On May 20, 2020, the U.S. Department of the Treasury issued a proposed rule modifying the mandatory filing requirements associated with certain foreign investments in U.S. businesses that deal with “critical technologies.” The proposed rule is subject to a 30-day comment period (due June 22), and will become effective sometime thereafter. Although it should clarify the circumstances under which transaction parties are required to seek review of their transaction by the Committee on Foreign Investment in the United States (CFIUS), it may increase the number of transactions where this is the case.
The proposed rule would abandon the current North American Industry Classification System (NAICS) code test and ask instead whether a U.S. regulatory authorization would be required for the export, re-export, transfer (in-country), or retransfer of the critical technology to a foreign person that is a party to the proposed transaction and/or certain foreign persons in the chain of ownership and control. If so, then a CFIUS filing would be mandatory if any such foreign person:
- Could directly control such U.S. business as a result of the covered transaction;
- Is directly acquiring an interest that is a covered investment in such U.S. business, under existing rules defining CFIUS jurisdiction over non-control investments in a “TID U.S. business”;
- Has a direct investment in such U.S. business and their rights change in a way that could result in a covered control transaction or covered investment;
- Is a party to any transaction, transfer, agreement, or arrangement designed or intended to evade or circumvent CFIUS jurisdiction; or
- Individually holds, or is part of a group of foreign persons that holds in the aggregate, a voting interest, direct or indirect, of 25 percent or more in such U.S. business, subject to special calculation rules.
“U.S. regulatory authorization” refers to (1) a license or approval issued under the International Traffic in Arms Regulations (ITAR), (2) a license under the Export Administration Regulations (EAR), (3) certain specific or general authorizations issued by the Department of Energy related to foreign atomic energy activities, or (4) a specific license from the Nuclear Regulatory Commission related to the export or import of nuclear equipment and material.
In assessing whether a U.S. regulatory authorization would be required for export of the critical technology to the foreign person, transaction parties should:
- Consider each foreign person’s principal place of business (in the case of entities) or nationality (for individuals) to determine whether an export license would be required for the specific critical technology, essentially treating the foreign person as a hypothetical “end user” of the technology; and
- Disregard available exemptions and exceptions under the ITAR or EAR that would authorize the technology transfer to the foreign person, except in the case of EAR License Exceptions ENC (encryption), TSU (technology and software unrestricted) and STA (strategic trade authorization).
The proposed changes would be significant. Under current regulations, transaction parties have often gained comfort that they are free from the mandatory filing requirement because the U.S. business bears no nexus to any of the 27 specific NAICS code industries that trigger the requirement. By removing this prong of the analysis, the proposed rule applies irrespective of the industries involved, aligning CFIUS’s jurisdiction with the U.S. export control regimes and placing an even greater emphasis on the export-control status of the technologies of the U.S. business and nationalities of the foreign investor(s) and certain foreign persons in the chain of ownership and control.
The proposed rule also makes technical changes to the definition of “substantial interest” to further clarify when foreign-government investment in a TID U.S. business would trigger a mandatory filing requirement.
The proposed rule comes on the heels of new CFIUS regulations imposing a filing fee and the rollout of a new web-based CFIUS Case Management System.