It is increasingly popular for overseas investors to purchase minority interests such as limited partnerships in U.S.-based companies or funds. Such investors are increasingly concerned about CFIUS risks associated with such investments. New regulations proposed by CFIUS to implement the 2018 FIRRMA statute are a must-read for overseas investors and their counsel contemplating a minority investment or purchasing a limited partnership that may invest in one or more U.S. companies.

As most counsel may be aware, the U.S. government has established an interagency committee known as the Committee on Foreign Investment in the United States (or “CFIUS”), which is authorized to review certain transactions involving foreign investment in U.S. companies (“covered transactions”) in order to determine the effect of such transactions on the national security of the U.S.¹

The review process begins when the parties to a foreign investment in the U.S. submit a notice to CFIUS, announcing the proposed transaction and providing various information specified in the government regulations. If CFIUS finds that a covered transaction presents national security risks and that other provisions of law do not provide adequate authority to address the risks, then CFIUS may impose conditions on the parties to “mitigate” such risks or may refer the case to the president for action, such as suspending or prohibiting the transaction.

In 2018, Congress enacted the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA), which, among other significant changes, expanded the role of CFIUS to review non-controlling foreign investments in U.S. businesses as well as foreign investments in certain U.S. real estate. Procedurally, FIRRMA makes the filing of a notice (or a new short-form declaration) mandatory for certain covered transactions in which a foreign government has a “substantial interest” or where the U.S. business involves “critical technologies.”

This past September, the U.S. Treasury Department published proposed regulations to “comprehensively” implement the legislation passed in 2018.² Of greatest relevance to potential foreign investors is FIRRMA’s expansion of the CFIUS’s jurisdiction to authorize reviews of certain non-controlling (or minority) investments by foreign persons in a U.S. business involved in “Technology, Infrastructure, and Data” (TID).

Section 800.248 of the proposed regulations defines a “TID U.S. business” to include any U.S. business that:

• produces, designs, tests, manufactures, fabricates or develops one or more “critical technologies”;

• owns, operates, manufactures, supplies or services “critical infrastructure”; or

• maintains or collects “sensitive personal data” of U.S. citizens that may be exploited in a manner that threatens U.S. national security.

Importantly, Section 800.211(b) of the proposed regulations makes clear that an investment in a TID U.S. business will not be a “covered” investment unless such investment affords the foreign person:

• access to material nonpublic technical information;

• membership, observer, or nomination rights for the board of directors or equivalent; or

• involvement in substantive decision-making regarding

• use, development, acquisition, safekeeping, or release of “sensitive personal data” of U.S. citizens;

• use, development, acquisition, or release of “critical technologies”; or

• management, operation, manufacture, or supply of “critical infrastructure.”

Put differently, a non-controlling foreign investment is not a “covered” investment (and is not subject to CFIUS review) if it does not meet these jurisdictional criteria. Thus, if a foreign minority investor or limited partner in an investment or fund partnership has no role in the selection of the partnership’s investments or in their management, the investment would not be “covered” under CFIUS and would not require the filing of a notice or declaration.

The exception is strengthened by Section 800.307 of the proposed regulation, which provides an additional clarification regarding investment funds. Specifically, this Section provides that a limited partner’s membership on an investment fund’s advisory board or committee does not in and of itself render the foreign person’s indirect investment in an unaffiliated TID U.S. business a “covered investment” so long as all of the following criteria are satisfied:

1. The fund is managed exclusively by a general partner, a managing member, or an equivalent;

2. The foreign person is not the general partner, managing member, or equivalent;

3. The advisory board or committee does not have the ability to approve, disapprove, or otherwise control: (i) Investment decisions of the investment fund; or (ii) Decisions made by the general partner, managing member, or equivalent related to entities in which the investment fund is invested;

4. The foreign person does not otherwise have the ability to control the investment fund, including without limitation the authority: (i) To approve, disapprove, or otherwise control investment decisions of the investment fund; (ii) To approve, disapprove, or otherwise control decisions made by the general partner, managing member, or equivalent related to entities in which the investment fund is invested; or (iii) To unilaterally dismiss, prevent the dismissal of, select, or determine the compensation of the general partner, managing member, or equivalent;

5. The foreign person does not have access to material nonpublic technical information as a result of its participation on the advisory board or committee; and

6. The investment does not afford the foreign person any of the access, rights, or involvement specified in § 800.211(b).

Accordingly, if the involvement of a foreign investor or limited partner meets the criteria described above in the proposed regulations, the investment is not a “covered transaction” and not subject to CFIUS review.

[1] CFIUS operates pursuant to section 721 of the Defense Production Act of 1950, as amended (section 721), and as implemented by Executive Order 11858, as amended, and regulations at 31 C.F.R. Part 800, as amended, and 31 C.F.R. Part 801.

[2] See 84 Fed. Reg. 50174 (September 24, 2019). (Proposed rules governing certain transactions by foreign persons involving real estate in the United States were published at 84 Fed. Reg. 50214.) The initial period for comments has now expired, but several parties have requested an extension of time to provide their comments. FIRRMA requires that final regulations become effective no later than February 13, 2020.