Investors be warned. In 2020 the U.S. Department of the Treasury issued comprehensive new regulations to implement the Foreign Investment Risk Review Modernization Act (“FIRRMA”). These include provisions that address the treatment of indirect investments through investment funds that should be carefully considered by anyone contemplating such an investment in a U.S. business.

When analyzing potential investments, it is imperative to consider regulatory regimes that may impact the relevant transactions. The Committee on Foreign Investment in the United States (“CFIUS”) is a multi-agency group that reviews foreign investments in certain U.S. entities and assets to determine whether they present a national security concern and, if so, whether that concern can be mitigated. If such concerns cannot be mitigated, or the parties are unwilling to agree to the mitigation proposed, CFIUS may recommend that the President prevent or reverse the transaction or take other steps to alleviate the potential threat to the country. In a year that has seen other jurisdictions introduce new foreign direct investment oversight, the U.S. government implemented FIRRMA, which contains the first significant revisions to CFIUS’s process and jurisdiction in more than a decade.

"Parties to certain transactions are obliged to file a declaration or notice to CFIUS in advance of completing their transaction."

Perhaps most notably, while participation in the CFIUS review process historically has been voluntary, pursuant to FIRRMA parties to certain transactions are obliged to file a declaration or notice to CFIUS in advance of completing their transaction. Failure to submit such declarations to CFIUS in advance of completion may result in significant penalties – up to US$250,000 or the full value of the transaction, whichever is greater. In addition, under the regulations implementing FIRMMA, certain non-controlling investments in U.S. businesses with sufficient connections to critical technologies, critical infrastructure, and/or sensitive personal data of U.S. citizens (so-called “TID U.S. businesses”) can trigger the jurisdiction of CFIUS and may be subject to mandatory reporting requirements.

CONCLUSION

Parties considering cross-border transactions, as well as those who provide capital or insurance for such transactions, should consider potential national security concerns both in the selection of transaction partners and in structuring proposed transactions. A review by CFIUS is a fact-specific inquiry, and early planning may minimize risk and time delays. We advise clients to consult with counsel before cross-border deals are structured and the parties chosen to assist in navigating around potential roadblocks.