases where the parties have lied to CFIUS or where they have materially breached any mitigation agreements they have reached with the committee, the parties can go forward without the fear that CFIUS will later seek to unravel the deal.

Second: FIRRMA has now substantially expanded CFIUS jurisdiction to cover certain other transactions not necessarily resulting in foreign control. In these cases, even small minority stakes can trigger CFIUS review. The expanded CFIUS jurisdiction includes foreign investments in U.S. businesses involved in a) critical infrastructure, b) critical technologies or 3) the collection or maintenance of personal data on U.S. citizens, if the foreign investor is given access to material nonpublic technical information, membership or observer rights on the board, or any involvement in substantial decisionmaking concerning the U.S. business. In such circumstances and with certain limited exceptions, a CFIUS filing will be mandatory and substantial penalties can be imposed for failure to file.

As noted, many of these changes have not yet gone into effect regulations currently are being drafted by the Treasury Department that will implement this part of the FIRRMA law. On Sept. 17, 2019, the Treasury Department issued two sets of proposed regulations one addressing the expansion of CFIUS jurisdiction, with particular focus on the areas listed above, and the other specifically dealing with the expansion of CFIUS jurisdiction on real estate investments. Consistent with the Administrative Procedure Act, the Treasury Department is seeking public comment on the proposed regulations and, after considering these comments, it will develop and release final regulations implementing FIRRMA no later than Feb. 13, 2020. While these proposed regulations are not yet final, they provide a glimpse into how expansive CFIUS jurisdiction will become by early 2020. Indeed, we have already felt the impact of this expanded jurisdiction, with the "Pilot Program" that CFIUS launched last year, implementing the new law with regard to foreign investments in U.S. businesses involved in critical technologies in 27 Pilot Program Industries, including aviation, defense, semiconductors, telecommunications, among others. Under this Pilot Program, for certain investments involving critical technologies, CFIUS filings are now mandatory and must be filed at least 45 days prior to closing, or else draconian penalties can be imposed. And once the Treasury Department finalizes its regulations implementing the rest of FIRRMA, more transactions will be subject to such mandatory filings.

Importantly, however, the definition of "critical technology" is still evolving. Under FIRRMA, critical technologies include those subject to export control license requirements (such as those on the U.S. Munitions List / ITAR, on the Commerce Control List, nuclear technologies, and select agents and toxins). But in addition, under FIRRMA, critical technologies also include those deemed "emerging" or "foundational" categories that, under the concurrently enacted Export Control Reform Act of 2018 (ECRA), the U.S. Commerce Department is currently reviewing. In November 2018, the Commerce Department issued an Advance Notice of Proposed Rulemaking, which lists a number of technologies that might ultimately be deemed "emerging" under ECRA and FIRRMA ("foundational" technologies will be addressed at a future date), including certain biotechnologies, artificial intelligence and machine learning, certain microprocessor technologies, among others. The Commerce Department asked for public comment on its list, and the final list is still under consideration. Depending on this final list of technologies, as well as the ultimate regulations implementing FIRRMA that will be finalized by the Treasury Department early next year, this could also dramatically broaden the scope of CFIUS reviews.

FIRRMA and the Treasury Department's proposed regulations regarding such "other" investments also offer an additional twist that may be of significant interest to Israeli investors. Under the law, the Treasury Department can limit the expansion of CFIUS jurisdiction to noncontrolling investments with regard to certain "excepted" investors or foreign states namely, investors with clean records of compliance with U.S. laws and from countries deemed sufficiently friendly to the United States to present less of a national security risk. Such investors would not be exempt from CFIUS jurisdiction with regard to investments resulting in foreign control of a U.S. business, but conceivably could escape the expanded CFIUS jurisdiction for certain other noncontrolling investments. That said, the proposed regulations issued on Sept. 17, 2019, are just a tease. The Treasury Department says it will consider this issue further over the coming months. Needless to say, the evolving concept of "excepted" investors or foreign states could be one of major significance to Israeli investors.

Third: FIRRMA clarified that CFIUS does not have jurisdiction over indirect foreign investments through U.S. investment funds in businesses involved in critical infrastructure, critical technology or the collection of personal data on U.S. citizens, so long as the foreign investment is entirely passive. For this limitation on CFIUS jurisdiction to apply, the U.S. general partner must have exclusive control of the investment fund, the foreign investors must not have any ability to control the fund or its investment decisions and the foreign investor must not have access to material nonpublic technical information. If those conditions are met, a U.S. investment fund's investments in U.S. businesses will not trigger CFIUS review even if foreigners are investors in the fund.

Fourth: FIRRMA basically codifies existing CFIUS practice that has subjected certain real estate transactions to CFIUS review, if the subject property is located within an airport or seaport, or if the subject property is in "close proximity" of a military installation or other sensitive U.S. government facility, which could provide the opportunity for the foreign investor to collect intelligence on sensitive U.S. government activities impacting national security. These provisions will become effective once the Treasury Department regulations implementing FIRRMA with regard to real estate transactions become final in February 2020, but for most intents and purposes, this is a continuation of prior practice although the proposed regulations issued on Sept. 17, 2019, provide some additional shape and detail as to how these provisions will operate. In one important respect, however, the new law does significantly expand CFIUS jurisdiction by including within its ambit both developed and undeveloped real estate. So, certain "greenfield" investments will now trigger CFIUS review, if they are in "close proximity" of a sensitive U.S. government site.

Fifth: FIRRMA provides that CFIUS has jurisdiction to review investments clearly designed to circumvent CFIUS review a catch-all provision that reflects the concern that certain foreign investors were cleverly structuring their deals to avoid the letter of CFIUS law.

In addition to these substantive changes, FIRRMA also revised various CFIUS procedural rules, deadlines and filing fees, among other things.

Long and short, FIRRMA has changed the game on CFIUS reviews, and Israeli investors need to keep these new rules front of mind. Once fully implemented early next year, FIRRMA will dramatically expand the types of transactions subject to CFIUS review. In particular, for those involving critical infrastructure, critical technology or personal information on U.S. citizens, as well as real estate transactions near sensitive U.S. government facilities. CFIUS will come into play even for certain minority investments, and filings will now be mandatory in many cases.

Will this expansion of CFIUS jurisdiction be a huge obstacle to Israeli investments in the United States? It is difficult to say. Politically, FIRRMA was all about fears of China, and CFIUS is clearly scrutinizing Chinese investments more carefully. As a result, Chinese investment in the U.S. is down dramatically by 95 percent compared to only two years ago. This is obviously significant. But for most transactions not involving Chinese investors, the new CFIUS rules should not stand as a huge obstacle. Indeed, Israeli investors should begin to pull together arguments regarding the provisions in FIRRMA and in the proposed regulations concerning "excepted" investors and foreign states making the argument that they should be excepted from much of the expanded CFIUS jurisdiction, given Israel's close friendship with the United States. But even aside from this new potential twist, the new CFIUS rules should be viewed like antitrust reviews an essential regulatory step, but not usually a fatal one, assuming the parties have employed experienced CFIUS counsel to navigate them through the process and, if necessary, negotiate with CFIUS to forestall a block or minimize any mitigation or divestment requirements. Bottom line, given the expansion of CFIUS jurisdiction, the question of CFIUS review must now be an early topic in the due diligence process for any transaction. In any case potentially triggering CFIUS review, experienced CFIUS counsel should be brought in early to assist the parties in evaluating whether a mandatory filing is required or a voluntary one is advisable. The CFIUS question cannot wait until the last minute. But again, with experienced CFIUS counsel in the mix, the vast majority of transactions will proceed unscathed.