On May 21, 2020, the Committee on Foreign Investment in the United States (“CFIUS”) proposed a rule to refine its requirements for mandatory filings for certain transactions, in particular those involving foreign investments in US businesses dealing in “critical technologies.” The proposed rule would limit the critical technology filing obligation to instances where an export control authorization is required for the investor or certain parties in its ownership structure, with limited exceptions. It would also clarify the applicability of the mandatory filing requirement arising from foreign government ownership interests for limited partner or equivalent investments.

The regulations that the proposed rule will modify were only recently finalized as part of the implementation of the Foreign Investment Risk Review Modernization Act (“FIRRMA”; see our February 14 Legal Update). CFIUS will accept public comments on the proposed rule through June 22, 2020, and is expected to finalize the rule shortly thereafter.

In most instances, it is technically voluntary for parties to a transaction involving foreign investment in the United States to submit the transaction to CFIUS for review. However, the only way to receive a legal safe harbor from the risk of CFIUS unilaterally reviewing an already-closed transaction and requiring changes or recommending divestment is to file and receive approval or confirmation that the transaction is outside of CFIUS jurisdiction.

“Critical technologies” are certain articles, services or items controlled for export; nuclear facilities, equipment and technology; select agents and toxins; and still-to-be-defined emerging and foundational technologies. With respect to transactions involving critical technologies, the proposed rule would eliminate the consideration of whether the technology is used or designed for use in one of 27 sensitive industries identified by CFIUS. (This provision will remain in effect until the proposed rule is finalized.) Instead, a mandatory filing would be required if a US business deals in critical technologies for which a “US regulatory authorization” would be required to export, re-export, transfer (in-country), or retransfer the technologies to (i) the foreign person involved in the transaction, (ii) a foreign person that could control or have certain rights with respect to the US business, or (iii) a foreign person with a voting interest of 25 percent or more in (i) or (ii).

The proposed rule would directly tie the mandatory filing requirement for critical technology transactions to established US export control regulations, as a “US regulatory authorization” would cover licenses or approvals granted under the International Traffic in Arms Regulations (“ITAR”), the Export Administration Regulations (“EAR”), and Department of Energy and Nuclear Regulatory Commission authorizations related to atomic energy and nuclear equipment and material. Generally speaking, this determination would be made without regard to whether a license exception applies, other than certain limited license exceptions under the EAR.

With respect to the mandatory filing requirement for transactions involving foreign governments, the proposed rule further clarifies the applicability of the requirement in the case of investments made as a limited partner or an equivalent entity. Under the proposed rule, the mandatory filing requirement would only apply if an entity in which a foreign government has a “substantial interest” acquired a “substantial interest” in a general partner, managing member, or equivalent that primarily directs, controls, or coordinates the entity.

Currently, the two circumstances in which a mandatory filing is required are:

  • Transactions involving US businesses that produce, design, test, manufacture, fabricate, or develop “critical technologies” which are used or designed for use in one of 27 sensitive industries, as specified by their North American Industry Classification System (“NAICS”) codes.
  • Transactions involving the acquisition of a “substantial interest” (defined to mean a voting interest of 25 percent or more) in certain US businesses by a foreign person in which a foreign government has a “substantial interest” (defined to mean a voting interest of 49 percent or more). This mandatory filing requirement only applies to investments in sensitive US businesses dealing in Critical Technology, Critical Infrastructure, and Sensitive Personal Data (known as “TID US businesses”). 

Since the implementation of the mandatory filing requirement for transactions involving critical technologies, there has been significant confusion about when the requirement applies. The proposed rule aims to modify the mandatory filing requirement by providing specificity and directly linking the requirement with well-established export control regulations. Considering the severe penalties associated with a failure to make a mandatory CFIUS filing (in such instances, CFIUS may impose a fine up to the size of the transaction), the proposed rule may help provide clarity for investors as they consider the regulatory implications of a transaction.