Treasury Department Issues New CFIUS Regulations Launching FIRRMA Pilot Program, Requiring Declarations For Certain Transactions

On October 10, 2018, the Treasury Department, as chair of the Committee on Foreign Investment in the United States (CFIUS), issued interim regulations implementing certain mandatory review provisions of the Foreign Investment Risk Review Management Act (FIRRMA) enacted in August, and making other conforming amendments to the existing CFIUS regulations in Part 800 of title 31 of the CFR. The interim regulations create a new Part 801 of title 31, establishing a "Pilot program to review certain transactions involving foreign persons and critical technologies," which requires filing of mandatory declarations for certain transactions. This pilot program impacts all qualifying transactions completed after November 10, 2018, unless the material terms of the transaction have already been agreed or certain other limited exceptions apply. This new mandatory filing carries civil penalty exposure for failure to file. It will have a have a significant impact on the CFIUS process for US businesses and the foreign companies seeking to invest in them, and it impacts a wide range of industry sectors and technologies. Importantly, these new mandatory requirements apply in circumstances where traditional control factors are not present—making a careful analysis of new investment transactions essential.

What do the pilot program regulations do?

For new transactions initiated after November 10, 2018, and for ongoing transactions scheduled to close after November 10, 2018 with terms that have not been fully established, mandatory CFIUS filings are required 45 days before closing for covered transactions involving certain US businesses that produce, design, test, manufacture, fabricate or develop a "critical technology."1 The regulations significantly expand the definition of covered transactions to certain transactions that do not afford control to a foreign person. These regulations implement authorities contained in FIRRMA that authorized CFIUS to accept, and in some instances require, short-form declarations in lieu of or in advance of a full-length notice that participants in transactions currently submit.2 The new regulations specify the transactions for which declarations must be filed and establish the process by which declarations must be submitted.3 They also provide for civil monetary penalties if a required notice is not filed.4

Key takeaways from the new pilot program rule

Know your business (and the one you're investing in). US businesses and foreign investors must take careful stock of whether their transactions involve a pilot program US business—in other words, one that produces, designs, tests, manufactures, fabricates or develops a "critical technology." To do so requires a thorough understanding of the US business' products, services and technologies, as well as the activities it performs in connection with those products, services and technologies. In addition, the industry sector of the US business is part of this analysis. Equally important to being able to identify whether a US business is covered by the pilot program is being able to understand when a US business is outside the scope of the pilot program.

Losing "control." Foreign investors and US businesses must be aware of the types of transactions that, while not conferring the potential for control of the US business on a foreign person, are now covered transactions under the pilot program.

"Stealth" critical technologies? While the new rule contains a detailed definition of "critical technologies" consistent with FIRRMA, it leaves certain gaps and leaves unresolved questions. First, the rule includes all EAR-controlled technologies that are controlled pursuant to multilateral regimes within the definition. The rule lists several multilateral regime reasons for control as a non-exhaustive list. However, there are controls under multilateral regimes not mentioned in the rule, such as encryption, to which the definition presumably would apply.

In addition, the Export Control Reform Act's (ECRA) provisions relating to identifying emerging and foundational technologies have not yet been implemented, but such technologies are within the definition of "critical technologies." Thus, there continues to be uncertainty regarding how such technologies may be identified in the future.

The return of "specifically designed"? As followers of export control reform know, a centerpiece of that initiative was to replace the catch-all "specifically designed" definitions in the International Traffic in Arms Regulations (ITAR) and the Export Administration Regulations (EAR) with the more clearly defined catch-and-release mechanism of "specially designed." Having been virtually eradicated from export control regulations (with a few exceptions), the concept has resurfaced in the FIRRMA pilot program. The concept is undefined in the new rules, as it was in the pre-reform United States Munitions List (USML) and Commerce Control List (CCL) categories. As a result, for those US businesses that engage in the specified activities involving a critical technology, but that do not utilize that technology in connection with the business' activities in a pilot program industry, transaction participants will need to assess whether the technology was designed "specifically" for use in such industries, without the benefit of a definition of the term.

Comment period until November 10. Anyone can submit comments on either interim rule until November 10.

When are declarations required and what is the process?

Not all transactions are subject to the new mandatory declarations process. The requirement applies only to "pilot program...