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January 12, 2022

Stroock Client Alert

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

The Foreign Investment Risk Review Modernization Act (FIRRMA) gave the Committee on Foreign Investment in the United States (CFIUS) enhanced powers in August 2018.   Some reviews of foreign investments were mandated – especially investments in sensitive businesses by foreign governments and government-controlled entities.  For the first time, FIRRMA expressly authorized review of real estate transactions and non-controlling investments in sensitive industries.

At the same time, however, FIRRMA gave CFIUS authority to exempt trusted foreign investors not only from mandatory filings, but also from reviews of real estate transactions and non-controlling investments. To secure exemption, however, these “excepted investors” (among other things) had to be organized in, or otherwise closely tied to “excepted foreign states.”

The definition of “excepted foreign state” has two parts. First, a foreign country must be identified by CFIUS as an “eligible foreign state.”  Second, CFIUS must confirm whether the eligible foreign state “has established and is effectively utilizing a robust process” to assess foreign investments for national security risks and to support coordination with the United States government on matters relating to investment security.  “Excepted real estate foreign states” must pass a similar two-part test. 

In January 2020, CFIUS deemed the United Kingdom (UK), Australia, and Canada to be eligible foreign states.  They were also deemed excepted foreign states and excepted real estate foreign states, pending review of their foreign investment programs.  To this end, the effective date of the second test was delayed until February 13, 2022. On January 5, 2022, CFIUS announced a number of actions concerning the status of “excepted foreign states” and “excepted real estate foreign states.”  

  • Australia and Canada were determined to be full-fledged “excepted foreign states” – the first countries to make the grade.  
  • New Zealand was identified as an eligible foreign state.
  • The effective date for determining whether an eligible foreign state has an acceptable foreign investment screening regime was extended to February 13, 2023, giving the UK and New Zealand a year to demonstrate that their regulatory processes are sufficiently robust to pass muster.  Until then, both countries will be deemed “excepted foreign states” and “excepted real estate foreign states.”  

Why it matters: First, CFIUS reviews can be costly and time consuming. Voluntary filing can be advisable for many reasons, including the peace of mind a successful review can provide investors and their lenders.  Moreover, review of certain transactions, although ostensibly voluntary, can be important or even necessary to protect relationships with government and other customers.  Further, CFIUS can call in transactions for review.  Nevertheless, “excepted investor” status (though not a “free pass”) avoids the regulatory requirements for mandatory review of certain controlling acquisitions involving sensitive businesses – and completely avoids reviews of real estate investments and non-controlling investments.  

Excepted investors must meet a range of criteria demonstrating their responsibility and record of compliance with applicable laws.  As a starting point, however, excepted investors must be organized, and have their principal place of business in the United States or an excepted foreign state.  The “excepted foreign states” and excepted real estate foreign states are, to date, an exclusive club.  This month, with the addition of New Zealand, the club got a little bigger.  

Second, Australia and Canada’s transitions to “excepted” status demonstrate that eligible countries will not be put in a perpetual bureaucratic holding pattern while their regulatory programs are  put under the microscope.  There is an end to the process.  All of this has to bode well for the UK, whose transition to full excepted investor status was undoubtedly delayed because its National Security and Investment Act only became fully effective this month, too late to allow for a determination of its “robust” implementation.  

Finally, the addition of New Zealand shows that CFIUS is ready to open the door to new entrants, although it remains to be seen if membership will expand beyond the Five Eyes.

By February 2023, the UK and New Zealand may well be given formal “excepted” status.  The next steps are unclear.  Nevertheless, as CFIUS grows more comfortable with investments by excepted investors,  can Japan be far behind?  

For more information, please contact any of the following members of Stroock’s National Security/CFIUS/Compliance Team.

Chris Griner

Shannon Reaves

Greg Jaeger

Christopher Brewster

Erin Bruce Iacobucci