The US Department of the Treasury recently published for public comment two proposed regulations that will expand the jurisdiction of the Committee on Foreign Investment in the United States (CFIUS) and make substantive changes to the CFIUS process.1 These proposals are the culmination of a major effort authorized by the Foreign Investment Risk Review Modernization Act (FIRRMA)2 to increase scrutiny of foreign investment aimed at economic sectors perceived to be particularly important for US security (i.e., companies associated with critical technologies, US infrastructure and large amounts of personal data). All companies that are involved in cross-border transactions through capital raising, M&A activity or investment funds will be potentially affected by the new regulations, which stand to make CFIUS issues more complex for the foreseeable future.
Summary of Key Proposed CFIUS Changes
The Treasury Department proposed two different sets of new regulations to implement FIRRMA.
First, the Department published proposed regulations intended to operate as the primary CFIUS rules covering all investments associated with US businesses. Key provisions include:
- Expanded CFIUS Jurisdiction for Foreign Investment in “TID US Businesses”
CFIUS currently exercises jurisdiction where a foreign person acquires “control” of a US business.3 But under the new regulations, non-controlling investments in US businesses associated with technology, infrastructure and data (a “TID US business”) will be subject to CFIUS jurisdiction if the investment affords the foreign person (1) access to material nonpublic technical information in the possession of the US business, (2) membership or observer rights on the board of directors (or equivalent body) of the US business, or (3) any involvement in substantive decision-making of the US business regarding certain actions related to critical technologies, critical infrastructure or sensitive personal data.
A TID US business is any US business that satisfies one of three criteria:
(1) Critical Technology—Produces, designs, tests, manufactures, fabricates or develops one or more critical technologies. The regulations will essentially define “critical technologies” to mean technologies subject to US export control restrictions.
(2) Critical Infrastructure—Performs specified types of work in relation to a list of covered critical infrastructure. A list of functions related to critical infrastructure that may trigger jurisdiction, which is attached as an appendix to the proposed rule, includes work associated with undersea cables, ports, telecommunications systems, natural gas facilities, stock exchanges, rail lines and oil pipelines, among others.
(3) Sensitive Personal Data—Maintains or collects, directly or indirectly, sensitive personal data of US citizens. To be considered “sensitive personal data,” the data, first, has to fit within particular categories of identifiable personal data information, such as health records, financial records, biometric data, and non-public communications. Second, the US business that collects the data must (i) target or tailor its products or services to a US executive branch agency or military department in the national-security field; (ii) maintain or collect data on more than one million individuals over the preceding twelve months; or (iii) demonstrate as its business objective to collect such data on greater than one million individuals. The definition exempts data maintained or collected by a US business concerning the employees of that US business and data that is a matter of public record.
- Exempted Foreign Investors—The proposed regulations allow CFIUS to designate in the future allied foreign states with robust foreign investment review procedures such that foreign investors from those jurisdictions may not be subject to the expanded CFIUS authorities applicable to TID US businesses.
- Short Form CFIUS Filings—Short form CFIUS declarations, which are currently available only for submissions under the CFIUS pilot program, will be available for all transactions covered by CFIUS jurisdiction. Such declarations are easier to complete than a full CFIUS Joint Voluntary Notice, and CFIUS must respond to a short form filing within 30 days.
- Limited Partner Protections—The regulations include provisions intended to clarify that the involvement of a foreign limited partner in an investment fund that is otherwise controlled by US persons generally does not trigger CFIUS jurisdiction even if the limited partner participates in an investment committee, so long as specific criteria are satisfied.
Of note, the proposed rule does not make any changes to the so-called CFIUS pilot program. The proposal states that the pilot program, which is summarized here and is set to expire in 2020, is being separately evaluated and that the Treasury Department welcomes comments from the public as to whether mandatory filings for transactions associated with critical technologies should continue.
Second, the Treasury Department published new regulations creating CFIUS jurisdiction to review certain foreign real estate acquisitions, by leases or purchase or concession, where the real estate is in close proximity to US airports or any of several hundred US government installations. Key provisions include:
- Covered Real Estate Transactions—The proposed real estate rule would trigger CFIUS jurisdiction for (i) any purchase or lease (or concession) to a foreign person of covered real estate that affords the foreign person any of three specially defined property rights with respect to “covered real estate”; and (ii) any change in the rights that a foreign person has relative to covered real estate, if the change could result in the foreign person having at least three specially listed property rights. Key definitions established by the rule are summarized below:
- Foreign Person—The rule defines a foreign person as any foreign entity, foreign national or foreign government.
- Property Rights—Under the proposed rule, any real estate investment that affords a foreign person with at least three out of four specially defined property rights may trigger jurisdiction: physical access to the real estate; authority to improve the property; ability to exclude others from physical access to the real estate; and authority to attach immoveable structures or objects to it.
- Covered Real Estate—Under the proposed rule, “covered real estate” is real estate that:
- Is located within or is part of an airport or maritime port;
- Is located in close proximity (i.e., one mile) to a designated military installation or government facility;
- Is located within an extended range (i.e., 100 miles from the boundary of the installation or 12 nautical miles from US coastline) of certain specially listed government installations; or
- Is within any county or other geographic area, or part of any other military installation, specially identified in the regulations.4
- The specially listed military installations and government facilities that may constitute covered real estate include more than 100 locations in more than 40 states and territories. As such, the number of potentially covered real estate transactions is likely to be quite large and may be particularly significant for institutional real estate investors.
- Jurisdictional Exceptions—The proposed rules include several important exceptions from CFIUS jurisdiction over what might otherwise be a covered real estate transaction. Of note:
- Foreign investment in a US business that is otherwise subject to CFIUS jurisdiction that will result in a transfer of covered real estate is not subject to the rule (i.e., if CFIUS has jurisdiction over a foreign investment in a US business, it will not separately exercise jurisdiction over the acquisition of real estate associated with that investment).
- The rules create a category of “excepted real estate investors” for foreign entities with a substantial connection to an “excepted real estate foreign state.” CFIUS will separately publish a list of such foreign states.
- Certain commercial office space transactions will be exempt if the foreign person will not hold or lease or have a right to more than 10% of the total building square footage and will not represent more than 10% of the building tenants.
- Investments in real estate in “urbanized areas” will not be subject to CFIUS jurisdiction unless those investments are in “close proximity” to a smaller list of government installations set out in the proposed regulations.
- No Mandatory Filing/Abbreviated Filing—The CFIUS rules will not create a mandatory notification for covered real estate investments, and they will permit abbreviated declarations to seek CFIUS safe harbor in relation to covered real estate transactions (although CFIUS can demand filing of a full notice in response to an abbreviated declaration).
Next Steps and Regulatory Comment Period
Navigating deal risks associated with CFIUS will grow more complex for both US businesses and foreign investors, and real estate investors will encounter entirely new issues when the CFIUS real estate rules are final. As such, foreign investors, investment funds and US businesses should carefully assess the changing CFIUS landscape and consider whether clarifying comments or points would be useful in relation to future investments. Parties have until October 24, 2019, to provide comments on the primary CFIUS regulations and until October 17, 2019, to provide comments on the CFIUS real estate rules. CFIUS will publish final rules by February 13, 2020.
“Control” is a term of art in this context that turns on an assessment of whether a transaction could empower a foreign person to direct important matters affecting the US business. 31 C.F.R. § 800.204(a). CFIUS rules carve out a limited safe harbor from the definition of “control” for passive investments. Under the safe harbor provision, “[a] transaction that results in a foreign person holding ten percent or less of the outstanding voting interest in a US business [is not a covered transaction] … but only if the transaction is solely for the purpose of passive investment.” 31 C.F.R. § 800.302(b).
A list of relevant installations is attached as an appendix to the proposed rule