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CFIUS 2.0: Emerging Tech Minority Investments – Expansion of Jurisdictional Scope Remains in Limbo

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Sixteen months after Congress enacted the Foreign Investment Risk Review Modernization Act (FIRRMA) and the Export Control Reform Act (ECRA) to address a slew of national security concerns related principally to China, it still remains unclear how quickly and fully the US Department of Commerce intends to carry out its statutory mandate to control so-called “emerging” and “foundational” technologies. 

In FIRRMA and ECRA, Congress essentially gave Commerce authority to decide how narrowly or widely to set the jurisdiction of the Committee on Foreign Investment in the United States (CFIUS) over non-passive minority investments involving emerging and foundational technologies. Yet, at times Commerce has seemed to be almost paralyzed by this question, as discussed below.

Final CFIUS Regulations Will Be Released Any Day Now

As we reported in a recent alert, the US Department of the Treasury (as chair of CFIUS) released comprehensive draft regulations to implement FIRRMA on September 17, 2019. After a 30-day comment period, CFIUS is now digesting more than 80 public comments and deliberating about how to adjust the draft regulations before they are finalized. These draft regulations will significantly expand CFIUS’s jurisdiction in several areas, one of which is non-passive minority investments involving critical technologies. Stakeholders in the CFIUS process should be aware that the grouping of technologies included in CFIUS’s definition of “critical technologies” remains in a state of flux and likely will expand at some point.

The six-part definition of “critical technologies” provided in CFIUS’s draft regulations is quite precise, and it includes emerging and foundational technologies controlled pursuant to section 1758 of ECRA. This prong of the definition – specifically, emerging technologies – drove much of the congressional concern during the development of FIRRMA. Congress was deeply concerned about the investment-driven transfer of technology to China, particularly technologies such as artificial intelligence (AI), additive manufacturing, quantum computing, autonomous vehicles, augmented or virtual reality (AR and VR), robotics, and blockchain technology. These concerns were based in part on analysis conducted by the Department of Defense that was subsequently made public. Ultimately, Section 1758 of ECRA was a compromise approach that Congress agreed on to address some of those concerns.

Commerce’s Uncertain Implementation of ECRA Sec. 1758

In November 2018, Commerce took a visible step towards implementation of this ECRA provision, issuing an Advance Notice of Proposed Rulemaking (ANPRM) to seek public comments on criteria for identifying emerging technologies under ECRA. Commerce solicited input to determine whether there were specific emerging technologies that were “essential to the national security of the United States” and listed 14 technology categories to illustrate potential technologies that may be controlled. These included, among others, biotechnology, AI, AR and VR, data analytics technology, additive manufacturing, quantum information and sensing technology, and advanced surveillance technologies. As of today, Commerce has yet to issue any proposed regulations governing emerging technologies, despite Commerce officials indicating for several months that new regulations on emerging technologies would be issued before the end of 2019. Specifically, Commerce has indicated that it will announce regulations controlling emerging technologies on a rolling basis, with the first tranche suspected to include additive manufacturing, AI, and quantum computing. In contrast, an ANPRM on foundational technologies has yet to be issued.

Reportedly, a significant cause of the delay is internal disagreement within the Trump Administration. Meanwhile, key members of Congress are getting impatient and have begun applying pressure on Commerce to move forward.

Until there is some resolution of the impasse at Commerce, US companies that are involved in any of the 14 areas of technology listed in Commerce’s November 2018 ANPRM should continue to monitor the situation. New export controls on emerging technologies could impact not only US companies’ plans for raising capital, but also their ability to export products overseas and engage foreign nationals here in the United States.

From a CFIUS Standpoint, What Happens If Commerce Does Impose Controls on Emerging and Foundational Technologies?

As technologies become controlled pursuant to ECRA, they will automatically be covered under FIRRMA’s definition of “critical technologies.” In turn, that will sweep into CFIUS’s jurisdiction additional non-passive minority investments involving the newly controlled technologies. Under CFIUS’s draft regulations, certain investments in US companies that produce, design, test, manufacture, fabricate, or develop any critical technologies will fall within the new jurisdiction. US companies involved in the emerging technologies at issue will need to assess whether certain inbound investments might then trigger CFIUS jurisdiction.

Will There Still be Mandatory CFIUS Filings for Certain Technology Investments?

Under the draft CFIUS regulations, most filings would remain voluntary, and there would not be any mandatory filing requirement for critical technology transactions. However, CFIUS has left open the possibility that this might change in the final regulations. In the explanatory section of the draft regulations, CFIUS indicated that it is still considering whether to continue the mandatory filing requirement from the critical technologies pilot program. For now, that program and its mandatory filing requirement remain in effect. Still, CFIUS may yet phase out most or all of that program, especially where it would be redundant with the final comprehensive regulations. Those are slated to take effect no later than February 13, 2020.

Key Takeaway

Even after CFIUS promulgates its new permanent regulations early next year, its jurisdiction over non-passive minority investments is unlikely to cover many emerging technologies until Commerce implements regulations adding export controls on emerging technologies. Therefore, CFIUS’s effective purview over this category of transactions will mostly be limited to investments in US businesses involved in technologies that are already regulated under legacy export controls (e.g., listed on the Commerce Control List and controlled pursuant to multilateral regimes).

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