New Pilot Program Regulations Expand CFIUS’ Reach

Client Alert

On October 10, 2018, the Department of the Treasury issued a set of interim regulations (31 C.F.R. Part 801) to implement certain provisions of the Foreign Investment Risk Review Modernization Act (FIRRMA), signed into law by President Trump on August 13, 2018. Importantly, these interim regulations, called the “Pilot Program” under FIRRMA, impose a new mandatory reporting requirement to the Committee on Foreign Investment in the United States (CFIUS) for certain non-controlling foreign investments in U.S. companies in sensitive industries involving “critical technologies.” The new, mandatory reporting requirement applies to transactions that are consummated on and after November 11, 2018. It does not apply to transactions that are completed prior to November 11, 2018, or to those for which there is a binding agreement on material terms executed prior to October 11, 2018, but which may close after November 10, 2018. Failure to comply with the new mandatory reporting requirement could result in a civil money penalty up to the value of the entire investment transaction.

Prior to FIRRMA, CFIUS jurisdiction was limited to “covered transactions” that “could result in control of a U.S. business by a foreign person” and depended upon a system of voluntary notification of such transactions to CFIUS (31 C.F.R. Part 800). While the voluntary notification scheme remains in place, the new Pilot Program adds that any foreign investment, even a fractional one that might not result in “control,” may be subject to the new mandatory reporting requirement if the transaction would result in the foreign investor having (a) access to any “material nonpublic technical information” in the possession of the U.S. business, (b) membership or observer rights on the board of directors (or equivalent) of the U.S. company, (c) rights to nominate an individual to a position on the board, or (d) any involvement, other than through the voting of shares, in the “substantive decision-making” of the U.S. company regarding the use, development, acquisition or release of “critical technology” (31 C.F.R. § 209).

Additionally, for the Pilot Program to apply, the foreign investment must (a) be in one of 27 listed Pilot Program industries set forth in Appendix A to the new regulations, and (b) involve one or more of the categories of “critical technologies” as expanded by FIRRMA, which now include a new, undefined category called “emerging and foundational technologies” (31 C.F.R. § 204). This line of inquiry is particularly important, as what constitutes “emerging and foundational technologies” is yet to be determined by a separate agency, the Bureau of Industry and Security (BIS) of the Department of Commerce (which is responsible for export controls) under Section 1758 of the Export Control Reform Act of 2018. Public and congressional debate over what technologies should be included within this new category suggests a long list of sensitive technologies potentially including artificial intelligence and machine learning, automated machine tools, additive manufacturing, autonomous vehicles, advanced battery technology, big data, biotechnology, high-temperature superconducting technology, hydrogen and fuel cells, integrated circuits, semiconductors and microelectronics, nanotechnology, and robotics, among others. BIS is likely to publish a notice soon, seeking public comment on what technologies should fall within the scope of the definition of “emerging and foundational technologies.”

Should a mandatory filing be required under the Pilot Program, parties have the option of filing either the longer, more detailed voluntary notice under existing CFIUS regulations (see 31 C.F.R. § 800.402) or a shortened “declaration” using a form to be developed by CFIUS (31 C.F.R. § 801.403). Either filing must be made with CFIUS either (a) 45 days before the completion of the transaction, or (b) if closing is scheduled prior to December 26, 2018, on November 10, 2018, or as promptly thereafter as possible. Declarations are subject to a 30-day review period by CFIUS, and all inquiries for further information must be answered within two business days. At the end of the review period, CFIUS may (a) request that the parties file the longer voluntary notice, (b) indicate that CFIUS is not able to complete action based upon the declaration, (c) initiate an investigation of the transaction, or (d) clear the transaction.

Why it matters

The new Pilot Program regulations underscore the importance of thorough and early evaluation of foreign investments in critical U.S. industries and technologies for the potential that they may fall under CFIUS jurisdiction. While more passive investments may fall outside the scope, investment structures that allow for some degree of control or access to sensitive technologies and data are likely to be scrutinized. Timing is also critical to compliance with the new Pilot Program rules, particularly if the transaction is set to close any time prior to December 26, 2018.


Andrew Zimmitti is a litigation partner in the financial services practice of the firm’s Washington, D.C., office. Andrew has represented financial institutions, institution-affiliated parties, money services businesses, and tribal-owned lenders in civil litigation and administrative enforcement actions involving U.S. sanctions compliance and enforcement (Office of Foreign Assets Control [OFAC]; Bureau of Industry and Security [BIS]), Bank Secrecy Act (BSA)/Anti-Money Laundering (Office of the Comptroller of the Currency [OCC]; Federal Deposit Insurance Corp. [FDIC]; Financial Crimes Enforcement Network [FinCEN]), state money transmitter licensing, consumer financial matters (the Consumer Financial Protection Bureau [CFPB] and the Federal Trade Commission [FTC]), foreign investment diligence involving the Committee on Foreign Investment in the United States [CFIUS], and related federal and state financial regulatory matters.



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