Sheppard Mullin CFIUS Attorneys is an author at Global Trade Law Blog.
Continue Reading Sheppard Mullin CFIUS Attorneys
Sheppard Mullin CFIUS Attorneys is an author at Global Trade Law Blog.
Sheppard Mullin CFIUS Attorneys is an author at Global Trade Law Blog.…
Continue Reading Sheppard Mullin CFIUS Attorneys
On January 19, 2021, the U.S. Department of Commerce (“DOC”) issued an interim final rule governing transactions in Information and Communication Technology or Services (“ICTS”) involving “foreign adversaries.” Although the rule takes effect on March 22, 2021, it allows DOC to review covered transactions initiated, pending, or completed on or after January 19, 2021. Continue Reading Friend or Foe? The DOC Issues New Interim Rule on Transactions Involving Information and Communication Technology or Services (“ICTS”) and Foreign Adversaries
On October 15, 2020, CFIUS will officially tie mandatory filings to U.S. export control regimes, including the Export Administration Regulations (EAR) and the International Traffic in Arms Regulations (ITAR). While that change may draw a clearer line of what constitutes a mandatory filing, it also pulls your CFIUS review into the complex (and somewhat nerdy) world of export regulations. Continue Reading Lend Me Your EARs: CFIUS Makes Export Controls a Trigger for Mandatory Filings
The Takeaway: Severe restrictions on ByteDance’s Sale of TikTok should be a warning to media and tech companies with foreign ownership, particularly Chinese investment, to know your risks and mitigate them before the government comes knocking. Continue Reading UPDATE: National Security Meets Teenage Dance Battles: U.S. Increases Pressure on ByteDance Sale of TikTok
On August 6, 2020, Trump issued two separate executive orders that will severely restrict TikTok and WeChat’s business in the United States. For weeks, the media has reported on Trump’s desire to “ban” TikTok with speculation about the legal authority to do so. We break down the impact of the Orders below. Continue Reading National Security Meets Teenage Dance Battles: Trump Issues Executive Orders Impacting TikTok and WeChat Business in the U.S.
On May 21, 2020, a proposed rule change brought the threat of a mandatory CFIUS filing to investments across all U.S. industries. The U.S. Department of Treasury proposed a rule that removes a restriction formerly in the Foreign Risk Review Modernization Act’s (FIRRMA) that limited mandatory filings with the Committee on Foreign Investment in the United States (CFIUS) to only 27 industries.
The proposed rule is consistent with a series of changes by the Trump Administration aimed at decreasing Chinese access to U.S. technology (through export controls, FDI review, and other restrictions). However, the rule change may create complications for investments from a wide range of countries. Continue Reading CFIUS UPDATE ISSUE — Well I Do Declare: Mandatory Declarations Everywhere
Robotic exoskeletons may augment human strength, endurance, and mobility. The latest CFIUS action has all the makings of a Terminator movie.
This month, the Committee on Foreign Investment in the United States (“CFIUS”) pushed back on a U.S. and Chinese joint venture (“JV”) in the biotech sector. The U.S. party to the JV, Ekso Bionics Holdings, Inc., is developing exoskeleton technology for medical and industrial uses. However, CFIUS required a termination of that JV with facilities in China and investments by Chinese partners. Continue Reading CFIUS UPDATE ISSUE — CFIUS Scrutiny in Biotech: The Ekso Case and the Eye of the Terminator
The pandemic that has put our world a bit sideways has, as you might expect, set back our publication date. We should have paper copies of the (much anticipated) CFIUS Book: Second Edition available by mid-May 2020. However, because we have the text ready, we will publish a series of preview excerpts for your review and, of course, as teasers for the New York Review of Books.
In this excerpt we discuss a new decision that investors will face as they approach investment in the United States, whether to file a full Joint Voluntary Notice or to file a short-form Declaration, also sometimes referred to as “CFIUS Lite.”
Please don’t hesitate to reach out and tell us what you think.
Taking a break from reporting on COVID-19 legal developments, we turn for a moment to what is happening now on export control of autonomous vehicle technology.
The autonomous vehicle R&D sector is booming, largely in the last three years. Companies are investing in sensor technology and machine learning, and creating pilot programs to test self-driving cars both for individuals and ride-sharing purposes.
The most pressing question around the new FIRRMA regulations is “Will my transaction be covered?” To provide a bit of guidance on that point, we present an illustration from our upcoming Second Edition of The CFIUS Book due out in March of this year.
With that question answered, we will examine the small changes between the proposed and final FIRRMA regulations.
On February 13, 2020 (just in time for Valentine’s Day), the biggest change to U.S. foreign investment review since its inception goes into effect. Like a Valentine card from the the Committee on Foreign Investment in the United States, an enormous (presumably heart-shaped) message:
Putting foreign money into the United States will be a lot harder.
P.S. Be careful with those tech investments. We’re really gonna be watching those, especially the emerging and foundational technologies.
Nevertheless, like all Valentine’s hopefuls, your investment in the U.S. economy still has a chance.
The Valentine’s Day Card
On January 13, 2020, CFIUS published its final rules implementing most of the changes created by the Foreign Investment Risk Review Modernization Act (FIRRMA). Those rules are largely similar to the proposed rules published on September 17, 2019. For background, our report on the investment regulation changes in those rules is available here, our report on the propsed real estate regulations is available here, and our report on Excepted Foreign States and Excepted Investors is available here. Finally, our report on the FIRRMA Pilot Program can be found here.
Building on those reports, this article provides a summary of the major points of the final regulations. We highlight where they differ from the proposed regulations:
I. The Heartbreak of Mandatory Filing
FIRRMA’s most significant change to foreign investment review was introducing a penalty – up to and including the value of an investment – for failure to file a declaration or notice for an investment that triggers a mandatory filing. Simply by failing to tick an administrative box, a company getting in on a seed or early series investment could be subject to millions of dollars in penalties. Under the FIRRMA regulations, two types of investments will trigger mandatory filings:
1. Investments in Critical Technology Businesses
Where a foreign person makes an investment in a U.S. business that produces, designs, tests, manufactures, fabricates, or develops critical technology for use in certain designated industries, the transaction parties must file a declaration or notice with CFIUS. At this point, the coverage of the Critical Technology mandatory filing will be largely similar to that under the Pilot Program.
However, the new regulations will expand significantly because they reference emerging and foundational technologies. Continuing to play with our hearts, the U.S. Commerce Department has not yet issued those lists of technologies. As soon as Commerce releases those lists, investment in large swaths of U.S. innovation and know how will be swept not only into CFIUS jurisdiction, but into the broadening expanse of mandatory CFIUS filings.
Interestingly, the final FIRRMA regulations except investments in critical technology that would be eligible for export pursuant to License Exception ENC. That may be a reach for those of you who are not export nerds, but it essentially means that the basic encryption technology that would be common in software being developed by companies looking for investment would not trigger the mandatory filing requirements.
2. Investments by Foreign Governments
If an entity in which a foreign government holds 49% of voting interest, directly or indirectly, obtains 25% or greater voting interest, directly or indirectly, in a U.S. Technology, Infrastructure, or Data (TID) business, the parties must file a declaration or notice with CFIUS (for more on the TID businesses, check back to our article on these regulations as initially proposed). Much to the relief of many investment funds, this mandatory filing is only triggered if a foreign government holds a 49% interest in the general partner of a fund, whereas the proposed rule had covered foreign government interests in funds’ limited partners.
II. More to love: Expanded CFIUS Jurisdiction
We note that all TID investments areas, though they do not quite have the sweetheart status of investments in critical technology or by foreign governments, have caught CFIUS’ eye.
The final rules provide for CFIUS jurisdiction over a non-controlling investments in a TID U.S. business by which a foreign person acquires any of the following in the target:
1. Board representation or board observer rights;
2. Access to non-public technical information; or
3. A right to participate in substantive decision-making regarding the U.S. company’s critical technology, infrastructure, or data.
We note that, in a tweak from the proposed rules, the final rules exclude from the “sensitive personal data” definition data that was derived from U.S. government databases as those data are broadly used in medical research.
III. CFIUS’ Crushes: Excepted Foreign States and Excepted Foreign Investors
As we discussed in our article on excepted foreign states, investors from certain countries will not be subject to the mandatory filing requirements or to CFIUS jurisdiction over non-controlling investments. For those companies, the investment review world will look a lot like CFIUS before the advent of FIRRMA. The initial countries selected are Australia, Canada, and the United Kingdom.
The regulations provide means to add other countries to the list, but we would not expect CFIUS to be handing out these passes freely . . . if at all. Further, the three initial countries on the Excepted Foreign State list will be subject to a review in two years. If their investment review regimes do not satisfy U.S. regulators, their Excepted Foreign State Status could be revoked.
Don’t forget, these are still just crushes. Only persons who meet the following qualifications can be an Excepted Foreign Investor:
1. You are organized under the laws of an Excepted Foreign State or the United States;
2. You have your principal place of business in an Excepted Foreign State or the United States;
3. 75% of your board members or observers must be nationals of an Excepted Foreign State or the United States;
4. Any individual or group of foreign persons that holds more than 10% of your voting interests must be nationals of an Excepted Foreign State or the United States; and
5. At least 80% of your voting interest must be held by nationals of an Excepted Foreign State or the United States.
IV. Location, Location, Location
The new regulations show CFIUS may be a bit enamored with real estate. The regulations make clear that CFIUS’ jurisdiction over real estate is not limited to transactions where a foreign person invests in a U.S. business where that business has close proximity to airports, ports, military installations, or other sensitive U.S. government facilities.
CFIUS will continue to review those transactions to determine national security vulnerabilities are exposed. But now CFIUS is taking full advantage that FIRRMA expanded CFIUS’ jurisdiction from transactions involving U.S. businesses to any purchases, leases, or concessions of real estate (including Real Estate Investment Trusts (REITs)) by foreign persons regardless (!) of whether a U.S. business is involved in that transaction. However, like all good relationships, there are some boundaries. CFIUS may only review those transactions that provide a foreign person with three of the four following property rights:
1. Physical access to the property
2. Exclusion of others from physically accessing the property
3. Improvement or development of the property
4. Affix structures or objects to the property
Thus, CFIUS’ love affair with real estate continues.
V. Private Equity: Not Yet Smitten
CFIUS’ love letter is not all final. While CFIUS is not exactly smitten with private equity, it is showing some affection by providing a few proposed definitions for some much-needed clarification.
CFIUS proposes the following:
1. Principal place of business is fully defined as the primary location where an entity’s management directs, controls, or coordinates the entity’s activities; or in the case of an investment fund, where the fund’s activities are primarily directed, controlled or coordinated by or on behalf of the general partner, managing member, or equivalent.
2. Parent is defined to include the general partner, managing member, or equivalent.
3. Limited partners are explicitly exempted in the following circumstances from critical technology and foreign government mandatory filings: Where the foreign person is a limited partner on the advisory board or committee of an investment fund, and that board or committee does not have the ability to approve or control investment decisions or decisions made by general partners, managing members, or the equivalent; and the foreign person does not otherwise have the ability to control the investment fund.
Note, however, that some of these definitions may now explicitly include more investors within CFIUS’ reach where before the regulations, there was some ambiguity.
While we could write an entire book on this (and we have!), we will leave you with our Valentine’s analogies and metaphors until the 13th. At that point, we invite you to revisit this blog for reference as these regulations will be in full effect.
My VC Fund has U.S. and non-U.S. General Partners, will I need to file CFIUS declarations for every investment I want to make in tech, in infrastructure, or in a company with customers’ personal data?
This is a critical question at the fore of concerns for diversified investment funds with foreign-person directors. There are more than a few funds that have non-U.S. General Partners – perhaps posted overseas to scout potential investments abroad, or U.S. residents but not yet citizens who bring global experience to a U.S. table. In an increasingly global marketplace, there is a clear potential advantage for a U.S. investment fund to look for the most talented investors with the broadest perspectives from around the world.
So why should this be a problem?
Because, under proposed CFIUS regulations, the presence of one or a few non-U.S. General Partners could be considered foreign “control” in a target investment, such that the investment is subject to CFIUS jurisdiction and, potentially, a mandatory CFIUS filing.
On September 17, 2019, the Committee on Foreign Investment in the United States (CFIUS) published proposed regulations implementing the Foreign Investment Risk Review Modernization Act. Under those regulations, a “foreign person” includes any “foreign national” as well as “any entity over which control is exercised or exercisable by a foreign national.” The definition of foreign national would also include U.S. legal permanent residents (Green Card holders), that had not yet obtained U.S. citizenship. Further, “control” would mean “the power, direct or indirect, whether or not exercised . . . to determine, direct, or decide important matters affecting the entity.”
In our experience, CFIUS has interpreted foreign “control” to include situations where one or two members of a board of directors are appointed by persons from a foreign country. CFIUS takes that position even where those one or two directors represent a small minority of the board in question. As the National Venture Capital Association (NVCA) points out in its comments on the proposed CFIUS regulations, “if that same logic were to hold true in the fund context, many funds with a U.S. place of business and a majority of U.S. based investment partners, but a few foreign general partners, would be considered ‘foreign persons’ subject to CFIUS review.”
The proposed rule, as written, does not account for the fact that, generally, fund decisions are made collectively among the General Partners and that, therefore, the minority of GPs would not typically drive the decisions of that partnership.
Notwithstanding the commentary, voiced by the NVCA and other interested stakeholders, CFIUS appears to be proceeding cautiously. In its past rulemaking and interpretations, CFIUS has erred on the side of over-inclusion in asserting its jurisdiction – willing to risk an increase of potentially-non-critical filings in order to ensure that the Committee has authority to review investments in which it may find a national security threat or vulnerability.
We will keep a careful track of the small changes in these proposed rules and report as much as we can here. Additionally, our CFIUS Team is available to field any specific questions on U.S. investment that you or your company may have.
 National Venture Capital Association; Re: National Venture Capital Association Comments on Proposed Rule RIN 1505-AC64, Provisions Pertaining to Certain Investments in the United States by Foreign Persons (84 FR 50174) (“Part 800 Rules”) and Proposed Rule RIN 1505-AC63, Provisions Pertaining to Certain Transactions by Foreign Persons Involving Real Estate in the United States (84 FR 50214) (“Part 802 Rules”). Available at: https://nvca.org/wp-content/uploads/2019/10/NVCA-Comments-on-Proposed-CFIUS-Rules-AS-SUBMITTED.pdf