CFIUS Reform: A Consideration for Foreign Investors

The Foreign Investment Risk Review Modernization Act of 2018 (“FIRRMA”) was signed into law on August 13, 2018. The purpose of FIRRMA is to address national security concerns over foreign exploitation of certain investments which were outside of the Committee on Foreign Investment in the United States (“CFIUS”) jurisdiction.

As background information, CFIUS is an interagency committee of the US. Under the existing regulations before FIRRMA, CFIUS has the authority to conduct national security reviews of transactions that could result in a foreign person’s control of a U.S. business. A foreign person can be any foreign national, government, entity, and any entity over which control is exercised or exercisable by a foreign national, foreign government, or foreign entity. The President and CFIUS have the authority to prevent or suspend such controlling investments in the US. Concerning such risks, transaction parties may file a voluntary notice with CFIUS seeking safe harbor clearance for the transaction.

FIRRMA substantially expands the scope of transactions eligible for review by CFIUS, making certain reviews mandatory and introduces new rules for the review process. The main changes to the CFIUS process include:

  • Authority over non-control investments in businesses involved in critical technologies, critical infrastructure, or sensitive personal data, as well as authority over real estate transactions implicating national security.
  • Certain administrative changes such as longer review timing, authorization of filing fees (lesser of 1% of transaction value or $300,000), and declaration process which is initiated through a declaration with basic information regarding the transaction that would not generally exceed five pages in length instead of a written notice for certain foreign investments.
  • Provision of a process for judicial review of CFIUS actions and decisions.
  • Clarification that in investment funds, limited partners may qualify as passive investors provided that certain conditions are met.

The provisions regarding the expanded scope of covered transactions and the declaration process will go into effect on the earlier of the date that is 18 months after the date of the enactment of FIRRMA and the date that is 30 days after CFIUS publishes a determination in the Federal Register that the regulations, organizational structure, personnel, and other resources necessary to administer the new provisions are in place.

Also, CFIUS conducts a pilot program under FIRRMA that expands CFIUS’ jurisdiction to cover certain foreign investments in critical technologies and subjects certain industry sectors to coverage under the pilot program. The pilot program became effective on November 10, 2018.

In line with the foregoing, understanding the expanded role of CFIUS and advance structuring will be imperative for certain cross-border transactions.