U.S. Securities Law Update | February 2020
New Regulations Expand CFIUS Authority
Regulations effective February 13, 2020 expand the jurisdiction of the Committee on Foreign Investment in the United States (“CFIUS”), which will have authority to review the following investments and transactions by foreign persons in the U.S. that may raise national security concerns:
- Control Transactions – Any transaction resulting in control of a “US business” by a “foreign person”.
- Non-Controlling TID Investments – An investment of any size (even non-controlling) by a “foreign person” in a “TID”, which are U.S. businesses involved in:
- Critical Technology
- Critical Infrastructure, or
- Sensitive Personal Data
and where the “foreign person” has (i) material non-public technical information, (ii) board or observer rights, or (iii) any involvement in substantive decision making (“triggering rights”).
- Sensitive Real Estate Transactions – Any transaction involving a purchase or lease by, or a concession to, a “foreign person” of real estate within an US air or maritime port, or in “close proximity” to US military or other sensitive facilities.
Israeli companies, investors and investment funds contemplating any of these transactions should carefully consider a voluntary filing with CFIUS. Absent clearance, CFIUS could investigate and force a filing after the fact, impose conditions on the transaction or even recommend that it be blocked (even after closing).
Control by a foreign person in a US business does not require majority ownership but includes minority interests with significant ability to influence “important matters” of the US business. Although foreign persons holding 10% or less of voting interests are excluded from the definition of “control”, this safe harbor applies only if an investment is held “solely for the purpose of passive investment” (however, certain common minority investor protections will not trigger control).
Non -Controlling TID Transactions
This refers to any US business that produces, designs, tests, manufactures, fabricates, or develops “critical technology”, which includes U.S. export control list technology such as certain defense, dual-use and nuclear-related articles and services; select agents and toxins; and emerging and foundational technology.
This refers to any US business that performs specific functions (owns, operates, supplies, services, or manufactures) in 28 different categories of U.S. “critical infrastructure”, which includes telecoms, power, oil and gas, water, finance, defense industrial base, and ports.
D=“Sensitive Personal Data”
This refers to any US business that maintains “identifiable data” from genetic testing (regardless of the amount of such data), and from 10 other data categories if the US business:
- Targets certain government or military employees (or contractors), or
- Had identifiable data on more than a million people over the previous year, or has a “demonstrated business objective” to do so in future.
Sensitive Real Estate Transactions
This includes real estate within an air or maritime port, or in “close proximity” to US military or other sensitive facilities, defined as within one mile (with an “extended range” of up to 100 miles for select sites). Certain exceptions apply, such as for single housing units.
In addition to voluntary filings, the following transactions require a CFIUS filing at least 30 days before closing:
- Critical Technology investments (as described above) – when a foreign investor has one or more “triggering rights”. For more information, see our client alert summarizing a pilot version of this requirement, available here, and
- Non-Controlling TID investments with a substantial foreign government interest – when a foreign person acquires a “substantial interest” (25% or more) in a U.S. business that is a TID, and a foreign government has a “substantial interest” (49% or more) in that “foreign person”.
Heavy penalties apply for failure to make these mandatory filings.
Unless majority-owned by US nationals, an investment fund incorporated outside the US will generally qualify as a “foreign person” for purposes of CFIUS if the general partner directs, controls and coordinates the fund’s activities and investments from outside the US.
In addition, the final rules provide that:
- For the “substantial interest” test, a foreign government’s limited partnership interests do not by themselves trigger a mandatory filing, and
- An investment fund with foreign limited partners is not subject to CFIUS jurisdiction for TID investments if the fund is managed exclusively by a general partner who is not a foreign person and the rights of the foreign LP are strictly limited (including no triggering rights).
To successfully adapt to the new requirements, Israeli companies, investors and investment funds should include CFIUS considerations in early transaction planning and conduct proper due diligence on any potential US target to determine whether a CIFIUS filing is either recommended or required.