Episode 2: Fund Exemptions under CFIUS's "Foreign Investment Risk Review Modernization Act"
2024-09-24 22:38:39
On January 13, 2020, the U.S. Department of the Treasury issued final regulations (hereinafter referred to as the "Final Regulations") to further implement the "Foreign Investment Risk Review Modernization Act" (hereinafter referred to as "FIRRMA") (collectively with FIRRMA, the "CFIUS Regulations"). The Final Regulations expanded the types of investments subject to CFIUS review, including "covered investments" in U.S. businesses involved in critical technologies, critical infrastructure, or sensitive personal data (hereinafter referred to as "TID U.S. Businesses"). Indirect investments by foreign persons in TID U.S. Businesses through investment funds may also fall under CFIUS review, unless an exemption under the CFIUS Regulations applies. This article primarily introduces the exemptions available to investment funds under the current CFIUS Regulations.
When a foreign person indirectly invests in a TID U.S. Business through an investment fund, and the foreign person (or their designee) becomes a member of the fund's advisory committee based on their limited partnership or similar interest in the fund, such an investment will not be considered a "covered investment" subject to CFIUS review (hereinafter referred to as the "Review Exemption") if all of the following conditions are met:
The fund is managed by a general partner, managing partner, or similar manager who is not a foreign person;
The fund's advisory committee does not have the authority to approve, disapprove, or otherwise control (i) the fund's investment decisions, or (ii) decisions made by the general partner, managing partner, or similar manager regarding the fund's portfolio companies;
The foreign person does not otherwise control the fund, including through the authority to (i) approve, disapprove, or otherwise control the fund's investment decisions, (ii) approve, disapprove, or otherwise control decisions made by the general partner, managing partner, or similar manager regarding the fund's portfolio companies, or (iii) unilaterally dismiss, appoint, or determine the compensation of the general partner, managing partner, or similar manager;
The foreign person does not gain access to material non-public technical information through participation in the advisory committee; and
The investment does not grant the foreign person any of the rights or powers included in the definition of a "covered investment."
The rights or powers included in the definition of a "covered investment" include: (i) access to any material non-public technical information of the TID U.S. Business; (ii) membership or observer rights on the board of directors of the TID U.S. Business, or the right to nominate a board member; or (iii) substantive decision-making power, other than through voting rights, over the use, development, acquisition, management, operation, or release of sensitive personal data, critical technologies, or critical infrastructure of the TID U.S. Business.
Additionally, the Final Regulations clarified exemptions related to funds under the CFIUS mandatory declaration system. In the following scenarios that would typically trigger a CFIUS mandatory declaration, if the fund's investment meets the requirements of the Review Exemption (conditions one, two, and three above), the fund's investment is exempt from mandatory declaration:
A covered transaction that would result in a fund, in which a non-exempt foreign government holds a significant interest, acquiring a significant interest in a TID U.S. Business; or
A covered transaction that constitutes a covered investment in, or results in control over, a TID U.S. Business engaged in the production, design, testing, manufacturing, or development of one or more critical technologies (hereinafter referred to as a "Critical Technology Covered Transaction").
Notably, for the fund exemption in Critical Technology Covered Transactions, with respect to condition one, the fund only needs to satisfy one of the following: the fund's general partner, managing partner, or similar manager is not a foreign person, or such manager is ultimately controlled by U.S. nationals.
Finally, the Final Regulations also clarified that in certain circumstances, a limited partner's indirect investment in a TID U.S. Business through a fund may independently trigger CFIUS mandatory declaration requirements. The Final Regulations provided an example to illustrate this scenario: in the example, the fund's direct investment in a U.S. critical technology company meets all the requirements for the Critical Technology Covered Transaction fund exemption, but a limited partner of the fund (who is not an exempt investor under the CFIUS Regulations) gains access to material non-public technical information of the U.S. critical technology company through the investment. The limited partner's indirect investment in the U.S. critical technology company is considered a covered investment, thereby triggering CFIUS mandatory declaration requirements, even though the fund itself is not required to make a mandatory declaration for its direct investment in the U.S. critical technology company.
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