CFIUS Revised the Mandatory Declaration Requirements for Certain Critical Transactions

In order to strengthen and modernize the authority of The Committee on Foreign Investment in the United States (CFIUS) to address national security concerns more effectively, The Foreign Investment Risk Review Modernization Act (FIRRMA) entered into force in August 2018. FIRRMA has broadened the authorities of the U.S. President, and CFIUS. It gave them the power to review, and to take action to address any national security concerns arising from certain non-controlling investments, and real estate transactions involving foreign persons.

On September 2020, the Department of the Treasury issued a final regulation that revises the requirement for filing a mandatory declaration with the CFIUS, in connection with certain transactions involving U.S. businesses that design, develop, fabricate, manufacture, or test one or more critical technologies. This regulation will become effective on October 15, 2020. However, transactions which have already been completed or for which binding written agreements have already been executed will not be subject to this regulation.

The final regulation expands the need for parties to foreign investments involving critical technologies to conduct appropriate due diligence on the export control classifications of U.S. businesses’ products and technology. The current regulations mandate declaration of “covered control transactions”, or “covered investments” to the U.S. businesses that are used in connection with 27 industries identified by NAICS Codes. Since the NAICS was developed for federal agencies to classify businesses for statistical purposes, it was not fully useful with national security matters. As a result, both investors and practitioners often expressed frustration with using the system as a reference point for the declaration requirement.

The final regulation removes the NAICS Codes criteria. Effective by October 15, 2020, the mandatory declaration requirement related to critical technologies will now solely depend on the export licensing or authorization requirements applicable to the U.S. business’ products and technology.

To specify, the mandatory declarations will only apply when:

• a U.S. business designs, develops, fabricates, manufactures, produces, or tests critical technologies.
• those technologies would require a regulatory authorization (license or approval from the State Department, the Commerce Department, the Energy Department, or from the Nuclear Regulatory Commission, if applicable) to export to an investor’s country.
• the investor either, individually or in aggregate with other foreign investors, holds a direct or indirect voting interest of 25% or more in the investing entity, or directly controls or acquires the U.S. business involved in the transaction.

Prior to the final regulation, if a business falls outside of the 27 relevant NAICS Codes, then there would be no mandatory filing to determine the applicable export licensing requirements. While eliminating the uncertainty in notifying the CFIUS during the transactions; the final regulation increases the importance of assessing U.S. businesses’ critical technologies under applicable U.S. export control classification regulations. For the transactions under the amended rule, however, complete and accurate assessments of the relevant technology controls are essential to avoid violating the mandatory declaration requirements.

About CIFUS: The Committee on Foreign Investment in the United States is an interagency committee that determines the effects of some transactions on national security. Established by U.S. President Ford’s Executive Order in 1975; CFIUS is chaired by the Treasury Department, and represented by 16 U.S. departments and agencies, including the Defense, State, Commerce, and Homeland Security Departments. Operating pursuant to Section 721 of the Defense Production Act of 1950, CFIUS is authorized to review certain transactions involving foreign investments in the U.S., and certain real estate transactions by foreign persons.

Şafak Herdem