McDermott Will & Emery

In Depth

On October 10, 2018, the US Department of the Treasury, acting in its role as chair of the Committee on Foreign Investment in the United States (CFIUS), issued two interim rules implementing provisions of the recently enacted Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA). The first interim rule implements certain provisions of FIRRMA that became effective immediately upon its enactment and clarifies the processes, definitions, and procedures with respect to CFIUS review and investigation. We addressed key changes in our August On the Subject, FIRRMA Legislation Amending CFIUS Will Soon Be Signed into Law. The second interim rule, which is the subject of this newsletter, establishes a FIRRMA “pilot program” to address specific perceived risks to US national security.

The first interim rule was effective upon its publication in the Federal Register on October 11, 2018. The second interim rule implementing the pilot program is effective on November 10, 2018, after completion of a thirty-day comment period. Both interim rules make significant changes to the jurisdiction and procedures of CFIUS that could affect all foreign investment in the United States.

The Pilot Program

Prior to FIRRMA, CFIUS’s authority did not extend to foreign direct investments in US businesses unless the foreign investor acquired a controlling interest. FIRRMA expands the jurisdiction of CFIUS by broadening the definition of “covered transaction” to include certain foreign direct investments in US business even in cases where the investment does not result in a controlling interest (“other investments” under FIRRMA). In order to capture such additional forms of foreign direct investment in US businesses, the pilot program implements FIRRMA’s establishment of mandatory declarations for certain transactions involving foreign investors.

The scope of the pilot program extends to transactions that meet the following criteria:

            1. Pilot Program Industries. The pilot program targets 27 “Pilot Program Industries,” included in an Annex to the new rule and listed below. Treasury identified these industries as requiring immediate attention; they generally correspond to the sectors that have attracted the most intensive CFIUS scrutiny in recent years as possibly implicating US national security.

            2. Pilot Program US Businesses. The pilot program applies to any US business that “produces, designs, tests, manufactures, fabricates, or develops a critical technology that is either utilized in connection with the US business’s activity in one or more pilot program industries, or designed by the US business specifically for use in one or more pilot program industries.”

            3. Foreign Investor. While FIRRMA was enacted with a view to concerns particularly about Chinese access to US critical technologies, the statute does not expressly call out China. Rather, the pilot program applies to all non-US persons, no matter the country, and there are no exemptions, including for investors from countries considered to be close US allies.  

            4. Pilot Program Covered Investments. For a non-controlling investment to be covered by the pilot program, it must provide the foreign investor with one of the following:

  • Access to any material nonpublic technical information in the possession of the target US business;
  • Membership or observer rights on the board of directors or equivalent governing body of the US business, or the right to nominate an individual to a position on the board of directors or equivalent governing body of the US business; or
  • Any involvement, other than through voting of shares, in substantive decision-making of the US business regarding the use, development, acquisition, or release of critical technology.

            5. Pilot Program Covered Transactions. The pilot program covers “pilot program covered investments,” described above, as well as any transaction that could result in foreign control of a “pilot program US business.”

Mandatory Declarations or Joint Voluntary Notice

Parties to a pilot program covered transaction must submit to CFIUS either a “declaration” (new under FIRRMA) or a full joint voluntary notice (as under current CFIUS rules and procedures) no later than 45 days prior to the expected completion date of the transaction. An exception applies for any transaction that is completed by November 10, 2018. For any transaction to be completed between November 10 and December 25, 2018, parties must file such declaration or joint voluntary notice by November 10 “or promptly thereafter” (31 C.F.R. §§ 801.401, 402). Declarations are abbreviated notices intended to be no more than five pages in length, and must include a description of the transaction, including the basis on which it is deemed to fall under the purview of the pilot program, along with information about the US business and the foreign investor (31 C.F.R. § 801.403). In the event parties choose to file a declaration instead of a full notice, within 30 days after the filing, CFIUS will take one of the following four actions: (1) request that the parties file a full joint voluntary notice; (2) invite further communication between the parties and CFIUS; (3) initiate a review of the transaction; or (4) notify the parties that CFIUS has completed all action (31 C.F.R. § 801.407).

Parties to Covered Transactions Must Monitor and Strictly Follow the New Rules, or Else!

The pilot program will be temporary, in effect for no more than 570 days following the date of FIRRMA’s enactment. Treasury will consider how it works in conjunction with new final rules that Treasury will be drafting and releasing for public comment in coming months. Treasury will incorporate aspects of the pilot program in the final rules. In the meantime, the new rules authorize CFIUS to impose penalties up to the value of a transaction for “any person who fails to comply with the requirements” of the new rules.  In light of such a potential penalty for failing somehow to comply with the rules and with an uncertain view to additional regulatory changes ahead, US companies and potential foreign acquirers and investors in any US business must monitor these developments and must seriously consider CFIUS requirements. Further, parties to deals involving any foreign investment in a US business should carefully consider the CFIUS implications in structuring their transactions.


Aircraft Manufacturing
NAICS Code: 336411

Aircraft Engine and Engine Parts Manufacturing
NAICS Code: 336412

Alumina Refining and Primary Aluminum Production
NAICS Code: 331313

Ball and Roller Bearing Manufacturing
NAICS Code: 332991

Computer Storage Device Manufacturing
NAICS Code: 334112

Electronic Computer Manufacturing
NAICS Code: 334111

Guided Missile and Space Vehicle Manufacturing
NAICS Code: 336414

Guided Missile and Space Vehicle Propulsion Unit and Propulsion Unit Parts Manufacturing
NAICS Code: 336415

Military Armored Vehicle, Tank, and Tank Component Manufacturing
NAICS Code: 336992

Nuclear Electric Power Generation
NAICS Code: 221113

Optical Instrument and Lens Manufacturing
NAICS Code: 333314

Other Basic Inorganic Chemical Manufacturing
NAICS Code: 325180

Other Guided Missile and Space Vehicle Parts and Auxiliary Equipment Manufacturing
NAICS Code: 336419

Petrochemical Manufacturing
NAICS Code: 325110

Powder Metallurgy Part Manufacturing
NAICS Code: 332117

Power, Distribution, and Specialty Transformer Manufacturing
NAICS Code: 335311

Primary Battery Manufacturing
NAICS Code: 335912

Radio and Television Broadcasting and Wireless Communications Equipment Manufacturing
NAICS Code: 334220

Research and Development in Nanotechnology
NAICS Code: 541713

Research and Development in Biotechnology (except Nanobiotechnology)
NAICS Code: 541714

Secondary Smelting and Alloying of Aluminum
NAICS Code: 331314

Search, Detection, Navigation, Guidance, Aeronautical, and Nautical System and Instrument Manufacturing
NAICS Code: 334511

Semiconductor and Related Device Manufacturing
NAICS Code: 334413

Semiconductor Machinery Manufacturing
NAICS Code: 333242

Storage Battery Manufacturing
NAICS Code: 335911

Telephone Apparatus Manufacturing
NAICS Code: 334210

Turbine and Turbine Generator Set Units Manufacturing
NAICS Code: 333611

See Annex A to Part 801 – Industries here