FAQs on the Foreign Investment Risk Review Modernization Act (FIRRMA) and the CFIUS Pilot Program
- Pursuant to FIRRMA, CFIUS has implemented a pilot program for critical technology industries and covered transactions.
- FIRMMA changes CFIUS by expanding its jurisdiction to review “other investments” that are deemed non-controlling involving a foreign person regarding a TID Business.
- TID Businesses are businesses in the following industries: (1) critical technology; (2) critical infrastructure; and (3) sensitive personal data.
- FIRRMA authorized CFIUS to conduct pilot programs to implement any provisions of the legislation that were not made immediately effective. In October 2018, the Department of the Treasury announced an interim rule that established a temporary pilot program.
- The Pilot Program expanded the scope of transactions subject to CFIUS review and made certain declarations mandatory.
- Consider hiring a team of experienced attorneys to advise you on how these changes affect your business.
Experienced Defense Team
If you need advice regarding FIRRMA or the CFIUS Pilot Program and how it may affect your business, it is time to get in touch and receive the advice of an experienced attorney.
The increase in foreign investment and possibility of national security threats have prompted Congress to pass massive reform to the process used to scrutinize these foreign transactions—FIRRMA.
However, understanding and complying with this reform can be a challenging prospect, especially because CFIUS now has broadened jurisdiction to review more transactions and request more information from U.S. businesses.
At Oberheiden, P.C., our attorneys have experience working with federal authorities, responding to agency requests for information regarding company transactions and investments with foreign entities, and advising our clients on how FIRRMA changes the duties of CFIUS. We can also clarify any questions or concerns you may have regarding the CFIUS Pilot Program.
Do not wait to get in touch with a qualified team of attorneys.
Put Oberheiden, P.C. on your side today to advise you on these issues and implications regarding FIRRMA or the CFIUS Pilot Program.
On August 13, 2018, the President signed into law the NDAA 2019, which included the Foreign Investment Risk Review Modernization Act (“FIRRMA”). FIRRMA reformed the process used by the Committee on Foreign Investment in the United States (“CFIUS”) to investigate foreign direct investment into U.S. businesses that pose national security threats.
Pursuant to FIRRMA, under 31 C.F.R. Part 801, CFIUS has implemented a pilot program for critical technology industries and covered transactions.
FAQ Series on FIRRMA and CFIUS Pilot Program
We provide this FAQ Series to our clients and potential clients to help clarify some of the most critical issues involving the changes to CFIUS that FIRRMA mandates as well as the basic facts surrounding the CFIUS Pilot Program.
If you have any further questions regarding the implications of CFIUS’s authority or the results and consequences of the Pilot Program, contact Oberheiden, P.C. today.
What is FIRRMA?
FIRRMA is the Foreign Investment Risk Review Modernization Act and was signed into law in August 2018 as a part of the 2019 NDAA.
FIRRMA introduces comprehensive reform to the process used by CFIUS to scrutinize foreign direct investment into U.S. businesses in order to determine whether such foreign investments threaten U.S. national security.
These reforms were triggered by increasing concerns in Congress that foreign investment into the United States by certain foreign governments such as China pose a high national security risk to the United States.
Some of the key provisions of FIRRMA include enhanced jurisdiction of CFIUS, greater emphasis on mitigation measures, and changes to the filing process by parties to the proposed transaction or investment.
What is CFIUS?
CFIUS is the Committee on Foreign Investment in the United States. It is a quasi-agency with the objective of scrutinizing certain foreign investments that are “covered” transactions for potential national security risks.
CFIUS has the authority to recommend to the President that certain foreign transactions—such as a proposed takeover that would grant a foreign entity control over a U.S. business—be blocked.
Alternative responses to proposed transactions include clearing the transaction in its entirety or clearing the transaction with mandatory mitigation measures agreed to by CFIUS and the parties.
How Did FIRRMA Change CFIUS?
FIRMMA first and foremost changes CFIUS by expanding its jurisdiction to review “other investments” that are deemed non-controlling involving a foreign person regarding a TID Business.
Prior to FIRRMA, CFIUS was limited to reviewing transactions that resulted in the possibility of foreign control of any U.S. business. After FIRRMA, “control” is not a determining factor to initiate a CFIUS review.
What is a “TID Business”?
CFIUS has the broadened authority under FIRRMA to review non-controlling transactions in TID Businesses. TID Businesses are businesses in the following industries:
- critical technology
- critical infrastructure
- sensitive personal data
What is the CFIUS Pilot Program?
FIRRMA authorized CFIUS to conduct pilot programs to implement any provisions of the legislation that were not made immediately effective.
In October 2018, the Department of the Treasury announced an interim rule, “Determination and Temporary Provisions Pertaining to a Pilot Program To Review Certain Transactions Involving Foreign Persons and Critical Technologies” (31 CFR Part 801), that established a temporary pilot program.
Briefly, the pilot program under the interim rule implemented two sections of FIRRMA that did not take effect upon enactment:
- It expanded the scope of transactions subject to CFIUS review to include certain foreign transactions involving critical technology companies, and
- It made FIRRMA’s mandatory declarations for such foreign transactions effective.
What is the Objective of the Pilot Program?
The objective of the Pilot Program was to allow CFIUS to address certain national security concerns by implementing a pilot program that tested two sections that were not made effective upon FIRRMA’s enactment.
By carrying out the pilot program, CFIUS could identify novel and evolving threats to national security that were posed by certain foreign investments and could therefore develop an immediate response.
What Investments Does the Pilot Program Apply To?
The CFIUS Pilot Program covers investments in any U.S. business that produce, design, test, manufacture, fabricate, or develop “critical technologies” that are either
- utilized in connection with the U.S. business’s activity in one or more of the 27 Pilot Program industries, or
- designed by the U.S. business specifically for use in one or more of the 27 Pilot Program industries.
Does the Pilot Program Apply to Foreign Persons?
Yes, the Pilot Program covered all foreign persons and was not specific to any one country.
A “foreign person” includes foreign persons; companies and other entities organized under laws other than U.S. law; and companies or entities organized under U.S. law that are controlled by a “foreign person.”
What Transactions Does the Pilot Program Apply To?
The Pilot Program applied to transactions that could result in foreign control of a U.S. business as well as non-controlling foreign transactions in U.S. businesses if the foreign investor has any of the following:
- access to any material non-public technical information in U.S. business’ possession
- membership or observer rights on the board of directors or equivalent body of the U.S. business
- any involvement—other than from voting shares—in the decision-making process of the U.S. business that pertains to critical technology
What is the Definition of “Critical Technology”?
“Critical technology,” as defined by FIRRMA, includes the following:
- Defense articles or services under the International Traffic in Arms Regulations (“ITAR”);
- Certain items of the Export Administration Regulations (“EAR”)
- Nuclear-related equipment and other items subject to the Department of Energy or Nuclear Regulatory Commission;
- Select agents and toxins; and
- Emerging and foundational technologies under the Export Control Reform Act of 2018.
What are the 27 Industries Subject to the Pilot Program?
The 27 industries subject to the Pilot Program are those where a foreign investment could pose a threat to the national security of the United States. These industries are based on their five-digit North American Industry Classification System (“NAICS”) code.
Annex A to Regulation 801 provides a list of these 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
When Can Parties to the Pilot Program File A Declaration Versus A Written Notice?
Parties to the Pilot Program had to initially determine whether to file a declaration versus a written notice. Such determination was based on the complexity of proposed transaction.
The Pilot Program required the filing of a declaration to CFIUS—these are basically short notices that describe the proposed foreign transaction.
However, the parties may instead elect to submit a written notice as opposed to the declaration in cases where the parties believe that CFIUS would need more detailed information regarding the proposed transaction in order to more thoroughly analyze potential national security risks.
In some cases, after a declaration is filed, CFIUS may determine that the parties need to submit more information on the proposed transaction and require them to submit a written notice. This may make it more preferable for the parties to file the written notice in the first place as opposed to the short, simplified declaration.
Need Advice Regarding FIRRMA and the CFIUS Pilot Program?
We understand that it is hard to stay abreast of all regulatory changes that modify the ways you transact with foreign individuals and foreign governments.
If you need advice regarding FIRRMA or the new authority vested in CFIUS, you need the advice of a skilled attorney.
The attorneys at Oberheiden, P.C. have the experience and knowledge needed to properly advise you on how the CFIUS Pilot Program and implications of FIRRMA may affect your business.
Call us at 888-680-1745 or contact our office for a free consultation to help resolve these regulatory challenges and legal concerns.