Expanded CFIUS Regulations in Effect February 13, 2020: Key Considerations for the Angel Investing Community


By: Gwendolyn Jaramillo, Partner at Foley Hoag LLP and Anna Annino, Associate at Foley Hoag LLP

Editor’s Note – ACA extends a huge thank you to ACA Gold Partner, Foley Hoag LLP for creating this timely article to educate the angel community on the recent changes related to the expansion of the jurisdiction of the Committee on Foreign Investment in the United States (CFIUS).  Thank you for your work on behalf of angels and the startup ecosystem!

On February 13, 2020, the final regulations went into effect which implement the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA) and expand the jurisdiction of the Committee on Foreign Investment in the United States (CFIUS). The new rules will have a significant impact on the angel investing community, especially for investments in certain industries as described further below. 

All future investment transactions by foreign persons, or entities or funds that are beneficially owned by foreign persons, should be reviewed for compliance with these new regulations. Whether or not an investment is a “foreign investment” and falls within the jurisdiction of CFIUS should be determined with reference to the new rules, and in some cases, such investments may be subject to mandatory filings, although most foreign investment transactions will still be subject to a voluntary filing regime.  Mandatory filings must be submitted to CFIUS 30 days prior to the completion date of the transaction.

When is a Mandatory Filing Required?

Mandatory declarations may be required either:

  1. When a foreign investment is in a U.S. business that operates within one of twenty-seven specified industries designated by North American Industry Classification System (NAICS) codes (known under the former CFIUS rules as “Pilot Program industries”) and produces, designs, tests, manufactures, fabricates, or develops a “critical technology;” or  
  2. When a foreign government acquires a “substantial interest” in a U.S. business that operates within what are defined as TID (Technology, Infrastructure, Data) industries.

What Are TID Businesses Exactly?

TID U.S. Businesses are:

  1. Technology Businesses: U.S. businesses that produce, design, test, manufacture, fabricate, or develop one or more “critical technologies.”
  2. Critical Infrastructure Businesses: U.S. businesses that perform certain “covered infrastructure” functions  (a very detailed list, which can be found at  Appendix A to 31 CFR Part 800, including providing certain services to IP networks, telecommunications services, non-commercially available industrial resources, interstate oil pipelines, crude oil storage facilities, rail lines, public water systems, and electric power generation, storage, or transmission facilities.
  3. Data Businesses:  U.S. businesses that maintain or collect directly or indirectly, large quantities of “sensitive personal data” of U.S. citizens, which is broadly defined to include identifiable health, financial, or genetic data. Angel investors should be aware that in particular, if a U.S. target has or has held sensitive personal data of U.S. persons, CFIUS review may occur even if a mandatory filing is not required.

What is a Critical Technology?

Critical technology is defined with reference to existing U.S. regulations (such the U.S. Munitions List and the Commerce Control List) and other regulatory regimes.  In order to determine if the U.S. target “produces, designs, tests, manufactures, fabricates, or develops” a critical technology, a careful analysis of the regulations and advice of a specialist will be required.  Certain technologies, such as artificial intelligence and quantum computing that have not been subject to export controls to date, may become “critical technologies” in the future when new expected export control regulation updates are released.

What Transactions Are Now Subject to CFIUS Jurisdiction under the New Rules?

Under the new rules, CFIUS now has expanded authority to review the potential national security implications of transactions resulting not just in foreign control of a U.S. business but also non-controlling foreign investments in a TID U.S. business as discussed above.  Another area of expanded CFIUS jurisdiction is certain real estate transactions involving foreign persons if the real estate is located in sensitive areas.   

When Should a Voluntary Filing Be Made?

The decision whether or not to make a voluntary filing is unique to each transaction involving a foreign investor.  Investments in TID U.S. businesses by foreign persons, even if a mandatory filing is not required, should be reviewed by counsel to determine if a voluntary filing may be appropriate based on a risk assessment. In particular, investments by foreign persons in U.S. businesses that involve the sensitive personal data of U.S. citizens, have links to government procurement, or operate in sensitive industries or geographies, may benefit from a voluntary filing. 

What If a Filing is Not Made?

If a mandatory filing is required but not made, CFIUS has the authority to impose a penalty of up to the total value of the transaction (the investment amount).  In addition, future rounds of investment could be put at risk if it is later discovered by CFIUS that a prior investment required a filing that was not made.  CFIUS has the power to investigate prior transactions, issue subpoenas to require information, and if necessary, require restructuring or even unwinding of a prior transaction if it is deemed to have created a significant national security risk.  This is the case whether a transaction was subject to a mandatory filing requirement, or only a voluntary filing option. 

Consequently, investors considering an investment in a new target should consider any national security implications of the investment, including who the other investors and shareholders would be, what industries and technologies the target is engaged in, whether the target has any links to defense, intelligence, or sensitive supply chains, and consider whether a voluntary filing may be appropriate.  Once CFIUS has completed its review of a transaction, that investment has a “safe harbor” that would prevent CFIUS from reassessing the transaction in the future (as long as full information had been provided).

Are Any Foreign Investors Exempted?

Under certain circumstances – which should always be reviewed by counsel – certain non-controlling foreign investments may be exempt from mandatory filing requirements. The exemptions may apply to:

  1. Certain qualified investment funds if structured to maintain control by U.S. persons and limit access to decision-making and information by foreign persons.
  2. Certain foreign investors from excepted foreign states who meet all requirements set forth in the new regulations for excepted foreign investors.

Currently, CFIUS has designated Australia, Canada, and the United Kingdom as “excepted foreign states,” although this list may expand in the future. Note that transactions that involve the acquisition of control (as little as 10%), even if by an “excepted foreign investor,” require a mandatory declaration for certain foreign investments in TID U.S. businesses.   

What is the Significance of NAICS Code Classifications?

CFIUS still relies on the analysis of NAICS codes, which remains challenging for many businesses which pivot their focus from one industry to another during their development, or provide innovative products or services not accurately captured by the current codes. As discussed above, mandatory declarations are required for foreign investments if the U.S. business (1) operated within one of twenty-seven specific NAICS codes, and (2) developed a critical technology. While this definition is expected to change in the future, for the time being investors will need to be aware of which NAICS codes apply to the businesses that they invest in.

Are There Filing Fees Associated with CFIUS Filings?

On this front, at least, there is some good news for the angel investing community.  Because angel investors typically invest in smaller tranches, which often is as little as $300,000 to $500,000 in total and may provide for only one year of operating expenses, CFIUS fees are a key concern. On March 9, 2020, CFIUS released a proposed rule that would establish filing fees for certain transactions subject to CFIUS review.  The final rule should be published in late April or May 2020.

Short-form mandatory declarations will not trigger a fee. The proposed rule sets forth fees for voluntary notice filings based on the value of the transaction:

  • $750 million or more: a filing fee of $300,000
  • $250 – $750 million: a filing fee of $150,000
  • $50 – $250 million: a filing fee of $75,000
  • $5 – $50 million: a filing fee of $7,500
  • $500,000 – $5 million: a filing fee of $750
  • Under $500,000: no filing fee

For More Information

The CFIUS website provides information regarding the final and interim rules, including:

  1. Provisions Pertaining to Certain Investments in the United States by Foreign Persons (31 CFR §800)
  2. Provisions Pertaining to Certain Transactions by Foreign Persons Involving Real Estate in the United States (31 CFR. §802)
  3. Final FIRRMA Regulations – Fact Sheet
  4. Final FIRRMA Regulations – FAQs
  5. Final FIRRMA Regulations – Press Release

Foley Hoag LLP is a leading national law firm in the areas of dispute resolution, intellectual property, and corporate transactions for emerging, middle-market, and large-cap companies. With a deep understanding of clients strategic priorities, operational imperatives, and marketplace realities, the firm helps companies in the biopharma, high technology, energy technology, financial services and manufacturing sectors gain competitive advantage. The firm's 225 lawyers located in Boston, Washington, and the Emerging Enterprise Center in Waltham, Massachusetts join with a network of Lex Mundi law firms to provide global support for clients largest challenges and opportunities. For more information visit www.foleyhoag.com.

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