On June 9, 2020, the U.S. Department of the Treasury (Treasury) announced via its Twitter account that it had launched a website dedicated to the monitoring and enforcement functions of the Committee on Foreign Investment in the United States (CFIUS or the Committee). The enforcement website, which includes an email tipline—both CFIUS firsts—is a visible indicator of the recent steady increase in CFIUS' monitoring of and enforcement actions aimed at foreign investment transactions. Now that CFIUS has largely finished writing the rules implementing its recent expanded authority under the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA), the Committee appears to be turning its attention to monitoring and enforcement on a previously unprecedented scale.
Racing Through 2020
For more than 30 years, CFIUS, a federal regulatory authority charged with reviewing foreign investment into U.S. businesses for national security risk, has operated fairly quietly, with relatively few enforcement actions. However, since the passage of FIRRMA in 2018, CFIUS has been proceeding at a breakneck pace implementing its new powers and authorities. Near the start of 2020, Treasury issued final rules fully implementing the powers granted to it through FIRRMA. The key features of the new rules include expanding CFIUS jurisdiction to include certain small equity investments in a broad range of technology, infrastructure, and data businesses; maintaining mandatory filings related to "critical technologies"; and implementing mandatory filing requirements for certain investments involving foreign government stakeholders (you can read about the rules here).
Since that time, Treasury has established filing fees for long-form CFIUS filings (known as "notices") but not for short-form filings (known as "declarations") (discussed here) and proposed revised rules that would shift the criteria for mandatory CFIUS filings for companies that have "critical technologies" (discussed here). The new enforcement website is the latest step in moving FIRRMA from legislative initiative to government policy in action.
How Stepped-Up Enforcement Will Impact Foreign Investment
The Committee's new enforcement and monitoring team has a number of responsibilities. These include searching for unfiled foreign investments (i.e., "non-notified" transactions); requesting filings for non-notified investments; imposing penalties for failing to make mandatory filings; monitoring compliance with CFIUS mitigation agreements; and imposing penalties for noncompliance with mitigation agreements. Given the expansion in CFIUS's jurisdiction under FIRRMA, a concomitant expansion in the scope of the Committee's enforcement activities is unsurprising.
This increased emphasis on enforcement may ultimately be the most important result of FIRRMA. The Committee has always had elective jurisdiction over a wide range of transactions; while FIRRMA expanded that jurisdiction slightly, the key limitation on CFIUS activity has always been limited resources and attention. Now, however, the one to two persons formerly charged with seeking out non-notified transactions in the pre-FIRRMA era has become a full-time team, and its activity levels are intensifying. Ultimately, we expect that for venture investments or acquisitions involving more sensitive investors—e.g., Chinese or Russian acquirers—and/or more sensitive industries—e.g., semiconductors, advanced battery technologies, gene sequencing technologies, etc.—the calculus on not filing with CFIUS voluntarily may be about to change substantially. A few key early takeaways follow:
First, CFIUS is contacting parties more often to enquire about their deals. While CFIUS does not provide real-time details on the number of non-notified transactions that it investigates, informal data from the CFIUS bar highlights a clear uptick in CFIUS outreach to parties who have not filed. While that outreach has not been limited to Chinese foreign investment into U.S. businesses, it does appear that the risk of CFIUS outreach is higher in cases of unfiled Chinese investment into certain sensitive U.S. industries.
Second, despite this uptick in monitoring activity, we are not yet aware of CFIUS having levied any enforcement penalties against parties for failure to make a mandatory filing. Committee staff have informally indicated that penalties for failing to make mandatory filings will be forthcoming in appropriate cases. The Committee has, however, started to publicize its penalties with respect to violations of mitigation agreements: CFIUS has publicly declared that it imposed fines of $1,000,000 and $750,000 in 2018 and 2019, respectively, after parties failed to comply with mitigation agreements and/or interim orders imposed by CFIUS.
Third, the inclusion of an email tipline on the new enforcement website has the potential to ratchet up CFIUS enforcement activity by giving commercial competitors a mechanism to create CFIUS troubles for their rivals seeking foreign investment. While the Committee is growing its dedicated enforcement and monitoring staff and adding new data sources, CFIUS has still primarily been reliant on its own research to become aware of non-filed transactions. In the past, aggressive competitors of parties taking foreign capital have from time to time engaged counsel to make CFIUS aware of potentially market-altering foreign investment, in order to encourage the Committee to take steps to review those transactions. A tipline likely will make these kinds of actions easier to take. Ramping up this dynamic could have substantial consequences for CFIUS filing decisions: parties who are aware of having organized U.S. opponents to their foreign investments may need to consider voluntary filings to get ahead of potential enforcement activity. Opponents of a particular foreign investment may in turn have a powerful new tool against their foreign-financed competitors, but should think carefully about whether and how to use it, lest CFIUS comes back to bite them in a future acquisition or financing.
While CFIUS has a demonstrably increased emphasis on closely monitoring non-notified transactions, that should not suggest to investors that foreign funding is unwelcome for U.S. business. The Committee continues to approve the vast majority of transactions that it sees—including some transactions involving parties from countries of notable concern, such as China. In addition, many transactions continue to proceed without seeking CFIUS approval, because they do not appear to present the kinds of national security risk that causes the Committee to intervene. The best path to avoiding delays or potential negative action by the Committee remains an early assessment of CFIUS risk when seeking any form of foreign investment.