Long-awaited final rules from the U.S. Treasury Department governing national security reviews of foreign investments in U.S. companies were issued Monday, with importance for general counsel in specific industries—including venture capital—who are involved in cross-border dealmaking.

"General counsel and in-house counsel at companies involved in technology, infrastructure and data, which capture a broad spectrum of the economy should be aware of these changes, particularly the expanded jurisdiction of CFIUS and mandatory reporting requirements," said Christian Davis, an international trade partner at Akin, Gump, Strauss, Hauer & Feld in Washington, D.C. He was referring to the Committee on Foreign Investment in the U.S., the interagency panel chaired by the Treasury secretary.

But the Treasury Department generally excluded from the new regulations most deals from Australia, Canada and the United Kingdom, unless there is a concern about foreign control of the acquiring companies.

"The only countries that are initially eligible for exemptions are the U.K., Canada and Australia.  As a result, most investors will be subject to the new expanded jurisdiction of these rules," Davis said.

Mario Mancuso, partner at Kirkland & Ellis and leader of its international trade and national security practice, said in an email, "the selection of the U.K., Australia, and Canada as the first 'excepted foreign states' is not surprising in light of their shared security perspectives and interests. With that said, it's important to note that not every investor from one of these countries will be exempt from CFIUS' jurisdiction, and the exemption applies only to certain non-controlling investments and real estate transactions. In other words, the CFIUS calculus for traditional M&A will not materially change as a result of this action."

Anne Salladin, a partner at Hogan Lovells in its regulatory practice group, said, "It's a new concept and we will have to see how it plays out going forward." She added, "I would call it a bit of a test run and it is a totally new concept for this committee."

Aside from the "whitelisting" of those three countries, the final rules for national security reviews of foreign investment transactions hewed closely to the draft rules proposed last fall. The final regulations take effect Feb. 13 and were enacted under the Foreign Investment Risk Review Modernization Act of 2018. 

The regulations require mandatory filing for CFIUS review of two categories of investments: First, certain foreign government-backed investments in U.S. businesses, and, second, certain foreign investments in critical technology companies. Most filings remain voluntary, however.

"Anyone with pie-in-the-sky hopes of dramatic changes from September [when the draft rules were issued] were probably disappointed," said Ken Nunnenkamp, international trade and national security partner at Morgan, Lewis & Bockius in Washington, D.C.

"This is the new paradigm and there's still more to come on penalties, definitions and fees," he said. "The venture capital community was introduced to this new world in September and it is not going away."

The final rules significantly extend the power of the interagency committee to review for national security threats private equity and minority-stake, non-controlling investment deals involving foreign entities and persons. As always, the panel can require modification of deals, or not approve them.

Mancuso said U.S. private equity investors would likely benefit from the new proposed definition of "principal place of business," which, he said "provides important clarity on when investments by U.S.-controlled funds through non-U.S. fund vehicles may be subject to CFIUS' legal jurisdiction."

The final rules also expand reviews of real estate transactions located near military installations, airports and maritime ports. The real estate transactions are not subject to a mandatory declaration requirement but urban areas aren't completely exempt.

Giovanna Cinelli, leader of the international trade and national security practice at Morgan Lewis, said the Treasury Department resisted calls from some trade groups for the new regulations to narrowly define "national security." Instead, she said, the department "confirmed its longstanding approach that there is no set definition of national security and it wouldn't be appropriate to come up with a standing definition." 

The final rules increase scrutiny of investments—including minority investments—by foreign entities and persons of the U.S. in critical technology, infrastructure and data businesses (TID) in the United States, including those handling specific types of sensitive personal data on more than 1 million U.S. residents, which could include big insurers and financial services companies among many others.  

"While CFIUS did build in some new exemptions to these filing requirements, parties will need to ensure that they are complying with these rules in the context of transactions going forward," Davis said.

Nunnenkamp said, "As a practical matter all transactions where foreign money is coming in must do this analysis up-front," especially with respect to TID transactions. 

The Treasury Department said it would publish separate proposed regulations regarding filing fees and penalties at a later date.

Direct investment in U.S. companies from China in particular has declined dramatically since 2016, plunging from more than $46.5 billion that year to about $3.1 billion in 2019, not solely because of CFIUS rules and U.S.-China trade battles, but also because of internal factors in China, according to the Rhodium Group, a research organization. Venture capital from China into U.S. companies also declined last year to the smallest level since 2015, according to data from Refinitiv.

Signs of a possible thaw in U.S.-China trade tensions recently have appeared, however: The Treasury Department also announced Monday its intention to lift its designation of China as a currency manipulator. And the two countries are expected to sign a "phase one" compromise trade deal Wednesday.

In a statement, Treasury Secretary Steven Mnuchin said of the CFIUS rules: "These regulations strengthen our national security and modernize the investment review process and also maintain our nation's open investment policy by encouraging investment in American businesses and workers, and by providing clarity and certainty regarding the types of transactions that are covered."

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