On January 13, 2020, the U.S. Department of the Treasury (Treasury) issued final and interim regulations implementing the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA), which expands the jurisdiction of the Committee on Foreign Investment in the United States (CFIUS) to review foreign investments and mitigate any potential national security concerns. While the final regulations largely track the proposed regulations issued on September 17, 2019, Treasury has made refinements and added several clarifying examples. See Sidley’s previous Update on the proposed regulations.
Following the structure of the proposed regulations, the final regulations were issued in two parts: one part covers investments in real estate, available here, while the other covers certain other investments in U.S. businesses, available here. Treasury simultaneously released a number of frequently asked questions on the proposed regulations, available here, and a fact sheet, available here.
The final CFIUS regulations will go into effect on February 13, 2020.
Key Takeaways From the Final Regulations:
- Voluntary declarations are now available for all covered transactions. The regulations allow parties to submit an abbreviated filing (i.e., a declaration), which allows for expedited assessment of certain transactions. Previously, declarations had been available (and were mandatory) only for investments that fell under CFIUS’s interim pilot program.
According to an incremental investment rule in the current regulations, a foreign person does not need to submit a notice to CFIUS for the acquisition of an additional interest in a U.S. business if CFIUS reviewed the foreign person’s earlier, initial interest in the business and concluded all action. The final regulations clarify that this rule applies to situations where CFIUS reviewed the initial investment after receiving a notice or a declaration.
- The substance of the interim pilot program rules pertaining to foreign investments in U.S. critical technology companies remain in place. Mandatory filings continue to be required for transactions involving U.S. businesses that produce, design, test, manufacture, fabricate or develop one or more critical technologies for one of several designated sectors. CFIUS has exempted from mandatory filing requirements investments made by excepted investors (discussed below) and investments made via certain fund structures or Foreign Ownership, Control, or Influence (FOCI) mitigated entities, that is, foreign-owned companies with necessary mitigation agreements required by the Defense Counterintelligence and Security Agency (formerly the Defense Security Service) to receive a facility security clearance. Treasury anticipates issuing a notice of proposed rulemaking that would revise the mandatory declaration requirement regarding critical technology from one based upon North American Industry Classification System codes to one based upon export control licensing requirements. For further information on the FIRRMA pilot program, see Sidley’s previous Update here.
- Mandatory declarations will now be required for certain transactions involving a “Technology, Infrastructure, and Data (TID) U.S. business.” The final regulations require a declaration for certain covered transactions where a foreign government holds a “substantial interest” in an investor and the investor intends to acquires a “substantial interest” in a TID U.S. business. TID U.S. businesses are U.S. businesses that (a) produce, design, test, manufacture, fabricate or develop one or more critical technologies, (b) perform certain specified functions with respect to critical infrastructure or (c) maintain or collect, directly or indirectly, sensitive personal data of U.S. citizens.
CFIUS refined its definition of “substantial interest” in the final regulations. The draft regulations had indicated that a 49% limited partner interest in a fund constituted a substantial interest. The final regulations state that “a single foreign state will be considered to have a substantial interest in [a fund] only if [it] hold[s] 49% or more of the interest in the general partner, managing member, or equivalent of the entity.”
CFIUS exempts from the mandatory declaration requirement investments by excepted investors (discussed below) or through certain fund structures.
- Excepted investors located in excepted foreign states will be exempt from expanded CFIUS jurisdiction and mandatory filing requirements. CFIUS has released an initial list of “excepted foreign states” and “excepted real estate foreign states,” which includes only Australia, Canada and the United Kingdom. CFIUS maintains the discretion to expand the list. These countries will receive excepted state status for two years. For each of these countries (and any other countries deemed eligible in the future) to qualify as an excepted foreign state or an excepted real estate foreign state after February 13, 2022, it must satisfy certain criteria that CFIUS will outline related to the eligible foreign state’s foreign investment review processes and bilateral cooperation with the United States on national-security-based investment reviews. Treasury will post the list of the criteria on its website. Although excepted investors will be exempt from the new rules extending jurisdiction to covered investments (i.e., certain investments that do not result in control of a U.S. business) and real estate transactions, this does not exempt them from CFIUS jurisdiction over transactions that could result in foreign control of a U.S. business.
An investor is exempt only if it is from an excepted foreign state and meets additional criteria to qualify as an “excepted investor.” In the final regulations, CFIUS relaxes the criteria to qualify as an excepted investor. For example, the final regulations require that only 75% (as compared with 100%) of the investor’s board be composed of U.S. nationals, or nationals of excepted foreign states; the “minimum excepted ownership” of the entity was reduced from 90% to 80%; and up to 10% (as compared with 5%) of the voting or economic rights can be held by an individual investor not from the United States or an excepted foreign state.
- The final rule narrows the definition of “genetic information.” The draft regulations included “genetic information” in the definition of sensitive personal data, and any entities that maintained or collected “genetic information” qualified as a TID U.S. business. Unlike other types of data included in the definition of sensitive personal data, the genetic information need not have been “identifiable.” The final regulation narrows the type of genetic information that would qualify as sensitive personal data and states that the scope is limited to identifiable data. The final definition defines genetic information to include only “results of an individual’s genetic tests, including any related genetic sequencing data, whenever such results constitute identifiable data.”
- The new definition of “principal place of business” may result in more investors qualifying as foreign entities. Under the regulations currently in force, an entity organized outside the United States is generally considered to be a foreign entity, subject to certain exceptions. One exception is that the entity will be considered a U.S. person if its principal place of business is in the United States and it is not controlled by a foreign person. Neither the draft regulations nor the current regulations defined “principal place of business.” In an interim final rule, CFIUS defined “principal place of business” as the primary location where the management controls the entity “or, in the case of an investment fund, where the fund’s activities and investments are primarily directed, controlled, or coordinated by or on behalf of the general partner, managing member, or equivalent.” However, if, in any government filing, an entity has designated a non-U.S. location as its principal place of business or headquarters, then that designation will control (absent a change of facts). For example, if an investment fund has reported its principal place of business as the Cayman Islands in a Securities and Exchange Commission filing, then, for CFIUS purposes, its principal place of business will be the Cayman Islands, even when management is located entirely in the United States.
The new “principal place of business” definition enters into force on February 13, 2020, but CFIUS is accepting public comments on the definition for 30 days after the publication of the regulations in the Federal Register. Based on the comments received, CFIUS may modify the definition.
- The final regulations covering real estate remain similar to the proposed regulations. Many of the modifications to the investment regulations, such as the definition of principal place of business and the designation of Australia, Canada and the United Kingdom as excepted foreign states, are mirrored in the final real estate regulations.
In addition, Treasury notes in the final regulations that it anticipates making available a web-based tool to help the public understand the geographic coverage of the rule.
- The final regulations do not resolve all outstanding issues. For example, the final regulations do not cover CFIUS’s new authority under FIRRMA to charge filing fees of 1% of the total value of the transaction or $300,000, whichever is less. Treasury will publish a separate proposed rule regarding filing fees at a later date.
Additionally, Treasury did not clarify the definition of “U.S. business,” a key factor in determining the scope of CFIUS’s jurisdiction. Previous regulations limited the definition of U.S. business to cover entities operating in interstate commerce in the United States “but only to the extent of its activities in interstate commerce in the United States.” The final regulations exclude the quoted qualifier. CFIUS did not clearly state whether the scope of its jurisdiction now extends to activities outside the United States. Instead, it stated only that the definition “is not intended to suggest that the extent of a business’s activities in interstate commerce in the United States is irrelevant to the Committee’s analysis of national security risk.”