On August 13, 2018, the United States enacted the Export Control Reform Act and the Foreign Investment Risk Review Modernization Act (“FIRRMA”) to: (i) further restrain international transfers of U.S. advanced technology and (ii) expand the authority of the Committee on Foreign Investments in the United States (“CFIUS”) to screen investment projects contemplated by foreign investors. Within the U.S. government, CFIUS is tasked with examining the national security implications of foreign investments, and its leading concern is transfer of technology important to the security of the United States to a foreign entity in an acquisition or investment transaction.

Not only are obvious strategic areas under scrutiny now, but also “emerging and foundational technologies” are becoming subject to regulation.  Therefore, any new technology with high potential, for example in the areas of artificial intelligence, data imagery or data processing, could be subject to such regulation. 

While these changes create impediments for investments, the good news is that FIRRMA introduces a special beneficial treatment (without being subject to CFIUS’ review) for investments through investment funds which satisfy certain criteria set forth by FIRRMA. These criteria can be summarized as follows:  (1) the fund should be managed exclusively by a U.S. general partner or equivalent; (2) foreign limited partners can have advisory board seats, but the advisory body should not have the ability to control the investment decisions of the fund or decisions made by the general partner or equivalent; (3) the foreign person should not otherwise have the ability to control the fund; and (4) the foreign person should not have access to material nonpublic technical information as a result of its participation on the advisory board or committee. More information on FIRRMA and the new regime is available in the Forbes article co-authored by Harry Clark, Orrick partner in the International Trade & Compliance Group.

At this time additional measures may need to be taken by non-U.S. investors to continue their U.S. investments. While the relevant provisions of FIRRMA will not take effect until the earlier of February 2020, or 30 days after notice by the Secretary of Treasury that the regulations and other resources necessary to administer FIRRMA are in place, the U.S. government is likely to start informally applying the new approach much sooner. 

Non-U.S. investors interested in making new or maintaining existing investments in the United States should analyze the new “safe harbor” regime at this time and get advice on recommended changes to the existing investment structure and compliance strategy for future investments.