On May 21, 2020, the Committee on Foreign Investment in the United States (“CFIUS”) proposed a rule to modify the mandatory filing requirements for certain foreign investment transactions involving critical technologies.
Under the existing rules, mandatory filing of a notice or declaration is required for covered transaction (i) where a foreign government holds a “substantial interest” (defined to mean a voting interest of 49% or more) in a foreign investor who obtains a “substantial interest” (defined to mean a voting interest of 25% or more) in a US critical technology, critical infrastructure, or sensitive personal data business (“TID US business”) or (ii) that is a covered investment in, or could result in foreign control of, a TID US business involving critical technology if critical technology is used in connection with the 27 targeted industries (as identified by reference to the North American Industry Classification System codes (“NAICS Code”)).
The proposed rule removes the use of NAICS codes in determining whether a filing is required. Instead, the proposed rule focuses on whether a “U.S. regulatory authorization” is required to export the critical technology to the principal places of business (for entities) or countries of nationality (for individuals) of the foreign investor and its parent entities. The proposed rule will not be effective immediately. Treasury will issue final rules after a public comment period.
Under the proposed rule, a filing would be mandated for covered transactions “involving a TID US business that produces, designs, tests, manufactures, fabricates, or develops one or more critical technologies for which a US regulatory authorization would be required for the export, re-export, transfer (in-country), or retransfer of such critical technology to a foreign person that is a party to the covered transaction,” when the foreign person:
Could directly control such TID US business as a result of the covered transaction;
Is directly acquiring an interest that is a covered investment in such TID US business;
Has a direct investment in such TID US business, the rights of such foreign person with respect to such TID US business are changing, and such change in rights could result in a covered control transaction or a covered investment;
Is a party to any transaction, transfer, agreement, or arrangement designed to evade or circumvent CFIUS jurisdiction; or
Individually holds, or is part of a group of foreign persons that, in the aggregate, holds, a direct or indirect “voting interest” of 25% or more in any entity that meets the criteria in items (a) through (e) above. For entities that are controlled by a general partner, managing member, or equivalent, only interests in the general partner will be considered to be a “voting interest”; limited partner or similar interests will be disregarded.
The term “U.S. regulatory authorization” is defined under the proposed rule as
A license or other approval issued by the Department of State under the International Traffic in Arms Regulations;
A license from the Department of Commerce under the Export Administration Regulations;
A specific or general authorization from the Department of Energy under the regulations governing assistance to foreign atomic energy activities at 10 CFR part 810 other than the general authorization described in 10 CFR 810.6(a); or
A specific license from the Nuclear Regulatory Commission under the regulations governing the export or import of nuclear equipment and material at 10 CFR part 110.
The proposed rule places great significance on these U.S. export control regimes in the CFIUS process, and highlights the need for foreign investors and U.S. companies to conduct diligence early in the transaction process to understand how items are classified and controlled under these regimes. The parties should identify the export control status of all products, software, and technology produced, designed, tested, manufactured, fabricated, or developed by the U.S. business (whether or not sold to third parties), all jurisdictions relevant to the investors, and the corresponding licensing requirements prior to the closing of a transaction.
The exact timing of when the changes will become effective is not yet clear. CFIUS will accept public comments on the proposed rule through June 22, 2020, and is expected to finalize this rule thereafter. MagStone team will continue to provide update on the status of these new regulations affecting CFIUS and U.S. export controls.