1. Background

​

On October 10, 2018, an interim rule published by the Office of Investment Security, Department of the Treasury sets forth the scope of, and procedures for, a pilot program of the Committee on Foreign Investment in the United States (“CFIUS”) under section 721 of the Defense Production Act of 1950, as amended by the Foreign Investment Risk Review Modernization Act of 2018 (“FIRRMA”). This pilot program relating to critical technologies implements provisions of FIRRMA that were not immediately effective upon enactment.  The purpose of the pilot program is to assess and address ongoing risks to the national security of the U.S. resulting from two urgent and compelling circumstances: (1) the ability and willingness of some foreign parties to obtain equity interests in U.S. businesses in order to affect certain decisions regarding, or to obtain certain information relating to, critical technologies; and (2) the rapid pace of technological change in certain U.S. industries.

​

2. Relevant Definitions

​

Certain terms as used in FIRRMA are further clarified by the interim rule.

“Contingent equity interest” means a financial instrument that currently does not entitle its owner to voting rights but is convertible into an equity interest with voting rights.

“Critical technologies” is specifically defined with reference to (1) defense articles or defense services included on the United States Munitions List set forth in the International Traffic in Arms Regulations (ITAR); (2) items included on the Commerce Control List set forth in Supplement No. 1 to part 774 of the Export Administration Regulations and controlled: (a) pursuant to multilateral regimes, including for reasons relating to national security, chemical and biological weapons proliferation, nuclear nonproliferation, or missile technology; or (b) for reasons relating to regional stability or surreptitious listening; (3) specially designed and prepared nuclear equipment, parts and components, materials, software, and technology covered by 10 CFR part 810 (relating to assistance to foreign atomic energy activities); (4) nuclear facilities, equipment, and material covered by 10 CFR part 110 (relating to export and import of nuclear equipment and material); (5) select agents and toxins covered by 7 CFR part 331, 9 CFR part 121, or 42 CFR part 73; (6) emerging and foundational technologies controlled pursuant to Section 1758 of the Export Control Reform Act of 2018.

Pilot program U.S. business includes any U.S. business that produces, designs, tests, manufactures, fabricates, or develops a critical technology that is either utilized in connection with the U.S. business’s activity in the pilot program industries, or designed by the U.S. business specifically for use in the pilot program industries. The list of pilot program industries is included in Annex A of this rule. It includes only those industries in which the threat of erosion of technological superiority from some foreign direct investment requires immediate action. These mainly include the aircraft engine and engine parts, computer, telecommunications, nanotechnology and semiconductor industries.

​

3. Scope of Transactions

​

The interim rule implements a pilot program relating to foreign investment into certain U.S. businesses that produce, design, test, manufacture, fabricate, or develop one or more critical technologies. Specifically, pilot program covered investment means an investment by a foreign person in an unaffiliated pilot program U.S. business that could not result in foreign control and that affords the foreign person: (1) access to any material nonpublic technical information in the possession of the pilot program U.S. business; (2) membership or observer rights on the board of directors of the pilot program U.S. business or the right to nominate an individual to a position on the board of directors of the pilot program U.S. business; or (3) any involvement, other than through voting of shares, in substantive decision making of the pilot program U.S. business regarding the use, development, acquisition, or release of critical technology. Furthermore, the above situation still applies to pilot program covered transactions irrespective of the percentage of voting interest acquired and the fact that the critical technology produced, designed, tested, manufactured, fabricated, or developed by the pilot program U.S. business became controlled pursuant to section 1758 of the Export Control Reform Act of 2018 after the pilot program effective date, unless any of the criteria set forth in paragraphs (b)(2)(i) through (b)(2)(iii) of § 801.103 (i.e., the parties have executed a binding written agreement establishing the material terms of the transaction before October 11, 2018) is satisfied with respect to the transaction prior to the critical technology becoming controlled pursuant to section 1758 of the Export Control Reform Act of 2018.

​

Where CFIUS has concluded all action for a pilot program covered investment, any incremental investment that meets the requirements of section 801.209, even if it involves the same foreign person in the same pilot program U.S. business, will nevertheless be considered a pilot program “covered investment” and subject to this pilot program.

On the other hand, the pilot program clarifies the transactions that are not pilot program “covered transactions.” These include (1) an investment by a foreign person in a U.S. business that manufactures a technology that it utilizes in connection with its activity in the pilot program industries, but does not produce, design, test, manufacture, fabricate, or develop critical technologies; (2) an investment by a foreign person in a pilot program U.S. business that does not afford the foreign person any of the rights specified in Section 801.209 (i.e., have access to material nonpublic technical information) or any control rights; (3) a transaction that results in or could result in control by a foreign person of a U.S. business that is not a pilot program U.S. business.

​

4. Mandatory Declarations

a. Overview

​

This pilot program establishes mandatory declarations for certain transactions involving investments by foreign persons in certain U.S. businesses that produce, design, test, manufacture, fabricate, or develop one or more critical technologies. It also requires the submission of declarations with basic information regarding certain covered transactions, unless the parties elect to file a notice instead. The distinction between declarations and notices lie in three primary respects: (1) the length of the submission; (2) the time for CFIUS’s consideration of the submission; and (3) the CFIUS’s options for disposition of the submission. Finally, the pilot program provides that CFIUS take one of four actions with respect to a declaration: (1) request that the parties file a notice; (2) inform the parties that CFIUS cannot complete action on the basis of the declaration, and that they may file a notice to seek written notification from CFIUS that CFIUS has completed all action with respect to the transaction; (3) initiate a unilateral review of the transaction through an agency notice; or (4) notify the parties that CFIUS has completed all action.

The information that the parties shall provide in submitting a declaration is listed in Section 801.403 of this interim rule, and includes descriptions of parties, U.S. business and the transaction.

​

b. Important Date and Time of Review

​

Parties shall submit to CFIUS a declaration or a written notice no later than: (1) November 10, 2018, or promptly thereafter, if the completion date of the transaction is between November 10, 2018 and December 25, 2018; or (2) 45 days before the completion date of the transaction, if the completion date of the transaction is after December 25, 2018.

Parties should note that CFIUS shall take action on a declaration within 30 days of the receipt of the declaration from the Staff Chairperson, which is distinct from CFIUS’s completing review of a notice within 45 days of receipt.

​

5. Application

​

The regulations do not apply to transactions for which the completion date is prior to the pilot program effective date (November 10, 2018), or transactions for which the parties have executed a binding written agreement or other document establishing the material terms of the transaction, for which a party has made a public offer to shareholders to buy shares of a pilot program U.S. business or a shareholder has solicited proxies in connection with an election of the board of directors of a pilot program U.S. business or has requested the conversion of convertible voting securities prior to October 11, 2018.

The pilot program implemented through these regulations will end no later than the date on which the full regulations implementing FIRRMA become effective, and in no event later than the date that is 570 days after the enactment of FIRRMA (i.e., March 5, 2020).

​