Foreign Investment in the U.S.: Five things you need to know about the draft FIRRMA Regulations

The Department of the Treasury, on behalf of the Committee on Foreign Investment in the United States (CFIUS), has issued two sets of proposed regulations seeking to further implement the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA).

These draft regulations - one covering controlling and non-controlling investments in U.S. businesses and one covering real estate transactions - include some significant changes to CFIUS operations and jurisdictions. But, like FIRRMA as a whole, they also represent the codification of trends in CFIUS's practice to date (see our Insights).

This development is important for U.S.-based companies and for companies investing in the U.S.

But first, timing

The draft regulations do not take effect immediately. A 30-day public review and comment period is ongoing and will expire on 17 October 2019. CFIUS is expected to issue final rules no later than January 2020, with the new regulations to take effect no later than 13 February 2020.

Five things you need to know

The draft regulations are extremely detailed and a thorough review does not make for light work! As such, we have prepared a detailed summary for clients and now, in this blog post, provide our thoughts on five of the most important proposed changes.

Definitions of covered investments in U.S. technology, infrastructure and data

One of the key changes is the expansion of definitions of U.S. businesses engaged in critical technology, critical infrastructure, and sensitive personal data of U.S. citizens (TID). This in turn expands CFIUS jurisdiction to review transactions.

Critical infrastructure expanded: The draft rules now include 28 particular types of “covered investment” for critical infrastructure. U.S. businesses that perform certain functions involved with each type of infrastructure would qualify as a TID U.S. business.

Types of personal data limited: FIRRMA required mandatory filings for certain transactions involving access to the personal data of U.S. citizens. The draft regulations propose to limit the scope to only certain types of personal data.

Critical technology unchanged: Under the draft rules, the existing pilot program for critical technologies remains unchanged pending the release of the final FIRRMA regulations.

Mandatory v Voluntary filings

The draft regulations require mandatory filings for 25% investments in TID companies when a non-U.S. government holds a “substantial interest” (49%) in the investor.

These are in addition to mandatory filings required under the interim “pilot program” rules for investments in “critical technology” businesses that afford the non-U.S. investor material governance or information access rights.

The draft rules also permit parties to submit voluntary, five-page declarations for any transactions for which filings are not mandatory. As with mandatory declarations, CFIUS would provide an assessment and response within 30 days after acceptance.

For transactions unlikely to attract CFIUS scrutiny, voluntary declarations may be useful tools for obtaining CFIUS clearance in a shorter period of time. Keep in mind, however, that, unlike full notifications, short-form declarations will not provide a safe harbor against subsequent CFIUS reviews.

Special treatment for certain foreign investors

FIRRMA allowed CFIUS to exempt certain classes of investors from the expanded jurisdiction granted to CFIUS under the new law.

According to the draft regulations, CFIUS intends to identify “excepted foreign states”. This will be certain countries with “robust” processes to assess national security risks arising from foreign investments and to facilitate coordination with the U.S. on investment security matters. The draft regulations, however, do not include a list of “excepted foreign states”, and we expect CFIUS to take some time before identifying those countries.

Preferential treatment will then be available to “excepted investors”, defined narrowly, based on their connections to excepted foreign states and the absence of connections to countries that are not excepted foreign states. An excepted investor can still lose that status after closing; the draft regulations authorize CFIUS to initiate a retroactive review of subject transactions within the past three years to confirm that the foreign investor still qualifies for the exception.

Real estate transactions

FIRRMA gave CFIUS jurisdiction over a broader range of real estate transactions. This included the purchase or lease by a foreign person of real estate that is near an airport or maritime port or a United States military installation, or could otherwise expose national security activities at such an installation, facility, or property to the risk of foreign surveillance.

The proposed regulations create a new category of “covered real estate transactions” that clarifies the expansion of CFIUS’s jurisdiction over real estate transactions involving foreign persons. For example, the draft regulations include a real estate proximity list which is based entirely on military sites, and does not include sensitive, publicly-known civilian sites such as the White House, CIA headquarters, or NSA headquarters.

They also include narrow exceptions for certain investors and foreign states: foreign acquisitions, leases or concessions in a multi-unit commercial office building if the investment does not result in the foreign party controlling more than 10% of the building’s square footage or provide more than 10% of the building’s tenants.

FIRRMA exempts “urbanized” real estate except as provided by CFIUS in regulations. In general, the draft regulations’ “close proximity” rules will override the urbanized real estate exception.

Filing fees and penalties

FIRRMA authorizes CFIUS to begin collecting filing fees in connection with CFIUS notices, based on a transaction-specific formula to be defined in the regulations. Maximum fees will be up to the lesser of 1% of the value of the transaction or $300,000 (subject to annual adjustment for inflation). The formula for determining these filing fees will be defined in future rulemaking.