On Oct. 10, 2018, the U.S. Treasury Department issued interim regulations under the recently enacted Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA) “to protect critical American technology and intellectual property from potentially harmful foreign acquisitions.” These regulations introduce a new pilot program, a tool authorized by FIRRMA, that significantly expands the scope of transactions subject to review by the U.S. Committee on Foreign Investment in the United States (CFIUS), in connection with businesses involved in “critical technologies” within targeted industries.
Effective on Nov. 10, 2018, the pilot program will require mandatory declarations with CFIUS of certain investments by foreign persons in U.S. businesses dealing with critical technologies for use in specific industries.  The pilot program will end when the final FIRRMA regulations are implemented, expected no later than March 5, 2020.
This pilot program may significantly affect:
- U.S. businesses involved in “critical technologies” (further discussed below) that anticipate obtaining foreign investment, and
- Non-U.S. individuals contemplating investment in a critical technology business with presence in the U.S.
Such companies and individuals should familiarize themselves with the CFIUS pilot program and seek counsel and expert assistance before moving forward with a potentially covered transaction.
Which Businesses Are Covered By The Pilot Program?
The pilot program covers all U.S. businesses (Pilot Program Businesses) that:
- Produce, design, test, manufacture, fabricate, or develop a “critical technology”; and
- That “critical technology” is:
- Utilized in connection with the business’s activity in one or more pilot program industries; or
- Designed by the business specifically for use in one or more pilot program industries.
In a nutshell, “critical technologies” include most technologies that are subject to current U.S. export controls, as well as certain “emerging and foundational technologies”, still to be designated by the Commerce Department. 
The covered pilot program industries include a broad swath of aircraft, manufacturing, technology, communications, military, chemical, energy, and other industry sectors that have a nexus with U.S. national security. 
Given the expansive and evolving definition of “critical technologies”, companies operating in or dealing with the above industries in the US – and foreign investors considering investments in such businesses – should familiarize themselves with the pilot program and closely examine current and anticipated corporate transactions to determine whether they are covered by the new pilot program.
What Transactions Are Covered By The Pilot Program?
Transactions that are subject to mandatory CFIUS declaration under the pilot program include:
- Every direct and indirect non-controlling investment by a foreign person in a Pilot Program Business, irrespective of the percentage of voting interest acquired, that affords the investor: (1) access to material non-public technical information from the business; (2) membership or observer rights on the governing body of the business (e.g., board of directors); or (3) any involvement in the business’s decision-making involving critical technologies, other than through voting of shares; and
- Any transaction by or with a foreign person that could result in foreign control of the Pilot Program Business, including transactions carried out through joint ventures.
Note that the covered transactions are not limited to transactions by persons of specific nationalities (e.g., Chinese, Russian), but instead cover all such transactions by any foreign person(s).
Parties that engage in a covered transaction with respect to a Pilot Program Business are required to file a streamlined mandatory declaration with CFIUS (if the parties do not otherwise file a more formal voluntary notice) containing certain required information no later than 45 days before the completion date of the transaction. CFIUS is required to act on the declaration within 30 days of receipt of the declaration by the CFIUS staff Chairperson. Covered transactions that are expected to be completed between Nov. 10, 2018 and Dec. 25, 2018 must be notified to CFIUS on Nov. 10, 2018, or promptly thereafter.
It is important to note that a mandatory declaration does not offer regulatory safe harbor for Pilot Program Businesses when CFIUS actions are based on the declaration.  For regulatory safe harbor to be a consideration, the Pilot Program Businesses must submit a formal CFIUS filing.
Failure to submit the mandatory declaration for a covered transaction may result in a fine of up to the value of the transaction, and the transaction may be unwound.
What Does This Mean For Your Business?
- Know Your Business. The pilot program covers only certain businesses dealing with critical technologies in connection with specific industries. However, there is no de minimis exception and neither the critical technology aspect nor the connection with a covered industry has to be a “primary” concern of the business. That is, even minor involvement in critical technologies connected to the targeted industries may subject a U.S. business to the pilot program’s requirements. Accordingly, as a first step, it is important for U.S. businesses, and foreign investors contemplating an investment in a U.S. business, to do an assessment of the business to understand whether they may be subject to the pilot program. Ankura’s experts can help you systematically review and assess your business activities to determine whether your business may be subject to the pilot program’s requirements.
- Know Your Investors and Understand their Investments. Since the pilot program covers certain non-controlling investments (direct or indirect) by foreign persons, it is very important for covered U.S. businesses to conduct diligence on all investors and investments in the company. Specifically, U.S. businesses covered by the pilot program should understand: (1) who the investor(s) is/are in a given transaction; and (2) what rights and privileges the investor(s) will be afforded as a result of the transaction. This is a particular risk area for early-stage companies developing “emerging and foundational technologies” and taking on venture investment. Similarly, foreign investors in U.S. businesses need to understand the mechanics of anticipated deals and how particular transaction details may now increase regulatory risk.
Ankura’s experts can assist your business in determining whether current or planned organizational policies, practices, and controls afford or effectively prevent a foreign investor’s access to material non-public technical information or involvement in the business’s decision-making involving critical technologies. Ankura also provides a suite of due diligence services for U.S. businesses covered by the pilot program that provide in-depth insight into foreign investors.
- Plan Ahead and Understand Your Options. Just because a transaction is subject to CFIUS review does not mean it cannot go forward. But there definitely are strategies that will reduce the risk and impact of CFIUS intervention. Work with counsel and expert advisors to understand what this CFIUS pilot program means for your business and deals, and how to assure your continued success.
 In lieu of a mandatory declaration, parties to a covered transaction may opt to submit a longer formal filing under the existing CFIUS regulations. The differences between a mandatory declaration and a formal filing are: (1) the length of the submission; (2) the time within which CFIUS must make a decision on the submission; and (3) the options available to CFIUS for disposition of the submission.
 Specifically, “critical technologies” include:
- All defense articles and services controlled under the United States Munitions List (“USML”) identified in the International Traffic in Arms Regulations (“ITAR”);
- Specific items included in the Commerce Control List (“CCL”) under the Export Administration Regulations (“EAR”);
- Certain items related to nuclear energy and nuclear facilities;
- Selected agents and toxins; and
“Emerging and foundational technologies” as may be designated by the Commerce Department under the new Export Control Reform Act. Although the Commerce Department has not yet officially designated such technologies, they will like include technology related to, among other areas, Artificial Intelligence, Blockchain, Driverless Vehicles, Image/Facial Recognition, etc.
 Specified industries covered by the CFIUS pilot program are:
- Aircraft Manufacturing
- Aircraft Engine and Engine Parts Manufacturing
- Alumina Refining and Primary Aluminum Production
- Ball and Roller Bearing Manufacturing
- Computer Storage Device Manufacturing
- Electronic Computer Manufacturing
- Guided Missile and Space Vehicle Manufacturing
- Guided Missile and Space Vehicle Propulsion Unit and Propulsion Unit Parts Manufacturing
- Military Armored Vehicle, Tank, and Tank Component Manufacturing
- Nuclear Electric Power Generation
- Optical Instrument and Lens Manufacturing
- Other Basic Inorganic Chemical Manufacturing
- Other Guided Missile and Space Vehicle Parts and Auxiliary Equipment Manufacturing
- Petrochemical Manufacturing
- Powder Metallurgy Part Manufacturing
- Power, Distribution, and Specialty Transformer Manufacturing
- Primary Battery Manufacturing
- Radio and Television Broadcasting and Wireless Communications Equipment Manufacturing
- Research and Development in Nanotechnology
- Research and Development in Biotechnology (except Nanobiotechnology)
- Secondary Smelting and Alloying of Aluminum
- Search, Detection, Navigation, Guidance, Aeronautical, and Nautical System and
- Instrument Manufacturing
- Semiconductor and Related Device Manufacturing
- Semiconductor Machinery Manufacturing
- Storage Battery Manufacturing
- Telephone Apparatus Manufacturing
- Turbine and Turbine Generator Set Units Manufacturing
 Prior to the pilot program, if a transaction was fully notified to CFIUS, subsequent additional investment by the same foreign buyer in the same US business would not, except in limited circumstances, be subject to separate CFIUS review.
© Copyright 2018. The views expressed herein are those of the author(s) and not necessarily the views of Ankura Consulting Group, LLC., its management, its subsidiaries, its affiliates, or its other professionals. Ankura is not a law firm and cannot provide legal advice.