The Committee on Foreign Investment in the United States, commonly known as CFIUS, is a US government interagency committee that reviews investments in US businesses by a foreign person to determine whether they pose any national security risks.

CFIUS has the authority to review any transaction that could result in foreign control of a US business, certain non-controlling investments and certain real estate transactions. This includes mergers, acquisitions, and joint ventures, as well as the acquisition of any interest in a US business by a foreign person. If an investment meets the criteria for a mandatory CFIUS notification or if it is an investment that CFIUS may have an interest in from a national security perspective, it is necessary or advisable to file a notification with CFIUS. Failure to file could lead to monetary fines, divestment mandates, and, in certain circumstances, criminal prosecution.

One of the requirements for triggering a CFIUS review is an investment made by a “foreign person”. Although the term “foreign person” may appear straightforward, it is more intricate than what most people expect. According to the CFIUS regulations, a “foreign person” is described as a “foreign national,” “foreign government,” “foreign entity,” or any entity that is controlled or can be controlled by any of the above. The fact that CFIUS examines the entire ownership structure of an investor to identify any foreign person can result in some noteworthy situations.

A business incorporated in the US is undoubtedly not considered as a foreign entity, but it may be categorized as a foreign person. A straightforward scenario is when a foreign national owns 100% of a US business. It is evident that the US business is under foreign control, resulting in it being classified as a foreign person itself. However, in a more complex scenario where a US company is 60% owned by US nationals and 40% owned by foreign nationals, the question arises whether the foreign nationals exert control over the US business. CFIUS defines “control” broadly as the capability to influence significant decisions that impact an entity. Even without owning more than 50% of the business, foreign investors can achieve control through other means such as board representation, management decisions, or access to key technology or intellectual property. In the above scenario, if none of the foreign nationals exercises control and they have no arrangement with any other shareholder of the company to act in concert regarding the company, the company is not considered a foreign person. On the other hand, if any of the minority foreign shareholders has significant influence over the US business, the business is regarded as a foreign person.

It is also noteworthy that a foreign organization established under the jurisdiction of a foreign state might not be considered a foreign entity or foreign person for CFIUS purposes. According to the CFIUS regulations, a foreign entity is defined as an entity formed under the laws of a foreign country, with its primary business location outside the US or its shares traded on a foreign stock exchange. If an entity is established outside the US, but its operations and decision-making are based in the US, it may be considered a US entity. In another scenario, if a US national or group of US nationals owns a majority of the equity interest in a company, the company will not be deemed a foreign entity even if it is formed outside the US. It is worth noting that the analysis does not stop here. If a foreign individual, entity, or government is a minority shareholder and has a significant degree of control over the company, the company can still be categorized as a foreign person. On the other hand, if no foreign individual, entity or government has any significant ability to control the company, it is not considered a foreign entity or foreign person.

Therefore, both foreign companies planning to invest in US businesses and US companies seeking funding from foreign investors must conduct a thorough assessment of their foreign person status under CFIUS. Merely considering the place of organization of an entity is insufficient to determine the status of a foreign person. In certain cases, a company based in the Cayman Islands may not be deemed as a foreign person, whereas a US company could be considered one.