New CFIUS and Export Control Legislation Will Pose New Hurdles to Investment and Trade

Foreign Investment Risk Review Modernization Act 

FIRRMA expands the jurisdiction and powers of the Committee on Foreign Investment in the United States (CFIUS), the U.S. interagency committee that conducts national security reviews of foreign investment.

• Expansion of National Security Considerations - FIRRMA modifies and adds to the factors that CFIUS may consider when conducting its national security analysis. These factors focus on key themes of increasing significance to CFIUS, such as securing sensitive technology, protecting the U.S. defense supply chain, protecting sensitive personal information, and enhancing cyber security.
• Expansion of CFIUS Jurisdiction - CFIUS has jurisdiction to review “covered transactions,” currently defined as any transaction which could result in control of a U.S. business by a foreign person.¹ FIRRMA expands the definition of “covered transaction,” and thus the scope of CFIUS jurisdiction, in a number of ways:
  • Definition of United States Business: The current regulations define U.S. business as an entity engaged in interstate commerce in the United States, but only to the extent of its activities in interstate commerce. FIRRMA now defines “United States Business” as any entity engaged in interstate commerce in the United States. It is unclear if FIRRMA’s departure from the current regulatory definition signals an intent to broaden CFIUS’s jurisdiction to include non-U.S. assets of the acquired business.
  • Real Estate Transactions: FIRRMA expands CFIUS’s jurisdiction by including certain U.S. real estate transactions in the definition of “covered transaction,” regardless of whether the transaction involves a U.S. business. The provisions address concerns related to proximity to ports and military installations or sensitive U.S. government facilities.
  • “Other Investments” in Sensitive U.S. Businesses: Under FIRRMA, CFIUS has the authority to review any “other investment” by a foreign person (even if it does not rise to the level of control) in an unaffiliated U.S. business that involves critical infrastructure, critical technology or sensitive personal data of U.S. citizens.
    • To qualify as an “other investment” within the scope of CFIUS jurisdiction, the foreign person must have: (1) access to a U.S. business’s material non-public technical information; (2) the right to appoint a board director or board observer; or (3) any involvement in substantive decision making of the U.S. business regarding sensitive personal data, critical technologies, or critical infrastructure.
    • FIRRMA clarifies that despite the provision regarding board rights, limited partner participation on an advisory board or committee for an investment fund would not subject the investment to CFIUS jurisdiction, so long as: (1) the fund is exclusively managed by a U.S. general partner (or equivalent); (2) the general partner (or equivalent) is not a foreign person; (3) neither the advisory board nor the foreign person can approve, disapprove, or otherwise control investment decisions or decisions of the general partner related to entities in which the fund is invested; (4) the foreign person cannot unilaterally remove the general partner (or equivalent); and (5) the foreign person does not have access to material nonpublic technical information.
    • FIRRMA directs CFIUS to adopt regulations providing further guidance on the scope of “other investments.”
  • Exemption of Certain Categories of Investors from the New Real Estate and “Other Investment” Categories: FIRRMA directs CFIUS to identify categories of investors who will be exempt from the expanded scope of jurisdiction for real estate and “other investments.” CFIUS must “take into consideration how a foreign person is connected to a foreign country or foreign government, and whether the connection may affect the national security of the United States.”
• Declarations - FIRRMA establishes a streamlined process for shorter notifications, called “declarations.” Declarations are expected not to exceed five pages, and once received, CFIUS will have 30 days to take action. Such actions include requesting a formal notice, initiating a unilateral review, or clearing the transaction. Most declarations will be voluntary, but some will be mandatory. In particular, declarations will be mandatory for transactions involving an investment that results in the acquisition of a “substantial interest” in a U.S. business involved in critical infrastructure, critical technology, or sensitive data by a foreign person in which a foreign government has, directly or indirectly, a “substantial interest.” In addition, FIRRMA grants CFIUS the authority to impose mandatory notification requirements for other types of covered transactions involving critical technologies.
• Other Procedural Matters -
  • Timing: FIRRMA expands the statutory timeline for the CFIUS process. The initial review period is increased from 30 calendar days to 45 calendar days. The 45-day investigation time period remains unchanged. In extraordinary circumstances, the investigation may be extended for one 15-day period. The bill requires that CFIUS provide comments on a draft or formal notice within 10 business days of receipt or accept a formal notice within 10 business days if the parties stipulate to jurisdiction. This provision will likely bring more predictability and consistency to the process prior to the formal review.
  • Fees: There is currently no filing fee associated with a CFIUS review. However, under FIRRMA, CFIUS may impose a fee at the lesser of one percent of the value of the transaction or $300,000 (adjusted for inflation).

Export Control Reform Act

The National Defense Authorization Act also includes ECRA, which implicates U.S. export controls law in several ways:

• Statutory Basis for U.S. Export Controls - ECRA provides a permanent statutory basis for delegations, rules, regulations, determination, and licenses under the Export Administration Regulations.
• Review of License Requirements for Countries Subject to Arms Embargo - ECRA requires an interagency group to conduct a review of the controls on exports to China and other countries subject to a comprehensive U.S. arms embargo or a UN arms embargo. Consistent with the concerns expressed by Congress and the Trump Administration with respect to Chinese trade and investment practices, we anticipate that these reviews will generate additional end user- and end use-based controls.
• Evaluation of Emerging and Foundational Technologies - ECRA establishes a regular interagency process to identify “emerging and foundational technologies.” Where the interagency process identifies an emerging or foundational technology, ECRA directs that, at a minimum, the Department of Commerce impose a licensing requirement on that item to any country subject to a U.S. embargo, including an arms embargo (e.g., China).
  • Although ECRA does not enumerate emerging and foundational technologies, it is worth noting the Trump Administration’s statements concerning cutting-edge fields such as artificial intelligence, robotics, aerospace, and 5G technology. It seems reasonable to infer that these fields will receive the attention of the interagency process.

¹See 31 C.F.R. § 800.207.