As of November 10, 2018, foreign investors making acquisitions and equity investments into many U.S. businesses will be required to file their investments with the Committee on Foreign Investment in the United States (CFIUS) before closing. This mandatory filing requirement also covers investments from U.S. funds with foreign limited partners under many circumstances. Penalties for failing to make a mandatory filing may be as much as the total investment in question, and parties can be forced to divest their investment.

The guidance that follows provides a high-level description of the changes to the CFIUS rules.

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On October 10, the Department of the Treasury issued two new sets of regulations as the first stage in the implementation of the Foreign Investment Risk Review Modernization Act (FIRRMA), the law passed in August to reform CFIUS. FIRRMA is intended to ensure that CFIUS has an opportunity to review foreign investments into a wider range of U.S. businesses—including those that develop, make, or test "critical technologies"—and to evaluate national security risks associated with those investments. These initial rules are only the beginning of FIRRMA implementation, which will spread out over the next year or more, but even these initial rules may change the way in which many technology companies seek investment.

The first set of rules issued October 10, which take effect immediately, include a series of amendments to the existing CFIUS regulations generally intended to conform the existing regulations with certain aspects of FIRRMA. The second set of rules establishes a so-called "pilot program"—interim regulations that will implement many of the new authorities granted to FIRRMA from November 10, 2018 until final regulations are established. The pilot program expands CFIUS jurisdiction to many non-controlling investments, and then makes the filing of those investments, as well as many controlling investments, mandatory.

Answering five questions will determine whether a CFIUS filing is required; if the answer is "yes" to all five, a filing is likely necessary:

1. Did the investment sign after October 10, and will it close on or after November 10?

2. Is the investor a foreign person?

1. If the investor is a foreign natural person, a foreign entity, a foreign investment fund, a foreign government, or a U.S. entity under the control of any foreign person or entity (e.g., a U.S. company for which a foreign person has the right to designate one of its directors), it is a foreign person.
2. In addition, if the investor is a U.S. fund with one or more foreign general partners, or limited partners that serve in more than a purely passive capacity, it may also be a foreign person. A foreign limited partner that receives non-public information about a target's technologies generally is not considered passive.

3. Is the investment into the target business covered by the pilot program?

1. Any type of equity or equity-like investment into a U.S. business (e.g., an equity financing, entry into a new joint venture, or acquisition of contingent equity interests with rights granted upon conversion) is covered. Changes to pre-existing rights, e.g., new rights to access information, also are covered.
2. The investment must grant the investor one of the following rights: i. control over the target, ii. a board seat, observer, or nomination right, iii. access to non-public information about the target's technologies, or iv. any other form of involvement in the use, development, acquisition, or release of the target's technologies.

4. Does the target work with "critical technologies"?

1. The regulations define "critical technologies" very broadly to include not only defense-related products and services but also cameras, computers, semiconductor chips, security software, biotech, and more. Critical technologies also may expand over time, as the government has the authority to develop further the set of technologies of interest through rulemaking.
2. In addition to International Traffic in Arms Regulations (ITAR, administered by the Department of State) controlled defense articles and services, critical technologies also include: i. anything subject to the Export Administration Regulations (EAR) that is controlled for national security (NS), chemical and biological weapons proliferation (CW), nuclear nonproliferation (NP), missile technology (MT), regional stability (RS) or surreptitious listening (SL) reasons (generally anything that is more than anti-terrorism (AT) controlled), ii. certain items related to nuclear equipment and facilities, iii. certain toxins, and iv. yet to be defined emerging technologies.
3. If a company does not have sufficient information to determine the export classification of its products and technologies and satisfies the other four tests, then it may be advisable to make a precautionary filing as a result.

5. Does the target have customers or partners in a "pilot program industry"?

1. If the target's customers or other third parties that use the target's critical technologies operate in a specified list of industries—which includes computer manufacturing, semiconductor manufacturing, biotechnology, nanotechnology, battery manufacturing, aerospace manufacturing, optical instrument manufacturing, and many more—the target's activities with respect to those critical technologies likely fall within the pilot program industry. A full list of pilot program industries is provided at the end of this advisory.
2. If a company does not have sufficient information to determine the areas in which its customers do business, and it satisfies the other four tests, then it may be advisable to make a precautionary filing as a result.

Some other common questions follow:

When must a CFIUS filing be made? At least 45 days before the investment closes, unless the investment is expected to close between November 10 and December 25, in which case the filing must be made on November 10 or promptly thereafter.

How long will a mandatory CFIUS filing take? The traditional CFIUS filing process has historically taken four or more months to clear. The pilot program regulations establish an expedited short-form declaration process that is designed to provide CFIUS feedback within 30 days and can be used as an alternative. Because the pilot program is new, however, the timing of that declaration process may be unpredictable.

What penalties may apply for failure to make a mandatory filing? Parties who fail to comply can be compelled to file by CFIUS and forced to divest their investment in the target. In addition, those parties may be liable to the U.S. government for civil penalties up to the total value of the investment in question.

What about transactions subject to CFIUS jurisdiction that aren't covered by the pilot program, such as foreign investments that yield control over U.S. companies without critical technologies? Transactions currently subject to CFIUS jurisdiction continue to be subject to CFIUS jurisdiction, and CFIUS will continue to have the authority to review those transactions before or after closing if they are not filed voluntarily and cleared by CFIUS. While transactions outside of the pilot program are not required to be filed, CFIUS, as part of FIRRMA, has established a new office dedicated to monitoring for unfiled transactions and enforcing the new rules, and that office is expanding its review of unfiled transactions. Accordingly, even covered transactions not subject to the mandatory filing rules are subject to increased CFIUS risk.

Are there any transactions that are affected by CFIUS's expansion of jurisdiction to cover non-controlling transaction, but that are not subject to mandatory filing requirements? Not under the current pilot program, which defines a new set of "pilot program covered investments" and then makes all such investments "pilot program covered transactions" subject to mandatory filing requirements.

How are investments by funds impacted? The pilot program implements FIRRMA's exemption for investment funds that are exclusively managed by U.S. persons and that do not provide the foreign person with control over fund decision-making or access to key fund portfolio company information. In practice, however, this means U.S. funds may be considered foreign investors—or vehicles for foreign investments by their limited partners—if those funds have one or more non-U.S. persons at the general partner or management company, or if those funds have foreign limited partners that play more than a purely passive role.

What is the full list of covered pilot program industries?

• 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

For any questions regarding FIRRMA or any other CFIUS-related matter, please contact Stephen Heifetz or Joshua Gruenspecht.

For more on the pilot program and on the future of CFIUS, please join us and the National Venture Capital Association (NVCA) for NVCA's Emerging Technology Meets National Security conference in Washington, D.C., on November 14. FIRRMA, CFIUS, and the new pilot rules will be a big topic of conversation. Speakers will include Heath Tarbert, a senior CFIUS official responsible for FIRRMA implementation efforts, as well as a panel of key personnel at CFIUS member agencies. In addition, speakers will include venture leaders like Ted Schlein of Kleiner Perkins, Ray Rothrock of RedSeal, Bedy Yang of 500 Startups, and officials from national security agencies across the government.