The Department of the Treasury recently released interim rules establishing a pilot program under the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA) that mandates filings for foreign investments in certain critical technologies. As such, it is important that non-U.S. private equity funds looking to invest in U.S. critical technology companies be aware of and adhere to the new rules, which become effective 10 November 2018.

Under the pilot program, beginning 10 November, controlling and certain non-controlling investments by any non-U.S. fund (or other foreign company, for that matter) in certain critical technologies must submit a short-form filing to the Committee on Foreign Investment in the United States (CFIUS) or face potentially severe consequences. Prior to these new rules, CFIUS did not mandate filings.  

Expansion of CFIUS’ power 

While CFIUS has long had the power to review transactions in which a foreign person or entity could gain control of a U.S. business, the new pilot program expands that power to include investments in certain industries involving critical technology. Under the new program, CFIUS has the authority to review certain non-controlling foreign investments in a U.S. business that meet the following criteria:

• The U.S. business is a pilot program U.S. business, meaning that it is a U.S. business that
• "produces, designs, tests, manufactures, fabricates, or develops" critical technology that is used in the business’s activity in a pilot program industry; or
• designs such technology for use in such an industry.
• The investment affords the foreign investor
• access to any material non-public technical information of the U.S. business;
• membership or observer rights on the U.S. business’s board of directors or the right to nominate a member of the U.S. business’s board of directors; or
• involvement, other than by shareholder voting, in the U.S. business’s decision-making regarding critical technology.

The regulations identify 27 pilot program industries in which CFIUS has the power to review investments including, aerospace/defense, nuclear power, petrochemical manufacturing, telecommunications, battery manufacturing, nanotechnology, biotechnology, and semiconductors.  

Filing of short-form CFIUS notices

Under the new rules, non-U.S. private equity funds seeking to make certain investments (either controlling or non-controlling) in a pilot program U.S. business must, subject to certain exceptions, submit a short-form filing (a declaration) (i) 45 days prior to closing or (ii) if the closing will occur between 10 November 2018 and 25 December 2018, on 10 November 2018 or “promptly thereafter.” No such mandatory declaration need be submitted, however, if the foreign fund invests in the U.S. business through a U.S.-controlled investment fund and meets certain other passivity criteria.

Parties who are required to file a mandatory declaration under the program but fail to do so may face steep penalties – up to the value of the transaction.

Therefore, non-U.S. private equity funds should adhere to the interim pilot program rules and file a short-form CFIUS submission for investments in a business included in the U.S. pilot program that meet the criteria described above.  

For a full Hogan Lovells alert on this issue, as well as a list of the 27 industries included in the pilot program and what constitutes “critical technologies,” please see “New regulations expand CFIUS' jurisdiction and mandate filings.”

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