September 12, 2019
Stroock Special Bulletin
By: Chris Griner, André B. Nance, Shannon Reaves, Gregory Jaeger, Erin Bruce Iacobucci
As we welcome the former Associate Director of CFIUS Operations and Regulatory Affairs from the Department of Defense to our highly ranked CFIUS team, we want to share some insights into how the new statutory and regulatory changes to the authorities of the Committee on Foreign Investment in the United States (CFIUS) affect the investment funds industry. In collaboration with Stroock’s premier Private Funds practice, we offer the following key takeaways to the new regulatory landscape and potential issues to watch for in the near future.
CFIUS is a federal interagency committee with the authority to suspend, block, mitigate or unwind investments in the U.S. CFIUS jurisdiction was previously limited to investments that could provide a “foreign person,” including foreign investment funds and certain U.S. investments funds with foreign limited partners, “control” over a “U.S. business.” “Control” is broadly defined by regulation as the power to determine, direct or decide important matters of a U.S. business. CFIUS was a voluntary process and, upon conclusion of the process and clearance by CFIUS, a reviewed transaction was safe from subsequent CFIUS intervention.
Congress passed the Foreign Investment Risk Review Modernization Act (FIRRMA) in August 2018 and expanded CFIUS jurisdiction in a number of key ways for the investment funds industry:
Many details of these changes are subject to implementing regulations due on or before February 2020. Some of these requirements, however, became immediately effective through a temporary pilot program in October of last year, which included the following:
For the purpose of this pilot program, an investment fund will not be considered a “foreign person” if:
Rights that might trigger a filing requirement if afforded to a foreign person through an investment in a U.S. business covered by the pilot program include:
If an investment fund is not a “foreign person” and all foreign investors participating in that fund do not meet the criteria for control or non-controlling investments, then the transaction is excluded from the pilot program. Failure to file a mandatory declaration could result in financial penalties up to the value of the transaction, as well as the government’s ability to suspend a transaction pending a national security review.
While this pilot program is temporary, CFIUS is in the process of developing full implementing regulations for FIRRMA – a draft of which we are likely to see soon. A couple of key elements to look for include:
While the pilot program focused on critical technologies, as discussed above, full FIRRMA implementation will expand CFIUS jurisdiction to non-controlling investments in all critical U.S. businesses. Further, the Export Control Reform Act requires the government to identify and control certain emerging and foundational technologies. Once implemented, CFIUS’s jurisdiction would expand with respect to those technology sectors[2], reaching non-controlling investments by funds that are active in those sectors.
_______________________________________________
If you have any questions, or are considering an investment that may be covered by the expanded CFIUS filing obligations and would like to discuss the specifics of your investment or investment partners, please reach out to any of the following:
This article is for general information purposes only. It is not intended as legal advice, and you should not consider it as such.
[1] Full filings can be submitted instead.
[2] For a preview of what some of those new technologies might be, please see the Bureau of Industry and Security, Review of Controls for Certain Emerging Technologies, Advance notice of proposed rulemaking (ANPRM), 83 Fed. Reg. 58201 (Nov. 11, 2018), available at: https://www.govinfo.gov/content/pkg/FR-2018-11-19/pdf/2018-25221.pdf.
September 12, 2019
Stroock Special Bulletin
By: Chris Griner, André B. Nance, Shannon Reaves, Gregory Jaeger, Erin Bruce Iacobucci
As we welcome the former Associate Director of CFIUS Operations and Regulatory Affairs from the Department of Defense to our highly ranked CFIUS team, we want to share some insights into how the new statutory and regulatory changes to the authorities of the Committee on Foreign Investment in the United States (CFIUS) affect the investment funds industry. In collaboration with Stroock’s premier Private Funds practice, we offer the following key takeaways to the new regulatory landscape and potential issues to watch for in the near future.
CFIUS is a federal interagency committee with the authority to suspend, block, mitigate or unwind investments in the U.S. CFIUS jurisdiction was previously limited to investments that could provide a “foreign person,” including foreign investment funds and certain U.S. investments funds with foreign limited partners, “control” over a “U.S. business.” “Control” is broadly defined by regulation as the power to determine, direct or decide important matters of a U.S. business. CFIUS was a voluntary process and, upon conclusion of the process and clearance by CFIUS, a reviewed transaction was safe from subsequent CFIUS intervention.
Congress passed the Foreign Investment Risk Review Modernization Act (FIRRMA) in August 2018 and expanded CFIUS jurisdiction in a number of key ways for the investment funds industry:
Many details of these changes are subject to implementing regulations due on or before February 2020. Some of these requirements, however, became immediately effective through a temporary pilot program in October of last year, which included the following:
For the purpose of this pilot program, an investment fund will not be considered a “foreign person” if:
Rights that might trigger a filing requirement if afforded to a foreign person through an investment in a U.S. business covered by the pilot program include:
If an investment fund is not a “foreign person” and all foreign investors participating in that fund do not meet the criteria for control or non-controlling investments, then the transaction is excluded from the pilot program. Failure to file a mandatory declaration could result in financial penalties up to the value of the transaction, as well as the government’s ability to suspend a transaction pending a national security review.
While this pilot program is temporary, CFIUS is in the process of developing full implementing regulations for FIRRMA – a draft of which we are likely to see soon. A couple of key elements to look for include:
While the pilot program focused on critical technologies, as discussed above, full FIRRMA implementation will expand CFIUS jurisdiction to non-controlling investments in all critical U.S. businesses. Further, the Export Control Reform Act requires the government to identify and control certain emerging and foundational technologies. Once implemented, CFIUS’s jurisdiction would expand with respect to those technology sectors[2], reaching non-controlling investments by funds that are active in those sectors.
_______________________________________________
If you have any questions, or are considering an investment that may be covered by the expanded CFIUS filing obligations and would like to discuss the specifics of your investment or investment partners, please reach out to any of the following:
This article is for general information purposes only. It is not intended as legal advice, and you should not consider it as such.
[1] Full filings can be submitted instead.
[2] For a preview of what some of those new technologies might be, please see the Bureau of Industry and Security, Review of Controls for Certain Emerging Technologies, Advance notice of proposed rulemaking (ANPRM), 83 Fed. Reg. 58201 (Nov. 11, 2018), available at: https://www.govinfo.gov/content/pkg/FR-2018-11-19/pdf/2018-25221.pdf.