Even as the U.S. Department of the Treasury has released its proposed regulations beefing up national security reviews by the Committee on Foreign Investment in the U.S., the interagency panel chaired by the department, some CFIUS lawyers are voicing concern that the Commerce Department has yet to release its own set of draft rules defining "emerging and foundational technologies," which are included in critical technologies under the new law.

Some worry that the Commerce Department's delay in establishing the definitions is allowing many venture capital and joint investments by foreign entities in emerging technologies, such as artificial intelligence and robotics, to continue apace without a CFIUS review because they are not subject to controls under critical technologies, even as the Treasury and other agencies on the panel continue working toward the February 2020 deadline for final regulations. The uncertainty caused by the delay is causing anxiety for some clients, they said.

"There are still an enormous amount of technology companies and activities that are outside the reach of CFIUS because the Commerce Department has not yet moved with any speed to define the terms emerging and foundational technologies," said Giovanna Cinelli, a partner and international trade and national security practice leader at Morgan, Lewis & Bockius in Washington, D.C. 

The Foreign Investment Risk Review Modernization Act enacted by Congress last year required that the Commerce Department define emerging and foundational technologies before they could be considered "critical technologies" subject to review under FIRRMA. The Export Control Reform Act, also enacted as part of the same John S. McCain National Defense Authorization Act for fiscal year 2019 as FIRRMA, began the process of naming and controlling "emerging and foundational technologies" that are "essential to the national security of the United States." The public comment period for ECRA closed last December, but there was no set time frame for final rulemaking.

Without the Commerce Department's definitions, CFIUS lawyers are concerned that FIRRMA may be less effective at stemming the transfer of new technologies with potential military and civilian applications with risks to U.S. national security. Moreover, they contend that while statistics show a drop-off in foreign direct investment by China into the U.S. of more than 80% in the last couple of years, the data fail to capture many foreign entities' investments in tech startups that are continuing under the radar, even though the legislative overhaul was meant to capture exactly these types of investments.

A Commerce Department representative said in a statement on Wednesday that "the rulemaking process is ongoing, and the Department of Commerce, along with our interagency partners, continue to review the information we have received." The representative did not respond, however, to an additional question about when the agency's proposed rules are expected to be released. Other CFIUS officials said the proposals are expected by the end of the year.

In the absence of the new rulemaking from Commerce, the CFIUS panel mainly has used the Commerce Department's export control list, but that has limited scope, Cinelli.

"There wouldn't be a need for emerging or foundational technology [definition] if all you had to do was add it to the export control list. If you read the regulation, there was an expectation that they would announce some kind of list of emerging technologies," Cinelli said. "So because of that, you have a lot of investments happening in bleeding-edge technologies but because they are not on the Commerce control list they are outside of CFIUS' jurisdiction unless CFIUS has other authorities it could use."  

Tatiana O. Sullivan, an attorney with Stroock & Stroock & Lavan in Washington, D.C., who recently joined the firm from the U.S. Department of Defense, agreed with that assessment.

"CFIUS has not fully met its purpose until these technologies are controlled, because one of the main reasons Congress extended CFIUS' jurisdiction in the first place was to capture minority investments into these technologies. Until Commerce controls these technologies, CFIUS cannot capture these transactions," Sullivan said.

Chris Griner, chairman of Stroock's national security, CFIUS and compliance practice group and a partner, pointed out, however, that "the longer it takes, the better for the investment community, because they can continue to make these 1% and 2% investments." Minority investments into emerging technologies can continue without government oversight from export controls or CFIUS until the Commerce Department catches up.

Cinelli said while reports indicate that Chinese investment in the U.S. has declined dramatically in the last couple of years, the statistics fail to take into account the quality of the investments that are being made. Large deals for hotels and financial service companies have slowed, for instance—also because of internal pressures in China, not just CFIUS—but smaller and minority-stake investments remain. And "you might have only five acquisitions that year, but they are big ones. A quantitative discussion doesn't address that," she said. "We need to shift the debate to these factors." 

According to Rhodium Group data released last spring, Chinese venture capital investment in the U.S. has soared since 2014 and continued to thrive in 2018, even while foreign direct investment slowed, and contributed an estimated $3.6 billion in 270 unique funding rounds. But Chinese venture capital plays a much smaller role in the U.S. venture capital system than U.S. venture capital investment plays in China, the independent research group said.

TIKTOK AND CFIUS CONCERNS ABOUT PERSONAL INFORMATION

Concerns about the lag in Commerce Department proposed rulemaking comes even as CFIUS reportedly has asked ByteDance Technology Ltd., the Chinese parent company of viral social media video app TikTok, to submit to a CFIUS review of its up to $1 billion purchase of U.S.-based social media app Musical.ly two years ago, a deal that was not submitted for review before closing, according to media reports. Musical.ly paid $5.7 million in February to settle charges with the U.S. Federal Trade Commission that it had violated the Children's Online Privacy Protection Act. The app has been growing in popularity worldwide, especially among teenagers and preteens.

Lawmakers, including Sen. Marco Rubio, R-Florida, Sen. Chuck Schumer, D-New York, and Sen. Tom Cotton, R-Arkansas, have called for an investigation of the deal. Rubio earlier accused the platform of censorship. Schumer and Cotton sent a letter late last month to Joseph Maguire, the acting director of national intelligence, asking for the agency to assess the national security risks posed by TikTok and other foreign-owned social media platforms in the U.S., and requesting a congressional briefing on the matter. Their concerns center on the personally identifiable data on TikTok users in the United States and on privacy. Sensitive personal data is included under CFIUS jurisdiction in FIRRMA, and increasingly has been at issue in CFIUS reviews of foreign investments in U.S. companies aside from the traditional concerns about transfers of technologies with military applications and strategic assets.

On Tuesday, TikTok U.S. General Manager Vanessa Pappas released a statement saying it stores all U.S. user data in the United States, with a backup in Singapore and that it is empaneling outside experts "to help ensure that TikTok is well prepared to serve our users and community effectively and responsibly" and that "we will continue to work with the US government on all of the issues discussed above." Attempts to reach ByteDance and TikTok officials for comment were unsuccessful.

Covington & Burling received $110,000 in 2019 so far for lobbying on ByteDance's behalf, according to federal disclosure forms. K&L Gates also is advising the company on content moderation policies, according to TechCrunch. Emailed requests for comment from Covington and K&L Gates were not returned by publication time.

Commerce Secretary Wilbur Ross, in a July speech, said that since the start of 2017, Commerce has reviewed 662 CFIUS filings, including new declarations submitted under the Pilot Program. "CFIUS investigations will rise as we address previously undisclosed investments in U.S. technology companies that may pose national security risks. Further, we look at the entire spectrum of foreign investments for trends indicating when an important nascent technology sector has been targeted. We will address vulnerabilities using our CFIUS authority or export control laws," Ross said.