What is CFIUS and why should I care?
The Committee on Foreign Investment in the United States, (CFIUS ) is an interagency committee that is chaired by the Secretary of the Treasury. CFIUS is tasked with regulating certain foreign transactions and investments involving U.S. businesses and the interaction of those investments with national security concerns.
On January 13, 2020, the U.S. Treasury Department issued final regulations to implement the Foreign Investment Risk Review Modernization Act (FIRRMA), which expands the jurisdiction of CFIUS. These regulations became effective on February 13, 2020. Prior to FIRRMA, CFIUS review of transactions was typically on a voluntary basis, where the parties to the transaction voluntarily submitted to CFIUS review and approval. After FIRRMA, certain transactions are subject to mandatory CFIUS review and failure to obtain CFIUS review for such transactions can result in significant penalties.
Below is an overview of some of the most significant changes to CFIUS under FIRRMA.
1. Certain foreign investments covered by CFIUS under FIRRMA
Under FIRRMA, mandatory CFIUS review applies to foreign investment in U.S. businesses that:
- – “produce, design, test, manufacture, fabricate, or develop one or more critical technologies;
- – own, operate, manufacture, supply, or service critical infrastructure; or
- – maintain or collect sensitive personal data of U.S. citizens that may be exploited in a manner that threatens national security.”“Critical technologies” is defined by FIRRMA as: (1) technologies included in the United States Munitions List as “defense articles” or “service”s; (2) technologies included on the Commerce Control List as “relating to national security, chemical and biological weapons proliferation, nuclear nonproliferation, or missile technology; or for reasons relating to regional stability or surreptitious listening”; (3) certain toxins and agents covered by the Code of Federal Regulations; (4) “emerging and foundational technologies”; and (5) those technologies recommended by the CFIUS chairperson. See H.R. 5515-538 Title XVII, 546-47, 2018. The term “emerging and foundationalContacts: [email protected] (973-919-4547) and [email protected] (303-807-7827)*This publication does not necessarily deal with every important topic or cover every aspect of the topics with which it deals. It is not designed to provide legal or other advice. www.sequoialegal.com
Sequoia Legal CFIUS Update
technologies” has not yet been defined by CFIUS, but there has been an indication that the term may include artificial intelligence, biotechnology, and robotics.
“Sensitive personal data” includes data maintained or collected by U.S. businesses that “(i) target or tailor products or services to certain populations, including U.S. military members and employees of federal agencies with national security responsibilities, (ii) collect or maintain such data on at least one million individuals, or (iii) have 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.” Those involved in one or more the above industries are often referred to as “TID” U.S. businesses (technology, infrastructure, and data).
CFIUS’s goal here is to protect U.S. businesses, technologies, and data from foreign parties who might gain access to this information or to the business itself through investment.
Prior to the implementation of FIRRMA , mandatory CFIUS review focused on transactions resulting in foreign control of certain U.S. businesses. Under FIRRMA, mandatory CFIUS review has been expanded to cover “non-controlling covered investments” that afford a foreign person certain access, rights, or involvement in certain types of U.S. businesses. With respect to TID businesses, such access, rights or involvement include (1) access to nonpublic technical information, (2) membership, observer rights on, or the right to nominate an individual to a position on the board of directors or similar governing body, or (3) any involvement, other than through voting of shares, in substantive decision-making.
Takeaway: Mandatory CFIUS review now applies to non-controlling covered investments by foreign persons in TID businesses. TID businesses should carefully analyze any investment by foreign persons to determine whether mandatory CFIUS review is required. A failure to obtain mandatory CFIUS review when required can result in significant penalties, including the unwinding of the relevant investment/transaction.
2. Real Estate Transactions
Under FIRRMA, mandatory CFIUS review now applies to real estate transactions with a foreign person involving property which:
- – “is, is located within, or will function as part of, an air or maritime port;
- – is in close proximity to a United States military installation or another facility or property ofthe United States Government that is sensitive for reasons relating to national security;
- – could reasonably provide the foreign person the ability to collect intelligence on activitiesbeing conducted at such an installation, facility, or property; or
- – could otherwise expose national security activities at such an installation, facility, orproperty to the risk of foreign surveillance.”Takeaway: Mandatory CFIUS review now applies to real estate transactions (including sales, leases, and concessions) involving foreign purchasers of property meeting the criteria listed above.ExceptionsContacts: [email protected] (973-919-4547) and [email protected] (303-807-7827)
*This publication does not necessarily deal with every important topic or cover every aspect of the topics with which it deals. It is not designed to provide legal or other advice. www.sequoialegal.com
Sequoia Legal CFIUS Update
There a number of exceptions to the new mandatory CFIUS review requirements outlined above, which fall into two major categories: exceptions for certain foreign persons(which apply to foreign persons in both Sections 1 and 2 above), and those for real estate (which apply to Section 2 above).
- – Exceptions for foreign person and investors: Transactions involving foreign persons with ties to certain excepted countries that comply with certain laws, orders, and regulations will be excepted from the mandatory CFIUS review requirements outlined above . However, these excepted countries and specific requirements have not yet been outlined or clarified. These exceptions will not except transactions which were previously subject to CFIUS jurisdiction, nor will they except controlling investments by any foreign persons to U.S. businesses.
- – Exceptions for real estate: The mandatory CFIUS review requirements outlined in Section 2 above will not apply to real estate transactions involving: (1) single housing units, (2)real estate in urbanized areas (except as covered by other regulations between CFIUS and Secretary of Defense, or existing in close proximity to certain military activities or in air or maritime ports), (3) transactions in airports or maritime ports that are only for the purpose of retail sales; and (4) transactions regarding “certain commercial space in a multi-unit commercial building.”Takeaways: The mandatory requirements outlined in Section 1 and 2 above will not apply to persons from certain to-be-defined countries that comply with certain to-be-defined requirements. The mandatory requirements outlined in Part 2 above will not apply to transactions involving property meeting the criteria listed above. None of these exception create an exception for transactions or investments which would have been covered by CFIUS prior to FIRRMA.Unless otherwise specified, all quotations are taken from “Final FIRRMA Regulations – Fact Sheet,” U.S. Dept. of Treasury, Jan. 13, 2020. Learn more at https://home.treasury.gov/policy- issues/international/the-committee-on-foreign-investment-in-the-united-states-cfius/cfius-laws- and-guidance.