On October 10, 2018, the US Department of the Treasury, as chair of the Committee on Foreign Investment in the United States (“CFIUS” or the “Committee”), issued two interim rules implementing certain provisions of the Foreign Investment Risk Review Modernization Act of 2018 (“FIRRMA”), enacted in August 2018. One of these FIRRMA provisions authorizes CFIUS to conduct pilot programs to implement provisions in the legislation that did not become effective immediately upon enactment. The first interim rule details a FIRRMA pilot program that: (1) expands the scope of transactions subject to CFIUS review to include certain non-controlling investments made by foreign persons in US businesses involved in critical technologies related to specific industries; and (2) makes effective FIRRMA’s mandatory declarations provision for transactions that fall within the specific scope of the pilot program. The pilot program will commence on November 10, 2018. The second interim rule makes amendments to CFIUS’s existing regulations that are largely technical in nature and primarily implement provisions of FIRRMA that became immediately effective upon its enactment. These regulations became effective on October 11, 2018. For additional details on FIRRMA, please see our previous briefings, “CFIUS issues interim regulations to conduct a FIRRMA pilot program” and ”President Trump signs into law CFIUS reform bill”.

I. Expanded scope of CFIUS’s review under the pilot program

Until the passage of FIRRMA, CFIUS’s jurisdiction has been limited to “covered transactions,” generally defined until now as transactions that could result in foreign control of a US business. FIRRMA expands CFIUS’s jurisdiction to include certain foreign investments in critical technologies regardless of whether the foreign investor has control over the US business. The pilot program, consistent with this provision of FIRRMA, applies to transactions that meet the criteria below.

  • Industries covered. The pilot program covers 27 industries (listed below in section IV) (“Pilot Program Industries”). CFIUS has determined that certain strategically motivated foreign investment in these industries could pose a threat to US technological superiority and national security.
  • US businesses covered. To be subject to the pilot program, the US business must produce, design, test, manufacture, fabricate, or develop one or more critical technologies: (1) used in connection with the US business’s activity in one or more Pilot Program Industries; or (2) designed by the US business specifically for use in one or more Pilot Program Industries (“Pilot Program US Businesses”).
    • Critical technologies. The term “critical technologies” includes: (1) all items on the United States Munitions List; (2) certain items on the Commerce Control List that are subject to multilateral regimes for reasons of national security, chemical and biological weapons proliferation, nuclear nonproliferation or missile technology, or that are  controlled for reasons of regional stability or surreptitious listening; (3) certain nuclear facilities, equipment, and related parts and components; (4) select agents and toxins; and (5) “emerging and foundational technologies” that are controlled pursuant to section 1758 of the Export Control Reform Act of 2018
  • Access by foreign investor. To be covered under the pilot program, the foreign investor would have to be given:
    • access to any material nonpublic technical information in the possession of the target US business;
    • membership or observer rights on the board of directors or equivalent governing body of the US business, or the right to nominate an individual to a position on the board of directors or equivalent governing body of the US business; or
    • any involvement, other than through voting of shares, in substantive decision-making of the US business regarding the use, development, acquisition, or release of critical technology.
  • Foreign persons covered. The pilot program covers all foreign persons and is not country-specific.

CFIUS’s authority is limited with respect to certain types of investment fund investments, and there is an explicit exception for investments involving air carriers. With respect to the former category, membership as a limited partner or equivalent on an advisory board or a committee of the fund will not be considered a covered transaction subject to the pilot program with respect to the foreign person provided that certain conditions are met, including the following:

  • the fund is managed exclusively by a general partner, a managing member, or an equivalent;
  • the foreign person is not the general partner, managing member, or equivalent;
  • neither the foreign person nor the advisory board (or committee) has the ability to approve, disapprove, or otherwise control investment decisions;
  • the foreign person may not unilaterally dismiss, prevent the dismissal of, select, or determine the compensation of the general partner, managing member, or equivalent; and,
  • the foreign person does not have access to material nonpublic technical information as a result of its participation on the advisory board or committee.

II. Mandatory declarations under the pilot program

The interim regulations require the submission of declarations with basic information regarding pilot program covered transactions, unless the parties elect to file a notice instead. Generally, mandatory declarations must be made at least 45 days before the expected completion date of the transaction. The contents of a mandatory declaration are set out in the regulations.[i] As part of the declaration process, parties may stipulate that the transaction is a pilot program covered transaction and, if so, whether the transaction could result in control of a Pilot Program US Business by a foreign person and whether the transaction is a foreign-government controlled transaction. The Committee is required to take action on a declaration within 30 days of its receipt of the declaration from the Staff Chairperson. The Committee may take one of four actions with respect to a declaration: (1) request that the parties file a notice; (2) inform the parties that CFIUS cannot complete action on the basis of the declaration and that they may file a notice to seek written notification from the Committee that the Committee has completed all action with respect to the transaction; (3) initiate a unilateral review of the transaction through an agency notice; or (4) notify the parties that CFIUS has completed all action.

Where parties elect to file a notice instead of a declaration, or file a notice for a pilot program covered transaction following the Committee’s action on a declaration, the procedures detailed in CFIUS’s existing regulations[ii] generally will apply to that notice. Certain additional information that is set forth in the regulations will be required from the parties with respect to any pilot program covered investment notified to the Committee through a notice.

III. List of pilot program industries

  • Aircraft Manufacturing NAICS Code: 336411
  • Aircraft Engine and Engine Parts Manufacturing NAICS Code: 336412
  • Alumina Refining and Primary Aluminum Production NAICS Code: 331313
  • Ball and Roller Bearing Manufacturing NAICS Code: 332991
  • Computer Storage Device Manufacturing NAICS Code: 334112
  • Electronic Computer Manufacturing NAICS Code: 334111
  • Guided Missile and Space Vehicle Manufacturing NAICS Code: 336414
  • Guided Missile and Space Vehicle Propulsion Unit and Propulsion Unit Parts Manufacturing NAICS Code: 336415
  • Military Armored Vehicle, Tank, and Tank Component Manufacturing NAICS Code: 336992
  • Nuclear Electric Power Generation NAICS Code: 221113
  • Optical Instrument and Lens Manufacturing NAICS Code: 333314
  • Other Basic Inorganic Chemical Manufacturing NAICS Code: 325180
  • Other Guided Missile and Space Vehicle Parts and Auxiliary Equipment Manufacturing NAICS Code: 336419
  • Petrochemical Manufacturing NAICS Code: 325110
  • Powder Metallurgy Part Manufacturing NAICS Code: 332117
  • Power, Distribution, and Specialty Transformer Manufacturing NAICS Code: 335311
  • Primary Battery Manufacturing NAICS Code: 335912
  • Radio and Television Broadcasting and Wireless Communications Equipment Manufacturing NAICS Code: 334220
  • Research and Development in Nanotechnology NAICS Code: 541713
  • Research and Development in Biotechnology (except Nanobiotechnology) NAICS Code: 541714
  • Secondary Smelting and Alloying of Aluminum NAICS Code: 331314
  • Search, Detection, Navigation, Guidance, Aeronautical, and Nautical System and Instrument Manufacturing NAICS Code: 334511
  • Semiconductor and Related Device Manufacturing NAICS Code: 334413
  • Semiconductor Machinery Manufacturing NAICS Code: 333242
  • Storage Battery Manufacturing NAICS Code: 335911
  • Telephone Apparatus Manufacturing NAICS Code: 334210
  • Turbine and Turbine Generator Set Units Manufacturing NAICS Code: 333611

IV. Pilot program timing and applicability

The pilot program will end no later than March 5, 2020. The pilot program does not apply to transactions for which the completion date is prior to the pilot program effective date (November 10, 2018), or transactions for which the parties have executed a binding written agreement or other document establishing the material terms of the transaction prior to October 11, 2018.

V. Limited updates to existing CFIUS regulations

CFIUS has made certain limited updates to existing regulations primarily to implement provisions of FIRRMA that became immediately effective upon its enactment. These changes, which became effective on October 11, 2018, are mostly technical and designed to ensure consistency between CFIUS’s regulations and FIRRMA. Most notably, the interim rule updates the regulations to reflect FIRRMA’s extension of the CFIUS review period from 30 days to 45 days, which went into effect immediately upon enactment of the legislation. Other changes include removal of the requirement to submit hard copy notices to CFIUS; addition of a provision allowing parties to stipulate that a transaction that is the subject of a voluntary notice is a covered transaction and, as relevant, a foreign government-controlled transaction; and clarification of the “extraordinary circumstances” pursuant to which an investigation period can be extended by 15 days.

VI. Key implications and takeaways

These regulations are important first steps toward full implementation of FIRRMA. CFIUS is no longer an entirely voluntary process, and noncompliance with the mandatory declaration provisions can subject a party to significant civil monetary penalties up to the value of the transaction. In addition, the scope of transactions that CFIUS can review has expanded, and transactions that in the past would not perhaps be expected to present national security concerns may now be subject to CFIUS scrutiny. To mitigate their business and legal risks, parties contemplating or engaged in foreign investment transactions need to promptly consider these changes and evaluate how their transactions are impacted by the new CFIUS framework. We will continue to monitor the developments and issue additional briefings as warranted.

[i] Section 801.403.

[ii] 31 CFR part 800.

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