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Key Takeaways from CFIUS Final Rules Implementing FIRRMA

On January 13, 2020, the U.S. Department of the Treasury issued two final rules for the Committee on Foreign Investment in the United States (CFIUS) implementing the Foreign Investment Risk Review Modernization Act (FIRRMA), which was enacted on August 13, 2018. The final rules largely adopt the proposed rules published on September 17, 2019, with several key clarifications and modifications. As discussed previously, FIRRMA has resulted in two separate rulemakings that expand CFIUS’ jurisdiction to include (i) certain non-controlling investments in U.S. businesses engaged in critical technology, critical infrastructure, and sensitive personal data, and (ii) certain real estate transactions. The final rules will be published in the Federal Register on January 17, 2020 and will go into effect February 13, 2020 (Effective Date), with one exception described below. We anticipate that the Treasury Department will publish a separate rule concerning filing fees soon.

CFIUS pilot program included in final rule, future changes anticipated
The final rules incorporate the CFIUS pilot program, which expanded CFIUS’ jurisdiction to cover non-controlling transactions involving investments by foreign persons in certain U.S. businesses that produce, design, test, manufacture, fabricate or develop critical technologies that are utilized in connection with or designed by a U.S. business in one or more pilot program industries (the Pilot Program). However, the Treasury Department indicated that it will promulgate a new rule modifying the Pilot Program. The new rule would change the criteria for mandatory filings to be based on export-control licensing requirements rather than North American Industry Classification System (NAICS) codes. The proposed change should help provide clarity to businesses that are unsure of their NAICS code(s).

The final rules also exempt certain transactions from the mandatory declaration requirement under the Pilot Program. Most importantly, there is an exemption for companies captured by the Pilot Program solely because they are involved with critical technologies eligible for License Exception ENC. This license exception applies to a number of items controlled for encryption reasons. The exception in the final rules make it clear that companies developing items solely controlled for mass market encryption reasons (or other less sensitive encryption items) will not be pilot program businesses solely due to such activities. Another key exemption applies to investment funds managed exclusively by, and ultimately controlled by, U.S. persons.

Narrow list of “Excepted Foreign States” and an expansion of who may qualify as an “Excepted Investor”
The proposed rules introduced an exception to CFIUS’ expanded jurisdiction under FIRRMA for “excepted investors,” which are, generally, nationals, entities, and governments of certain countries, identified as “excepted foreign states.” A foreign person who qualifies as an excepted investor will not be subject to CFIUS’ jurisdiction for non-controlling investments. Accordingly, CFIUS will not have jurisdiction over non-controlling investments by an excepted investor with respect to (i) real estate transactions, and (ii) U.S. businesses that produce, design, test, manufacture, fabricate, or develop one or more critical technologies; own, operate, manufacture, supply, or service critical infrastructure; or maintain or collect sensitive personal data of U.S. citizens that may be exploited in a manner that threatens national security.

The final rules provide an initial list of the approved excepted foreign states. As expected, the list is quite narrow and will include Australia, Canada and the United Kingdom. CFIUS identified these countries in light of their robust intelligence sharing and defense industrial base integration with the U.S. The final rules note that CFIUS intentionally identified a notably narrow list of excepted foreign states, and that this list may expand in the future.

Although this list is effective as of the Effective Date, beginning two years from the Effective Date, in order for countries to remain excepted foreign states, or be added to the list, CFIUS must make a determination regarding the country’s process for analyzing foreign investments for national security risks and coordination with the U.S.

The final rules also modified the definition of excepted investor as shown in the chart below.

Requirements to Be an Excepted Investor

Proposed Rules Final Rules
Observers or board members that must be from an excepted foreign state or the U.S.


All 75%
Ownership threshold at which a foreign owner must be from an excepted foreign state.





The minimum ownership percentage that must be held by a U.S. person or a person from an excepted foreign state. 90% 80%
*The final rules clarify that for purposes of calculating the individual ownership interests in this section, multiple foreign ownership interests will be aggregated if the foreign persons (i) are related, (ii) have arrangements to act in concert, or (iii) are, or are controlled by, the national or subnational governments of the same foreign country.

New “principal place of business” definition
The final rules also implement an interim rule with respect to the definition of “principal place of business” using a modified “nerve center” test. The principal place of business is generally “the primary location where an entity’s management directs, controls, or coordinates the entity’s activities, or, in the case of an investment fund, where the fund’s activities and investments are primarily directed, controlled, or coordinated by or on behalf of the general partner, managing member, or equivalent.”

However, the interim rule also provides that if an entity claims to have its principal place of business in the U.S., but it has represented otherwise in its most recent filing or submission to the U.S. government, a U.S. subnational government, or a foreign government (other than filings to CFIUS), then CFIUS will generally apply the location claimed in such filing or submission.

The Treasury Department is seeking public comment on this definition over the next 30 days. We anticipate that the final rule defining principal place of business will help clarify, amongst other matters, whether an offshore incorporated fund may still qualify as a U.S. person.

Changes to real estate transaction rules
The final rules also include several minor modifications to the proposed rules concerning CFIUS’ expanded jurisdiction over certain types of real estate transactions. Most importantly, the changes made to the defined terms “excepted real estate investor” and “excepted real estate foreign state” in the final rules generally follow the changes made to the defined terms “excepted investor” and “excepted foreign state.”

Lastly, the final rules broaden the covered real estate exception for retail trade, accommodation, and food service stores by eliminating the reference to NAICS codes and instead applying the exception to leases and concessions of real estate that are “used only for the purpose of engaging in the retail sale of consumer goods or services to the public.”