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January 22, 2020

Stroock Special Bulletin

By: Chris Griner, Shannon Reaves, Gregory Jaeger, Christopher R. Brewster, Erin Bruce Iacobucci

After months of anticipation, the Department of the Treasury has published its final rules implementing the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA), significantly expanding the reach of the Committee on Foreign Investment in the United States (CFIUS). Formal implementation of these rules will have a significant and immediate effect for foreign investors in the United States.

Prior Stroock Special Bulletins discussed the proposed rules published in September 2019 in which Treasury addressed the expanded jurisdiction of CFIUS over non-controlling investments by foreign persons and certain real estate transactions.  On February 13, 2020, the proposed rules become permanent.  The major changes are outlined below:

‘Excepted’ Foreign Investors

The final rules create a new category of foreign investors, “Excepted Investors.” Excepted investors are investors from “excepted foreign states” who meet additional strict requirements.  CFIUS has identified three countries in the National Technology and Industrial Base (Australia, Canada and the U.K.) as the initial excepted foreign states.  Other countries will be considered for the list in the future on a country-by-country basis, based on an assessment of each nation’s foreign investment screening process and bilateral cooperation with the U.S. on matters of national security.

Public commentators felt the qualifications identified in the proposed rules for excepted investors were too strict, so the final rules make important adjustments to relax the criteria. Under the new rules, excepted investors include (1) foreign nationals from excepted foreign states who are not also nationals of non-excepted states, (2) excepted foreign state governments and foreign business entities that meet the following criteria:

  • The entity is incorporated and has its principal place of business in an excepted state or the U.S.
  • At least 75% of the entity’s board seats (or seats on an equivalent governing body) must be held by U.S. nationals or nationals of excepted states who are not also nationals of non-excepted states.
  • If a publicly traded entity, a majority of the interests are held by excepted investors; if a private entity, 80% of the interests are held by excepted investors.

These criteria apply to all parent and intermediate entities involved in the transaction. If an investor meets the above criteria, they are exempt from CFIUS’s expanded jurisdiction, including (1) all mandatory declarations, (2) CFIUS’s new jurisdiction over non-controlling investments and (3) CFIUS’s new jurisdiction over real estate transactions.

Investment Funds

The final rules go a long way to provide clarity to the investment community regarding when an investment fund is “foreign” and when an investment fund is “excepted” under the regulations. An investment fund is considered a “U.S. person” if the fund has its principal place of business in the U.S., the general partner or equivalent is a U.S. person, and no foreign limited partners can (1) exercise “control” or (2) have non-controlling investment rights through the fund or the general partner (or equivalent governing body).  If any one of the above requirements is not met, the investment fund is “foreign.”

The rules also provide important clarifications to the filing requirements affecting investment funds. A foreign investment fund will be treated as an “excepted investor” if the fund meets all the excepted investor requirements of an entity as identified above.  In the context of an investment fund, the ownership thresholds will apply collectively to ownership arising from both the general partnership and limited partners in the fund.  It is important to note that the fund’s excepted status does not necessarily extend to all limited partners. The rules contemplate scenarios in which an investment fund is exempt, but a foreign limited partner may have an independent filing requirement based on the rights it obtains in the transaction.

One critical point — CFIUS has now introduced an interim final rule clarifying that the “principal place of business” for a fund is the location of the fund’s central management, regardless of where the fund is incorporated.[1]  Since this definition is new and designed to address the global nature of investment funds, this interim final rule is subject to a public comment period, and comments are due by February 18, 2020.

Non-controlling investments

The final rules expand CFIUS jurisdiction to non-controlling investments into (1) U.S. businesses related to critical technology (certain technologies controlled under U.S. export laws and regulations), (2) specified assets of U.S. critical infrastructure and (3) U.S. businesses that maintain or collect specified sensitive personal data (all of the above, collectively, “TID U.S. businesses”). CFIUS jurisdiction attaches to these types of investments when a foreign investor, despite not obtaining control of the business, obtains the right to:

  • material, non-public, technical information of a TID U.S. business,
  • a board seat or observer rights on the board (or equivalent) of the TID U.S. business, or
  • substantive decision-making in a TID U.S. business.

Businesses that collect sensitive personal data fall into two groups under the regulations: those that target or tailor their business to sensitive populations (i.e. military, intelligence or U.S. government) and those that collect data within the general public. Those businesses that collect sensitive data of the general public only qualify as a TID U.S. business if they collect this data for one million or more individuals or have a demonstrated business objective to do so.  Sensitive data sets include, among others, genetic, financial, health and geolocation data.  The final rules focus the scope of relevant genetic data on results of genetic tests, rather than all genetic data.  The final rules also carve out genetic testing data derived from databases maintained by the U.S. government and routinely provided to private parties for the purpose of research.

Mandatory Declarations

Pre-FIRRMA, CFIUS was solely a voluntary process. The final rules now identify transactions that trigger mandatory filing requirements:

  • Foreign investors taking 25% of the voting interest in a TID U.S. business are required to file if a non-excepted foreign government owns more than 49% of the voting rights of the foreign investor.
  • CFIUS also made the requirements of the critical technology pilot program permanent with some important exceptions — notably, excepted investors are exempt from mandatory filing requirements.

In a win for foreign investors actively involved in the defense industrial base, there are also exemptions for entities that maintain security clearances pursuant to foreign ownership, control or influence (FOCI) mitigation under the National Industrial Security Program Operating Manual (NISPOM). Also excluded from the critical technology program are those U.S. businesses that would be subject to it solely due to certain encryption technology.

Covered Real Estate Transactions

The final rules significantly expand the scope of CFIUS jurisdiction beyond transactions that provide foreign persons ownership of U.S. businesses to capture simple purchases, leases and concessions of real estate. These new rules will also take affect February 13, 2020.

A “covered real estate transaction” is any transaction in which a non-excepted foreign person purchases, leases or is granted a concession of “covered real estate” that affords a foreign person at least three of four “property rights.” Covered real estate includes real estate within certain air or maritime ports, or in proximity to a specific list of military installations.  The relevant property rights include:

  • the ability to physically access the real estate,
  • the ability to exclude others from physically accessing the real estate,
  • the ability to improve or develop the real estate, or
  • the ability to attach fixed or immovable structures or objects to the real estate.

While the regulations provide a list of sensitive sites and provide for new CFIUS jurisdiction, some of which could be within 100 miles of those sites, Treasury states that its goal is to provide the public, prior to February 13, 2020, a tool for identifying the locations of covered real estate.

Declarations Vs. Full CFIUS Filings

The final rules allow parties, at their option, to use the short form 30-day declaration process for any covered transaction, instead of the typical, long form joint voluntary notice. As a result, investors in low risk transactions may increasingly take their transactions through the shortened 30-day process.  The risk of the shortened process is that CFIUS may not be able to provide a final determination about the transaction, in which case parties whose deal documents require a final CFIUS determination would still need to go through the long form filing.  Whether the declaration process will be beneficial or simply add additional time to the CFIUS review process will often depend on the relevant national security factors associated with a specific transaction.

Filing Fee Requirements

Treasury has not yet implemented filing fee requirements for transactions filed with CFIUS. FIRRMA authorized CFIUS to charge a filing fee up to 1% of the value of the notified transaction, or $300,000, whichever is less, to be adjusted annually. The final rules state these filing fees are forthcoming.


If you have any questions, please do not hesitate to contact:

Chris Griner

Shannon Reaves

Gregory Jaeger

Christopher R. Brewster

Erin Bruce Iacobucci

[1] Note that CFIUS will also take into account where a fund has declared its principal place of business to any U.S. regulatory body either at the federal or state level (including presumably tax filings).