Articles Posted in Regulation of Foreign Investment in the US (CFIUS)

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On November 19, 2018, the US Commerce Department’s Bureau of Industry and Security (BIS) issued a proposed rulemaking seeking public comment on criteria for identifying emerging technologies that are essential to U.S. national security.  The proposed rulemaking has two important impacts:

  1. Emerging technologies identified through this process will become subject to stricter export controls.  This will impact exports and re-exports to a number of countries or employees from those countries, including China.
  2. Certain types of foreign investments in U.S. companies that develop identified emerging technologies will be subject to mandatory filings with the Committee on Foreign Investment in the United States (CFIUS).  This includes minority, non-controlling equity investments that afford foreign investors certain rights.

BIS is currently seeking comment on: 1) how to define emerging technology to assist identification of such technology in the future; 2) criteria to apply to determine whether there are specific technologies within these general categories that are important to U.S. national security; 3) sources to identify such technologies; 4) other general technology categories that warrant review to identify emerging technology that are important to U.S. national security; 5) the status of development of these technologies in the United States and other countries; 6) the impact specific emerging technology controls would have on U.S. technological leadership; 7) any other approaches to the issue of identifying emerging technologies important to U.S. national security, including the stage of development or maturity level of an emerging technology that would warrant consideration for export control.  The deadline to submit comments is December 19, 2018.

Please see below for the list of representative technology categories provided by BIS.

1.  Biotechnology, such as:

  • Nanobiology;
  • Synthetic biology;
  • Genomic and genetic engineering; or
  • Neurotech.

2.   Artificial intelligence (AI) and machine learning technology, such as:

  • Neural networks and deep learning (e.g., brain modelling, time series prediction, classification);
  • Evolution and genetic computation (e.g., genetic algorithms, genetic programming);
  • Reinforcement learning;
  • Computer vision (e.g., object recognition, image understanding);
  • Expert systems (e.g., decision support systems, teaching systems);
  • Speech and audio processing (e.g., speech recognition and production);
  • Natural language processing (e.g., machine translation);
  • Planning (e.g., scheduling, game playing);
  • Audio and video manipulation technologies (e.g. voice cloning, deepfakes);
  • AI cloud technologies; or
  • AI chipsets

3.  Position, Navigation, and Timing (PNT) technology

4.  Microprocessor technology, such as:

  • Systems-on-Chip (SoC)
  • Stacked Memory on Chip

5.  Advanced computing technology, such as:

  • Memory-centric logic

6.  Data analytics technology, such as:

  • Visualization;
  • Automated analysis algorithms; or
  • Context-aware computing

7.  Quantum information and sensing technology, such as:

  • Quantum computing;
  • Quantum encryption; or
  • Quantum sensing

8.  Logistics technology, such as:

  • Mobile electric power;
  • Modeling and simulation;
  • Total asset visibility; or
  • Distribution-based Logistics Systems (DBLS)

9.   Additive manufacturing (e.g. 3D printing)

10.  Robotics, such as:

  • Micro-drone and micro-robotic systems;
  • Swarming technology;
  • Self-assembling robots;
  • Molecular robotics;
  • Robot compliers; or
  • Smart Dust.

11.  Brain-computer interfaces, such as:

  • Neural-controlled interfaces;
  • Mind-machine interfaces;
  • Direct neural interfaces; or
  • Brain-machine interfaces

12.  Hypersonics, such as:

  • Flight control algorithms;
  • Propulsion technologies;
  • Thermal protection systems; or
  • Specialized materials (for structures, sensors, etc.).

13.  Advanced Materials, such as:

  • Adaptive camouflage;
  • Functional textiles (e.g., advanced fiber and fabric technology); or
  • Biomaterials

14.  Advanced surveillance technologies, such as:

  • Faceprint and voiceprint technologies

Note that the US Commerce Department will be issuing a separate rulemaking for proposed controls on “foundational” technologies.

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The U.S. Department of the Treasury issued temporary regulations establishing a partial pilot program implementing two key changes to the jurisdiction and review of transactions by the Committee on Foreign Investment in the United States (CFIUS).  The pilot program (1) expands the scope of transactions subject to review by CFIUS to include certain “other investments” involving foreign persons and critical technologies (though not critical infrastructure or companies with personal identifier information); and (2) makes effective a mandatory declaration provision for all transactions that fall within the specific scope of the pilot program.  The pilot program will largely impact investments in companies involved in critical technologies pertaining to a specified list of industries by NAICS code, including the aircraft, semiconductor, nuclear, and telecommunications sectors.  It also makes filing declarations a mandatory requirement for covered transactions involving these companies, which include acquisitions of control as well as non-controlling investments (including investments of less than 10%) that afford the foreign investor certain rights.

Importantly, the pilot program will commence on November 10, 2018 and will apply on a global basis (i.e., there is no country exemption at this time).  The pilot program will not apply to transactions completed prior to November 10 or to transactions for which the parties have executed a binding written agreement or other document establishing the material terms of the transaction prior to October 11, 2018.

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On August 13, 2018, President Trump formally signed the 2019 National Defense Authorization Act, signaling a number of substantial changes on the horizon for government contractors and foreign investors in the United States. In “President Trump Signs FY 2019 NDAA,” our colleagues Richard B. Oliver, Glenn Sweatt, Alexander B. Ginsberg and Kevin Massoudi offer a roundup of Pillsbury’s coverage of the key issues.

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House and Senate negotiators have agreed on proposed reforms to the Committee on Foreign Investment in the United States (CFIUS) foreign investment review process, which has been added as Title XVII of the FY2019 National Defense Authorization Act (NDAA). The final bill makes a number of changes intended to improve the efficiency of national security reviews and investigations, although a significant increase in staff and funding will be required in order to handle the increased caseload. Importantly, outbound technology transfers in the context of joint ventures and other collaborative arrangements will not be added to the “covered transaction” definition, but will instead be addressed by U.S. export controls.

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Recently, the U.S. Senate overwhelmingly passed the 2019 National Defense Authorization Act, H.R. 5515 (NDAA). The Senate version contains several differences from the NDAA as passed by the House, and these discrepancies must now be resolved through a joint conference committee. Notably, the Senate attached to the NDAA its proposed Foreign Investment Risk Review Modernization Act (FIRRMA), which would update and alter the CFIUS review process. The House had not attached its CFIUS reform bill, H.R. 5841, but recently passed this bill as a standalone piece of legislation. Both bills would expand CFIUS jurisdiction to include certain types of non-controlling investments, affecting foreign investors in U.S. businesses. However, impacts would vary depending on whether the investor is from a country of special concern or an allied nation.

While there are also commonalities, important differences between the Senate and House proposed CFIUS reform legislation are described below.

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There are several legislative proposals pending in Congress targeting trade and investment involving China. If enacted, the proposals would prevent Chinese entities from acquiring certain U.S. technologies, prohibit U.S. government procurement from ZTE and Huawei, and limit U.S. issuers from receiving investments from Chinese parties.

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Recent reports suggest that the Administration may declare an emergency under the International Emergency Economic Powers Act (IEEPA) to grant the Committee on Foreign Investment in the United States (CFIUS) authority to review transactions involving the transfer of U.S. technology and intellectual property (IP) to foreign entities, even where there is no transfer of “control” as currently required under existing CFIUS regulations.  This executive action would follow a memorandum issued by President Trump directing the U.S. Government to propose possible restrictions on Chinese investment in U.S. companies due to concerns outlined by the Office of the United States Trade Representative (USTR) in connection with its Section 301 investigation.  The potential CFIUS review of U.S. technology transfers to foreign entities would mirror one aspect of the pending Foreign Investment Risk Review Modernization Act of 2017 (FIRRMA).

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Yesterday, President Trump issued a memorandum (“Memorandum”) directing his Administration to take several actions related to the investigation by the Office of U.S. Trade Representative (“USTR”) into China’s acts, policies, and practices (“APPs”) related to technology transfer, intellectual property, and innovation under Section 301 of the Trade Act of 1974 (“Section 301”). The actions include restrictions on Chinese investment in the United States and the imposition of higher customs duties on imports from China. At the signing ceremony, President Trump called this action “the first of many” against Chinese practices. USTR Ambassador Lighthizer echoed the President at a hearing before the Senate Finance Committee today, noting that the Administration “expects to bring additional [actions] in other areas where the [United States does not] have reciprocal response.”

Below we describe these actions and USTR’s findings in the Section 301 investigation.

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On November 8, 2017, members of the U.S. House and Senate introduced companion legislation that would update the Committee on Foreign Investment in the U.S. (CFIUS) and the national security review process. The bill, entitled the Foreign Investment Risk Review Modernization Act of 2017 (FIRRMA), would change the scope of what is considered a “covered transaction” and add a new “declaration” process that would be required in certain cases. Below are three of the most significant changes contained in the proposed bill.

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President Trump issued an Executive Order prohibiting the proposed acquisition of Lattice Semiconductor (Lattice) by a Chinese consortium known as Canyon Bridge. Lattice is a semiconductor company primarily manufacturing programmable logic devices.  The Executive Order prohibits the proposed acquisition and any substantially equivalent transaction, and requires the parties to permanently abandon the proposed transaction in 30 days. The Executive Order follows a lengthy review process with the Committee on Foreign Investment in the United States (CFIUS). This is only the fourth time since the enactment of the Exon-Florio Amendment in 1988 that a transaction has been formally blocked.

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