The interagency Committee on Foreign Investment in the United States (CFIUS) reviews inbound foreign investment for national security concerns. In particular, CFIUS reviews transactions that would result in foreign “control” over a U.S. business, which is defined broadly. The CFIUS review process is nominally voluntary, but many parties choose to file because CFIUS clearance of a deal provides a safe harbor against future government review.

CFIUS has increasingly scrutinized investments into sensitive U.S. industries from certain jurisdictions—particularly China—and recently has recommended the President block an investment or caused the parties to abandon a transaction in anticipation of such a recommendation. The Trump administration has also urged CFIUS to broaden its traditionally narrow mandate, arguing that economic security (e.g., the shrinking defense industrial base, employment losses) should be considered national security.

In November 2017, a bipartisan and bicameral group of lawmakers introduced the Foreign Investment Risk Review Modernization Act (FIRRMA). As we summarized in January, the proposed legislation would make key changes to CFIUS, including: (1) broadening the definition of “covered transactions” subject to CFIUS jurisdiction to include certain joint ventures, real estate sales, and subsequent transactions; (2) requiring certain investments, including in U.S. critical technologies and critical infrastructure, be reviewed; and (3) expanding the number of national security factors that trigger CFIUS review.

The Senate Banking Committee and House Financial Services Committee have held hearings to solicit the input of U.S. government regulators and the private sector. Because Congress drafted FIRRMA in consultation with CFIUS, member agencies generally support the bill. The private sector, however, has raised concerns about the breadth of the bill, the increased regulatory burden, and the potential unintended consequences, including:

• Joint Ventures. Joint ventures are not currently subject to CFIUS jurisdiction. FIRRMA would define “covered transactions” to include the contribution (other than through an ordinary customer relationship) by a U.S.-based “critical technology company” of intellectual property (IP) and associated support to a foreign person through “any type of arrangement.” U.S. companies are concerned they would need CFIUS review to set up JVs, or other arrangements like licensing agreements, that allow them to reduce costs by providing IP and associated support for offshore production.
• Regulatory Redundancy. The bill’s sponsors designed FIRRMA to allow the U.S. government to review the transfer to foreign parties of early-stage U.S. technologies that may not yet be subject to export controls (if a dual use has not yet been found). The private sector has urged the U.S. government to update its export controls regulations rather than empower CFIUS to analyze such technology transfers on a case-by-case basis.
• Investment Sources. U.S. venture capitalists are concerned that FIRRMA would inadvertently define them as foreign investors if their funds include passive foreign investment. This could affect U.S. VC investment in U.S. critical technology and critical infrastructure companies, which would also face new restrictions on soliciting foreign investment under FIRRMA, and could impact the availability of capital needed by these companies to grow their operations.

Congress continues to solicit perspectives on FIRRMA, and is expected to mark up the bill in the coming months. We will continue to monitor CFIUS reform efforts and how they could impact U.S. and global manufacturers.