United States: New Development: CFIUS's Jurisdiction Has Expanded To Cover Non-Controlling Investments In Certain Industries

Last Updated: July 24 2019
Article by Aria Kashefi, Panagiotis C. Bayz and Amy S. Josselyn

On August 13, 2018, the Foreign Investment Risk Review Modernization Act of 2018 (or FIRRMA for short) was signed into law, ushering in an unprecedented expansion in the jurisdiction of the Committee on Foreign Investment in the United States (or more commonly known as CFIUS). As our colleagues, Chuck Comey and Jim Ryan, mentioned in an earlier article, the enactment of FIRRMA capped months of escalation in the U.S./China trade relations. The expanded jurisdiction of CFIUS may result in financing transactions becoming subject to mandatory CFIUS declaration requirements prior to closing. Investors and companies alike should therefore take CFIUS considerations into account at the outset of any fundraising effort, even if the investment is not a controlling investment and the transaction is not expected to otherwise have any direct national security implications.

New development: CFIUS's jurisdiction has expanded to cover non-controlling investments in certain industries

1. Non-Controlling Investments in "Critical Technologies"

Prior to the enactment of FIRRMA, CFIUS only had jurisdiction to review transactions that could result (directly or indirectly) in "control" (broadly defined to include as little as 10% voting interest) in U.S. companies or U.S. assets by a foreign-owned or controlled person. The CFIUS review regime was also voluntary; there was no requirement to notify CFIUS of a transaction prior to closing, even if that transaction fell within CFIUS's jurisdiction.
With the enactment of FIRRMA, CFIUS's jurisdiction was expanded to include, among other things, certain non-controlling investments in U.S. businesses involving critical infrastructure, critical technologies, or sensitive data pertaining to U.S. persons. This expanded jurisdiction is expected to be fully effective by February 2020 when CFIUS issues regulations implementing various FIRRMA provisions.
In the meantime, CFIUS has implemented the first stage of this jurisdictional expansion through the critical technologies "pilot program," which applies to investments in U.S. businesses that produce, design, test, manufacture, fabricate or develop "critical technologies" (we will refer to such a business as an "Applicable U.S. Business"). Currently, critical technologies consist only of certain items controlled under the International Traffic in Arms Regulations or the Export Administration Regulations, nuclear materials and equipment, and select agents and toxins. However, the Commerce Department is currently preparing new export control regulations that will identify "emerging and foundational technologies," which will also be considered critical technologies for CFIUS purposes. These emerging and foundational technologies are expected to include cutting-edge technology such as artificial intelligence, 3D printing, robotics, and genetic engineering, among others.
Importantly, CFIUS's expanded review jurisdiction applies not only to such investments made directly by foreign persons, but also investments made by funds that have foreign persons as limited partners on an advisory board or committee of the fund. FIRRMA includes a limited carve-out that excludes from its jurisdiction funds that have one or more foreign limited partners, but where (i) the fund is managed by a general partner or managing member that is not a foreign person, (ii) the advisory board or committee on which the foreign limited partner sits does not control investment decisions of the fund or the general partner, (iii) the foreign limited partner does not control the fund, and (iv) the foreign limited partner does not have access to material nonpublic technical information of the portfolio companies of the fund.

2. Pilot Program Industries

A non-controlling investment by a foreign person in an Applicable U.S. Business is not, by itself, enough to trigger the mandatory CFIUS notification requirements. The critical technology produced by the Applicable U.S. Business must be one that is used in connection with the activities of the Applicable U.S. Business in one or more of the 27 specified industries (called "pilot program industries"), or that is specifically designed by the Applicable U.S. Business for use in one or more pilot program industries. The list of pilot program industries currently includes fields such as "Research and Development in Nanotechnology," "Research and Development in Biotechnology," "Semiconductor and Related Device Manufacturing," and, of course, various dual-use industries.

3. Access or Influence by the Foreign Investor

The third prong of the critical technologies pilot program jurisdiction involves the extent to which the investment will provide the foreign person access to information regarding critical technologies or influence over the activities of the Applicable U.S. Business. In addition to controlling investments, non-controlling investments that meet the first two requirements above are subject to the pilot program if they would afford a foreign person (a) access to material nonpublic technical information (financial information is expressly excluded from this definition); (b) membership or observer rights on the board of directors of the Applicable U.S. Business or the right to nominate an individual or observer to the board of directors; or (c) any involvement in substantive decision making of the Applicable U.S. Business regarding the use, development, acquisition, or release of critical technology.

4. Declaration or Notice Requirement and Review Period

The parties to an investment subject to the critical technologies pilot program must submit either an abbreviated declaration or a full notice to CFIUS at least 45 days prior to closing. If the parties choose to submit a declaration, CFIUS has 30 days to review it, at the end of which CFIUS can provide one of four responses: (i) request a full written notice; (ii) inform the parties that it cannot make a determination based on the declaration alone, and that they may file a full notice; (iii) initiate a unilateral investigation of the transaction; or (iv) "clear" the transaction by informing the parties that CFIUS has concluded all action. Failure to provide the required declaration or notice could result in fines up to the total value of the investment.
If CFIUS has national security concerns with respect to a particular investment, it would seek to impose mitigation to address such concerns. Mitigation may include, among other measures, limitations on the foreign investor having access to certain target company technology and facilities. In rare cases where CFIUS determines that national security concerns associated with the transaction cannot be mitigated, CFIUS can also recommend that the President issue an executive order blocking the transaction, or for closed transactions, requiring the foreign person to divest its interest in the U.S. business (which might lead to a "fire sale").

What does this development mean for investors and companies looking to raise funds?

Given the potentially significant penalties if a required filing is not made, investors and companies raising funds must carefully consider the relevant facts and the above legal developments (some of which are still in progress) at the outset of a financing transaction and, together with their legal advisors, develop a plan for navigating these issues.

1. Know Where You Stand; Be Prepared

For U.S. companies looking to raise money, it would be prudent to do a preliminary CFIUS risk assessment to determine, among other things, whether the technology produced by the company would be considered "critical technology" and whether it implicates one or more pilot program industries. Discussing any concerns with counsel as early as possible in the financing process will help identify risks of which management should be mindful in approaching and negotiating with investors.

2. Consider the Implications With Respect to Potential Investors

For a U.S. company that produces critical technology used in a pilot program industry, having foreign investors is not out of the question, and there may be any number of strategic reasons why having such investors may in fact provide a net benefit to the company. However, management should accept investments from foreign investors only after having considered whether additional regulatory compliance is needed. This includes determining whether the investor is a foreign person or, if an investment fund, has a foreign limited partner that may make the transaction subject to CFIUS's jurisdiction. Some investment funds prefer not to disclose their limited partners to their portfolio companies. However, management may still ask potential investment fund investors about their investment and decision-making process to properly understand whether there is any regulatory risk. It may also be prudent for U.S. companies to include representations and warranties by investors in the financing documents to address these CFIUS risks.

3. Consider the Rights Being Provided to Investors

Some of the investor rights that would trigger a CFIUS notification requirement are rights that are commonly provided to lead investors in a financing. For example, it is common for the lead investor (and in some cases other large investors) to receive board representation and/or observer rights. Therefore, where a U.S. company that produces critical technology used in a pilot program industry proposes to take an investment from a foreign person, management must carefully consider whether certain rights should be denied to such an investor or, alternatively, whether the company will implement proper compliance procedures, including filing of a CFIUS declaration or notice.

4. Be Careful About Existing Investors, Too

Finally, the new CFIUS regulations discussed above could apply to a new investment by an existing investor as well, and not only to investments by new investors. For example, if an existing foreign investor participates in a new financing round of an Applicable U.S. Business and obtains additional control, governance, or information rights, this could trigger a mandatory CFIUS declaration requirement. As such, management must take into account the identity of existing investors in new rounds, and may need to curtail the rights of certain investors or be prepared to comply with the new CFIUS notification requirements. In connection with a review of a notified transaction for a new investor, CFIUS can also inquire about prior financings that resulted in existing investors acquiring control of the U.S. business, and request that the parties submit a CFIUS notice for such prior transactions.

Prudent risk management leads to better results

The legal developments mentioned above, as well as subsequent developments that will surely follow, yet again bring into focus the importance of proper risk management. Management and investors know very well that risk is an inherent part of any business. The key question is how will risk be managed to put the company on the best course towards success? The discussion above will hopefully help management and investors chart the right course.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Morrison & Foerster LLP. All rights reserved

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions