The U.S. Department of the Treasury unveiled the pilot program for mandatory declarations, or light filings, for foreign investments in U.S. critical technology in certain industries to CFIUS earlier this month, with the requirements set to take hold on Nov. 1. The program stems from the recent overhaul of CFIUS through Foreign Investment Risk Review Modernization Act of 2018.
According to Treasury Secretary Steven Mnuchin, the program, which is designed to be temporary, will help "address specific risks to U.S. critical technology" and aid in "informing the development of final regulations that will fully implement FIRRMA."
"The pilot program and of course certain provisions of FIRRMA represent a sea change in the framework of how CFIUS operates. Traditionally it has been a voluntary process, but now there will be mandatory filings," said Stroock & Stroock & Lavan LLP special counsel Anne Salladin.
Here, Law360 outlines key aspects of the soon-to-be-instituted rule change.
Sensitive Industries Require Filings
Foreign investments in companies dealing with critical technologies in a group of 27 industries will be subject to the mandatory declaration to CFIUS outlined by the pilot program, catching a wide scope of deals as the committee looks to root out potential threats.
The series of industries includes many that were anticipated, like the manufacturing of aircraft engines, guided missiles, space vehicles and computer storage devices, as well as areas that not everyone may have expected.
"They also include industries like research and development in biotech, which is an industry that has historically not been such a high-profile industry for CFIUS. Although that has been changing," said Richard Matheny, head of Goodwin Procter LLP's global trade practice.
According to the Treasury, the industries were chosen in an effort to "narrowly scope the pilot program to include only those industries in which the threat of erosion of technological superiority from some foreign direct investment requires immediate action."
For now, critical technologies generally refers to those included in the International Traffic in Arms Regulations, those included in the Export Administration Regulations, and certain nuclear equipment and facilities, certain agents and toxins. It also includes emerging and foundational technologies outlined by the Export Control Reform Act of 2018, which was passed alongside FIRRMA and has not yet be defined.
"We'll need to see what technologies are ultimately going to be controlled under that part of the critical technologies to see how the full scope will operate," Salladin said.
Noncontrol Transactions to Be Reviewed
Along with outlining certain areas and industries that will require a CFIUS filing, the Treasury pilot program also formally expanded its scope from control transactions to also include other, noncontrol investments in areas with sensitive technology.
The expansion of CFIUS' jurisdiction was called for in FIRRMA, in hopes of allowing the interagency committee the opportunity to examine transactions that previously fell outside of its purview because it didn't meet CFIUS' definition of control.
These means that more types of foreign direct investment will be reviewed by CFIUS, and if it falls into one of the sensitive areas outlined by the pilot program, a mandatory declaration will be required.
"The coverage is broader than we might have expected. There was a lot of talk about FIRRMA and some of the transactions of concern and creative structures that FIRRMA is intended to capture. But the pilot program really captures a whole host of transactions, including very traditional transactions," said Jason Waite, an Alston & Bird LLP partner.
Deal parties also need to remember that the pilot program is an extension of CFIUS' jurisdiction, meaning that transactions that previously would be reviewed by the interagency committee will still be looked at.
"CFIUS still has jurisdiction over control transactions no matter what the industry sector. You don't want to look at this and say, 'Oh, I'm not subject to CFIUS because I'm not subject to the pilot program,'" Matheny said.
No Specific Countries of Concern Targeted
The pilot program, like CFIUS itself, applies to all foreign countries and does not single out either countries of concern or provide exemptions for countries that are considered allies. FIRRMA also stopped short of naming specific countries, although members of Congress designing the legislation were vocal about their concern with certain countries, such as China.
"The pilot program is an attempt to see what the scope of investments are in critical technology companies. It's notable that the program targets investments from all countries, not only from China," Salladin said.
The Treasury noted that the decision to require mandatory declarations for critical technologies in the named sectors was a deliberate one meant to both allow it to understand foreign investment in these areas and prevent creative structures from circumventing the process.
"The committee has developed this pilot program without exempting any country from the mandatory declaration requirement in order to understand and examine, in a comprehensive manner, the nature of foreign direct investment as it relates to critical technologies and the pilot program industries," the Treasury said in an outline of the pilot program.
"Further, foreign investors that may present national security concerns are becoming increasingly sophisticated in structuring investments in a manner that may obfuscate those concerns, including by utilizing entities in other jurisdictions," it continued.
Steep Civil Penalties Possible for Rule-Breakers
Those caught not following the rules outlined by the pilot program could find themselves coughing up a serious amount of cash to cover the civil penalties associated with the mandatory declarations.
According to the Treasury, "any person who fails to comply" with the new rules "may be liable to the United States for a civil penalty not to exceed the value of the pilot program covered transaction."
That gives CFIUS broad discretion for deciding who will need to pay a penalty, and how much exactly that penalty should be.
"Regarding the penalty provision, which provides that anyone who fails to comply with the requirements may be liable for a civil penalty, "gives CFIUS complete discretion to decide if someone failed to comply. This could be based on failure to include complete information, failure to file required information, failure to file at all," said McDermott Will & Emery LLP's David Levine.
The potential for a civil penalty provides a little extra economic motivation to abide by the new rules, but it could also snag companies acting in good faith, as the law is still evolving and there are still a number of questions remaining.
"The penalty for failing to file a mandatory declaration could be the amount of the transaction. And you've got … a lot of fast-moving deals in process, as well as some uncertainty about what is covered," Waite said.
Changes Are Expected Following Program
The program is a pilot one, meaning it is giving the Treasury the opportunity to quickly implement some of the changes envisioned by FIRRMA while allowing the department the ability to make any necessary adjustments before a final rulemaking.
"The pilot program will inform the full implementation of FIRRMA, including the committee's approach with respect to the country specification provision in FIRRMA," the Treasury said.
The pilot program is set to expire no later than March 5, 2020, according to the Treasury.
The fast implementation of the pilot program and its relatively brief lifespan are key to protecting sensitive U.S. technologies from landing in the wrong hands, the Treasury added.
"The temporary nature of the pilot program and the short time frame within which to gather data to help inform the full implementation of FIRRMA compel a rapid implementation of this interim rule. Delaying effectiveness of the interim rule would create an unacceptable risk of erosion of U.S. technological superiority," it said.
--Editing by Rebecca Flanagan and Alanna Weissman.
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