As described in our prior client alert, with the adoption by the United States of the Foreign Investment Risk Review Modernization Act of 2018 (known as FIRRMA) in August 2018, new regulatory hurdles must be navigated prior to investing in US start-ups. The hurdles are the result of expansion under FIRRMA of what is known as “CFIUS compliance” under the guise of attempting to address growing national security concerns over non-US exploitation of “critical technologies”.
What is CFIUS? CFIUS is an inter-agency administered by the US government’s Department of Treasury that monitors certain investments by foreign parties and foreign governments into US companies. CFIUS has the authority to initiate reviews of transactions, impose mitigation measures to address national security concerns, and even recommend to the US President that a transaction be blocked completely or that completed transactions be unwound.
How does compliance happen? Prior to FIRRMA, parties to a transaction that might give foreign investors control over a US business with critical technologies had two choices: (1) Decide that for whatever reason the transaction was exempt from needing formal CFIUS approval to the transaction, knowing that CFIUS had the right to intervene at any time and, potentially, unwind the transaction or (2) voluntarily notify CFIUS of the impending transaction and seek pro-active consent. As part of FIRRMA, a third method is being rolled out over an eighteen month period whereby parties that are involved in a transaction covered by a “pilot program” must submit a “lighter” notice filing through a new “declaration” process or file a standard voluntary notice filing. An initial pilot program (discussed below) went live on November 10, 2018.
Overview of a Standard Voluntary Notice Filing--The Old Way That Is Still A Path To Compliance.
Where parties believe that they may be engaged in a transaction covered by CFIUS, those parties have the right to notify CFIUS about the proposed transaction and seek approval. If approval is received, assuming all submissions to CFIUS were truthful, the transaction would receive “safe harbor” protections; meaning the transaction would be left undisturbed by the US government. If CFIUS determines the transaction poses national security risk for which other provisions of law do not provide adequate authority to address, CFIUS may impose conditions on the parties to mitigate such risk (e.g., require certain assets to be divested, require appointment of compliance personnel, etc.) or may refer the case to the President of the United States who has authority to block the transaction in its entirety.
A standard voluntary notice filing is initiated by a joint filing by all parties to the transaction to CFIUS. The requirements for the filing are spelled out in regulations and include a detailed description of the proposed transaction, the parties involved, and background information regarding each party’s respective business activities. CFIUS recommends contacting it informally and filing a draft notice to ensure that all appropriate and required information is included before officially submitting a notice.
Upon submission of the official filing, the Staff Chairperson at CFIUS will determine whether the notice satisfies the requirements for completeness. If it does, CFIUS is given 45 days (up from 30 days pre-FIRMMA) to review. If CFIUS believe an investigation is required, it then has an additional 45 days (which in extraordinary circumstances can be extended to 60 days) to conduct the investigations. In practice though, given CFIUS’s ability to informally stop the clock through a variety of method, a normal review/inspection period is often in excess of 90 days.
Currently, there is no filing fee for a voluntary notice filing. FIRRMA empowers CFIUS to begin charging a fee equal to the lesser of 1.00% of the value of the transaction or $300,000 and begin implementing an “expedited filing” fee.As such, most practitioners believe that fees are likely going to occur in the near future.
Overview of the Mandatory Declaration Process and the Initial Pilot Program--The New Way.
For the first time ever, now if parties are participating in a “pilot program covered transaction” (a term CFIUS is given wide latitude to define and redefine), they must make a filing with CFIUS or face penalties (in addition to those enumerated above related to unwinding transactions). Given this new requirement, FIRRMA authorized the implementation by CFIUS of new rules to make compliance more efficient.
Through these new rules, CFIUS is adopting frameworks where “short-form” declarations can be submitted by parties to a covered transaction in lieu of the formal voluntary notice submissions. The general concept is that pre-printed forms that are no more than 5 pages will be completed by the parties in the form of a joint declaration where the parties stipulate to certain facts in order to allow CFIUS to expedite review. Note, while the forms may not exceed 5 pages, the information required to be attached will likely mean the submissions end up far exceeding 5 pages.
As part of this new initiative, CFIUS has launched pilot programs through March 5, 2020 where these “light filings” can be made and CFIUS can attempt to gain insights that will assist CFIUS in its development final regulations under FIRRMA.
The first pilot program commenced on November 10, 2018. Under this pilot program, if a transaction could result in “control” by a foreign person of any US business that produces, designs, tests, manufactures, fabricates or develops a “critical technologies” that involved any of the following 27 industries, a mandatory filing with CFIUS is required: 
- 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
Admittedly, many of these industries appear directly related to military technology and national defense. Still, industries like nanotechnology, biotechnology, computer storage, and basic inorganic chemistry manufacturing can apply to companies that are not focused on any national security initiatives.
The declaration consists of a five-page document available at the US Department of Treasury’s website. It must be completed at least 45 days prior to the proposed closing date of a transaction by all applicable parties and submitted to CFIUS.In turn, once the Staff Chairperson of CFIUS inspects the declaration for completeness and determines it meets all requirements set forth in the applicable regulations, CFIUS has up to 30 days to assess the filing. The parties must respond to any CFIUS inquiries within 2 business days or the declaration can be rejected.
During the assessment, CFIUS can (i) take no action and clear the transaction, (ii) notify the parties that it is going to commence its own investigation, (iii) indicate that CFIUS is not able to complete action on the basis of the declaration and invite further correspondence, or (iv) require the parties to submit a traditional voluntary notice filing. Therefore, while a greenlight may occur faster than through the traditional voluntary notice filing process, given CFIUS’s other options, there are no assurances that will happen.
Importantly, if a declaration (or, alternatively, a traditional voluntary notice) is not submitted when it should have been, the parties can be assessed a civil monetary penalty up to the value of the transaction.
Conclusion. Given the expanded definition of “critical technologies” and “control” by a foreign person under FIRRMA and the requirement that mandatory filings now be made to avoid civil penalties, it is imperative that any non-US investor understand how and when CFIUS may apply to its investment strategies. The risk of inadvertently participating in an investment that could be unwound at a later date and expose the investor to civil penalties is now too great to ignore.