For a very long time, the United States has attracted direct investment from overseas. For America, this meant more capital flowing into domestic businesses and the creation of more jobs. As the trade war between the United States and China has escalated, however, a little-known U.S. regulatory body that has traditionally operated behind a veil is becoming more visible following legislation in 2018 that gives it more power to scrutinize inbound dollars.
What is CFIUS?
The Committee on Foreign Investment in the United States, or CFIUS, is composed of representatives of nine federal agencies tasked with reviewing acquisitions of American businesses by foreign investors. Headed by the Secretary of the Treasury, the Committee’s role is to determine if inbound deals pose a threat to national security. The committee reviews each transaction and then makes a recommendation to the president to either accept or block the deal. The chart below shows the number of investigations CFIUS has performed on foreign transactions from 2005 through 2016.
Congress steps in
Due to certain recent investments by foreign investors, some members of Congress expressed concern that entities controlled by a foreign government, investments in technology companies, or investment in data companies with personal information about their constituents presented potential national security problems.
In response to increased foreign investment in American companies, Congress passed and the president signed into law the Foreign Investment Risk Review Modernization Act, which took effect Nov. 11, 2018.
The legislation marks the most comprehensive update of CFIUS authority since its establishment by President Gerald Ford in 1975, expanding the Committee’s reach and imposing new mandatory filing obligations by foreign investors on certain investments.
The act also expanded the president’s authority to block or suspend proposed or pending foreign mergers or acquisitions involving any foreign person that could result in foreign control of an American business. To invoke this authority, the president must follow certain criteria to determine if an investment is a threat to national security.
FIRRMA regulations
Nine key themes came out of FIRRMA as reviewed by the Congressional Research Service:
- Broadens the scope of transactions under the purview of CFIUS by including for review of:
- Real estate transactions in close proximity to military or governmental facilities
- Nonpassive investment in a critical industry or technology
- Any change in foreign investors’ right in an American business
- Any transaction in which a foreign government has a direct or indirect interest
- Mandates various deadlines
- Including a report on Chinese investment in the United States
- Allows CFIUS to discriminate among foreign investors by country of origin
- Shifts the filing process for foreign firms to mandatory from voluntary
- Provides for additional factors for consideration
- Formalizes CFIUS’s use of risk-based analysis to assess national security risks
- Lengthens most time periods for CFIUS reviews and investigations
- Provides for more staff to handle an expected increased workload and additional funding
- Modifies CFIUS’s annual reporting requirements
- Mandates separate reforms related to export controls
- To establish an interagency process to identify emerging and foundational technologies
- Establish controls on the exports or transfer of such technologies
Impact on investment funds
Before the implementation of FIRRMA, national security review of foreign investments focused on covered transactions—those where an acquisition of an American business led to majority ownership or rights. Under FIRRMA, CFIUS gained new authority to review minority investments by foreign investors in American companies involved with critical technologies, infrastructure and personal data.
Asset managers that manage pooled investment vehicles with passive foreign investors would not be subject to CFIUS review if:
- The fund is managed by a general partner who is not a foreign person
- The fund’s advisory board or committee in which a foreign person participates cannot make investment decisions
- The foreign person cannot have the ability to control the fund by influencing important functions such as compensation of the investment manager
- The foreign person cannot gain access to nonpublic technical information
Recent trade conflict and CFIUS
The Congressional Research Service found that six transactions have been blocked by presidents over the last 30 years. The last three resulted from the current administration, with two focused on China, and one on Singapore. With the rise of the trade tensions between the United States and China, It is likely that CFIUS and the current administration will use expanded powers from FIRRMA to review transactions in connection with the high-tech and military sectors.
Foreign investors looking to make investments directly into American companies or investment funds will need to perform some additional due diligence to determine if their participation could lead to further scrutiny by CFIUS.
