Treasury Issues Final Rule Amending CFIUS Mandatory Filing Requirements
On September 15, 2020, the Department of the Treasury issued a Final Rule1 modifying the mandatory declaration requirements for certain transactions subject to review by the Committee on Foreign Investment in the United States (CFIUS). Most notably, the Final Rule does away with the list of 27 mandatory filing industries (by NAICS code) that many businesses have just come to understand, and replaces it with a more complex regime based on export control classification. Parties to any transaction subject to CFIUS review should carefully review the new obligations imposed by the Final Rule, as failure to file a mandatory declaration could result in significant monetary penalties and potential unwinding of the investment.
Background on CFIUS
CFIUS is an interagency committee that assesses national security risks (including economic security) associated with foreign entities’ investments in U.S. businesses and provides guidance to the President, who has authority under the Defense Production Act of 1950 to block proposed or pending transactions that threaten national security. In May 2020, Treasury released a notice of proposed rulemaking seeking comment on new mandatory declaration requirements for (1) certain foreign investments in U.S. businesses involved in “critical technologies” and (2) transactions where a foreign government acquires a “substantial interest” in certain U.S. businesses. Based in part on those comments, the Final Rule adopts new mandatory declaration requirements for both types of transactions.
Amendment to definitions relating to “critical technologies”
Parties to certain foreign investments in U.S. businesses that produce, design, test, manufacture, fabricate, or develop one or more critical technologies are required to file a short-form declaration (or a full notice) to the Committee.2 Prior to the Final Rule, these technologies were identified in part by reference to North American Industry Classification System (NAICS) codes.
The Final Rule removes the NAICS code criteria and redefines “critical technologies” as technologies for which U.S. regulatory authorization is required to export, re-export, transfer (in-country), or retransfer the critical technologies at issue to a foreign person that is a party to the covered transaction.3 “U.S. regulatory authorization” refers to certain (but not all) types of regulatory licenses or authorization required under the four main U.S. export control regimes:4
(a) A license or other approval issued by the Department of State under the International Traffic in Arms Regulations (ITAR);
(b) A license from the Department of Commerce under the Export Administration Regulations (EAR);
(c) A specific or general authorization from the Department of Energy under the regulations governing assistance to foreign atomic energy activities at 10 CFR §810 other than the general authorization described in 10 CFR §810.6(a); and
(d) A specific license from the Nuclear Regulatory Commission under the regulations governing the export or import of nuclear equipment and material at 10 CFR §110.
There are numerous criteria in the existing rules that define whether an investor is “foreign” for purposes of the mandatory filing obligation. The Final Rule adds one clarification to the existing rules relating to investment entities that have some, but not complete, foreign ownership. In addition to other criteria such as control rights and access to information, the Final Rule adds a voting interest test whereby a foreign investor’s 25 percent or greater voting interest (whether direct, indirect, or when aggregated among related entities) in a domestic investment entity or the general partner of a domestic investment entity renders that domestic entity foreign for purposes of the mandatory filing rules for critical technology transactions.5
Clarification of foreign ownership test for transactions that involve a foreign government interest
Parties to a transaction where a foreign government is acquiring a “substantial interest” in certain U.S. businesses are required to submit a mandatory declaration to the Committee.6 Prior to the Final Rule, this foreign ownership test for “substantial interest” was met if the investment entity had a general partner, managing member, or equivalent, in which a foreign government held a 49 percent or more interest. The Final Rule clarifies that this applies only where the investment entity’s activities are primarily directed, controlled, or coordinated by a general partner, managing member, or equivalent, in which the foreign government holds 49 percent or more interest.7
Foreign investors and U.S. businesses receiving foreign investments should look closely at the Final Rule’s amendments and re-evaluate transaction types that would not previously have triggered a mandatory filing. Failure to make a mandatory filing may result in a civil penalty up to $250,000 or the value of the transaction, whichever is greater, in addition to potential unwinding of the investment. It is therefore critical to understand whether an investor is considered foreign under the CFIUS rules even if, on the surface, the investment fund is U.S.-based.
1 85 Fed. Reg. 57124 (Sept. 15, 2020).
2 31 C.F.R. § 800.401 (2020).
3 31 C.F.R. § 800.401(c)(1) (2020).
4 31 C.F.R. § 800.254 (2020).
5 31 C.F.R. § 800.256(a) and (b). The Final Rule also clarifies that, when analyzing control up the chain of ownership, a parent is deemed to have a 100 percent interest in any entity of which it is a parent. Id. at § 800.256(c).
6 31 C.F.R. § 800.244 (2020).
7 31 C.F.R. § 800.244(b) (2020).