By now, you have skimmed through the proposed FIRRMA regulations issued on September 17 2019, and you have very likely read a dozen summaries of those regulations (with titles like “New Proposed CFIUS Regulations Published” or “Five Things You Have Got to Know About FIRRMA” or even “Drop 10 Pounds in One Week AND Learn About Foreign Investment Restrictions!”), but none of those summaries, including our excellent précis of the regulations, could cover all the details in the more than 300 pages of text proposed by the Committee on Foreign Investment in the United States.

For that reason, we propose a series of focused articles where we will get our hands dirty and dig into the regulations to unearth those little gems that may be an advantage to your company.

Today we will look at the concepts of Excepted Foreign States and Excepted Investors and help you determine whether your business may slip the net of the new CFIUS regulations implemented under FIRRMA and invest in U.S. businesses without the burden of a CFIUS notification or filing.

It is easy to become too academic in these discussions, so we will proceed in a Q&A format to facilitate a more grounded discussion.

Q:   What are the limits to the exception?

A: Starting at the boundaries and working our way to the center, we note that the Excepted Foreign States and Excepted Investors will only be excepted from review of non-controlling investments. If you are a non-U.S. person and your transaction could result in control of a U.S. business, then you are under CFIUS jurisdiction. No exceptions.

Q:   What are the advantages of the exception?

A: Recall that the proposed FIRRMA regulations massively expand CFIUS jurisdiction over non-controlling investments. Where the FIRRMA Pilot Program only touched on 27 industries, the proposed regulations cast the CFIUS wide net over non-controlling investments in any “TID” business: companies working with critical Technology, critical Infrastructure, or sensitive personal Data.

This new proposed exception for Excepted Investors and Excepted Foreign States cuts a hole in that wide net. Excepted Investors will not have to consider whether they are making a covered non-controlling investment in a covered TID business. They will simply put in their money and reap the benefits of their investments (unless they obtain control of that business– then we’re back up in the section above and under CFIUS scrutiny).

Q:   That sounds great, but who will be “Excepted” ?

A: You can be sure that countries around the world are already lobbying hard to become an Excepted Foreign State. Under the proposed regulations, the Excepted Foreign States must be selected by CFIUS and then, in a separate process, be reviewed for the robustness of their own investment review regulations.

The smart bets for exceptions to U.S. security-based restrictions (U.S. export controls, for example) are on the so-called “NATO Plus” countries: NATO member states, plus South Korea, Japan, Australia, and New Zealand. However, the field may be more open in an era where U.S. policy toward NATO and other traditional allies is, at best, inconsistently articulated. However, you can safely avoid putting your chips on China to make the “excepted” list.

Q:   Ok, So I’m in a potentially Excepted Foreign State, how will I know if I’m an Excepted Investor?

A: The first part of the Excepted Investor definition is fairly straightforward. You are an Excepted Investor if you are:

  1. A national of an Excepted Foreign State (and not also a national of a non-excepted state); or
  2. A foreign government of an Excepted Foreign State. Simple enough, right? Well, there is one more type of Excepted Investor, but the rules get a little tricky, so we’ll list out some of the requirements, then parse them. You are also an Excepted Investor if:
  3. You are a company

3.1. Organized under the laws of an Excepted Foreign State,
3.2. With your principal place of business in an Excepted Foreign State,
3.3. With observers and board members who are only U.S. or Excepted-Foreign-State nationals; and
3.4. The same is true of all the persons or companies that own 5 percent of your company

So if all of those are true, you are off to a good start. But what if you have some investors that are not from Excepted Foreign States? Well, as stated above, no one non-excepted person may have more than 5 percent ownership and . . .

3.5. Your company must be held at the level of “minimum excepted ownership” by a person or entity that meets the qualifications in 1, 2, or 3.1 – 3.3.

Q:   [Deep breath] . . . So what is this “minimum excepted ownership?

A: Well, as we keep digging, we find that minimum excepted ownership may mean one of two things:

3.5.1. If your company’s securities are primarily traded on an exchange in an excepted state or the United States, then “minimum excepted ownership” is a majority, >50%, held by a party that meets one of the qualifications in sections 1-3 of Excepted Investor;[1] or

3.5.2. If your company’s securities are not traded on an exchange in an excepted foreign state or the United States, then “minimum excepted ownership” is 90 percent held by a party that meets one of the qualifications in sections 1-3 of Excepted Investor.

Q:   Wait, now I’m more confused. 

A: That’s not surprising. This article is getting long and these details are complex, but stay with us. This next part key.

Here’s how minimum excepted ownership works: If you’re a company owned, organized, and headquartered all in an Excepted Foreign State, you’re fine. But let’s say you’re all those things and a public company traded on the NASDAQ North in Stockholm. Well, if Sweden (a NATO Member) is an Excepted Foreign State, then you will need to be certain that more than 50% of your ownership is either U.S. a person or an excepted investor in order to meet the minimum excepted ownership threshold.

Now let’s say you’re a French company, privately held primarily by French persons, headquartered in France, but 3% of your company’s voting rights are held by a Saudi Sovereign Wealth Fund and 4% are held by a private Chinese investor, the rest is held by French and American individuals and companies. Again, if France (a NATO member) is an Excepted Foreign State, you will still be considered an Excepted Investor because you will meet the qualifications of 3.1 – 3.4, and the 93% ownership by U.S. and Excepted Foreign State persons will meet the threshold for minimum excepted ownership.

Q:   That is a lot.

A: Yes, it is. And there is more detail like that throughout these proposed FIRRMA regulations. But we will go through it slowly and carefully in our series of FIRRMA updates. You can also reach out to your trusted CFIUS counsel.

[1] That is, a majority of the company’s voting interest, the right to a majority of its profits, and the right in the event of dissolution to a majority of its assets.