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October 13, 2020

Stroock Client Alert

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

 It has long been recognized that U.S. export regulations have failed to adequately define “emerging technologies” that can play a critical role in U.S. national security – technologies that can have a major impact on national security, but are in the early stages of development.  This month, the Commerce Department’s Bureau of Industry and Security (BIS) issued a final rule[1] implementing new controls on six such “emerging technologies”[2]

1. hybrid additive manufacturing (AM)/computer numerically controlled (CNC) machine tools;

2. computational lithography software designed for the fabrication of extreme ultraviolet (EUV) masks;

3. technology for finishing wafers for 5nm (nanometer) production;

4. digital forensics tools that circumvent authentication or authorization controls on a computer (or communications device) and extract raw data;

5. software for monitoring and analysis of communications and metadata acquired from a telecommunications service provider via a handover interface; and

6. and sub-orbital craft (designed to operate above the stratosphere and land on Earth without completing an orbit).

The BIS rule is now in effect.

The definition of “emerging technologies” has implications that extend beyond U.S. export controls.  “Emerging technologies” are also a concern for the Committee on Foreign Investment in the United States (CFIUS), the multi-agency committee that reviews the national security implications of foreign investments in U.S. businesses.  Investments deemed to present a potential threat to national security may be blocked – or may require restructuring to clear review. 

Notably, “emerging technologies”  are deemed “critical technologies” under CFIUS regulations[3], and  foreign investments involving U.S. businesses that produce, design, test, manufacture, fabricate, or otherwise develop critical technologies are potentially subject to CFIUS jurisdiction, including the possibility of mandatory filing requirements.  

On October 15, a new CFIUS rule goes into effect that, among other things, changes the mandatory filing requirements for certain foreign investments in U.S. critical technologies.  Historically, as we discussed in a previous Stroock Client Alert[4], certain transactions were subject to mandatory filing if the target U.S. business (1) produced, designed, tested, manufactured, fabricated, or developed one or more “critical technologies” and (2) was engaged in one of 27 designated industries identified by North American Industry Classification System (NAICS) codes.  

The new rule replaces the NAICS code industry test with one that is based on “U.S. regulatory authorizations.”[5] Under the new rule, mandatory filing will depend upon whether U.S. regulatory authorizations would be required to “export, re-export, transfer (in country), or retransfer” the technology to certain persons acquiring, directly or indirectly, specified rights or ownership in the U.S. business.  The rule applies even if there is no intent for the U.S. business to make such exports. 

The new rule leaves in place several exemptions from mandatory filing requirements, including those for “excepted investors”[6] and for certain transactions in which the foreign person’s interest is subject to mitigation arrangements pursuant to the National Industrial Security Program Operating Manual (NISPOM).  Notably, however, the  CFIUS rule does not adopt most of the license exceptions available under export control regulations.  Further, even if a transaction is not subject to a mandatory filing requirement, it may be subject to CFIUS’s voluntary filing jurisdiction.  Transactions that are not reviewed and cleared are subject to potential review in perpetuity.   Investments can and have been reviewed after closing, and can result in divestment orders.   

An accurate understanding of the export control classifications for the products and services of a target U.S. company is vital to transaction planning and regulatory compliance.  In all cases, export controls can have significant implications for the manufacture and marketing of technologies, for research and development, for staffing, and for related services – even if the technology never leaves the United States.   Unauthorized exports can carry civil and criminal penalties.  As part of due diligence, investors – foreign and domestic – should consider whether a potential target has properly classified its technology and has an appropriate export control policy in place.  In particular, if a transaction merits CFIUS review, all parties should be aware that CFIUS will pay close attention to how “critical” – and “emerging” -- technologies are and will be protected – even when the acquisition involves investors from allied countries. 

For help in preparing applications for export classification reviews, analysis of CFIUS applicability to your deals, or for any additional questions about the application of these or other CFIUS or export regulations to potential foreign investment, please contact any of the following members of Stroock’s National Security/CFIUS/Compliance Team.

___________________________________________

For More Information:

Chris Griner

Shannon Reaves

Gregory Jaeger

Christopher R. Brewster

Jonathan A. Labib

Erin Bruce Iacobucci

[1] Bureau of Industry and Security, Department of Commerce, Final Rule: “Implementation of Certain New Controls on Emerging Technologies Agreed at Wassenaar Arrangement 2019 Plenary,” 85 FR 62583 (Oct. 5, 2020), available at: https://www.federalregister.gov/documents/2020/10/05/2020-18334/implementation-of-certain-new-controls-on-emerging-technologies-agreed-at-wassenaar-arrangement-2019.

[2] As controlled under section 1758 of the Export Control Reform Act of 2018 (50 U.S.C. 4817). See 31 C.F.R. § 800.215(f).

[3] See 31 C.F.R. § 800.215(f).

[4] Stroock Special Bulletin – “Proposed CFIUS Regulations May Shortcut Filing Requirements for Investors From Allied Countries,” May 27, 2020, available at: https://www.stroock.com/news-and-insights/proposed-cfius-regulations-may-shortcut-filing-requirements-for-investors-from-allied-countries.

[5] U.S. regulatory authorizations include (a) licenses or other approvals issued by the Department of State under the ITAR; (b) licenses from the Department of Commerce under the Export Administration Regulations (EAR); (c) certain specific or general authorizations from the Department of Energy; or (d) certain specific licenses from the Nuclear Regulatory Commission.

[6] See 31 C.F.R. §800.219.

This Stroock publication offers general information and should not be taken or used as legal advice for specific situations, which depend on the evaluation of precise factual circumstances. Please note that Stroock does not undertake to update its publications after their publication date to reflect subsequent developments. This Stroock publication may contain attorney advertising. Prior results do not guarantee a similar outcome.

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