U.S. Treasury Proposes Expanding the Investigative and Enforcement Powers of CFIUS

The United States Department of Treasury has proposed expanding the investigative and enforcement powers of CFIUS, along with its jurisdictional reach, including as to previously non-filed transactions.

Background

The Committee on Foreign Investment in the United States (CFIUS) is an inter-agency panel led by the United States Department of Treasury, which is authorized to review covered transactions by non-U.S. investors into U.S. businesses. The Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA) expanded the jurisdictional reach of CFIUS to include covered minority investments in addition to covered control transactions (based on a standard for “control” that is broad and overarching). Transactions that reach certain thresholds, such as those involving “critical technology”, require a mandatory filing. Others, however, only require a voluntary filing, meaning the decision as to whether to file is left to the transaction parties themselves, giving due consideration for the factors set forth in FIRRMA. One such factor is the “national security” impact of the transaction, which is effectively undefined to create maximum flexibility for CFIUS. This has created a market environment that relies on practitioners and the parties themselves to make judgments based on CFIUS standards, prior CFIUS enforcement, and other laws and executive documents pertaining to national security. For example, in practice, the risk dynamic for a voluntary filing will be markedly different if the ultimate beneficial owners controlling the non-U.S. investors are from the “excepted countries” of Canada, the U.K., Australia, and New Zealand, as compared to the primary “country of concern”, the PRC (including Hong Kong).

The existence of the voluntary filing dynamic for most transactions subject to CFIUS has led some transaction parties to make a strategic decision not to file, on the hopes that CFIUS will not discover the transaction. However, CFIUS has expended resources, including through its “SWAT” program targeting transactions with a transaction value of as little as US$500,000, to thoroughly investigate the U.S. venture capital and M&A ecosystem. This has led to retroactive enforcement, which CFIUS is empowered to undertake, requiring parties who did not file to make a filing, and then be subject to CFIUS determination as to whether to approve the transaction, set conditions (e.g. requiring PRC parties to divest or become “entirely passive”, such as removing their board seats and veto rights), or to recommend to the President that the transaction be denied. 

Proposed Rules

To further its investigative powers to examine previously non-filed transactions, on 15 April 2024, the United States Department of Treasury issued a proposed rule “Amendments to Penalty Provisions, Provision of Information, Negotiation of Mitigation Agreements, and Other Procedures Pertaining to Certain Investments in the United States by Foreign Persons and Certain Transactions by Foreign Persons Involving Real Estate in the United States” (the “Proposed Rules”).

In addition to procedural clarifications intended to deny transaction parties the ability to delay a CFIUS review, the Proposed Rules contain two key expanded powers: (1) providing CFIUS with the ability to request information from “other persons” who are not transaction parties about a particular transaction, including a non-filed transaction and (2) expanding the penalties for non-compliance from a base rate of US$250,000 to US$5,000,000 (and in the case of non-filed transactions, the higher of that and the value of the transaction itself). This includes the issuance of a subpoena on a discretionary basis, compared to a prior standard based on necessity.

The ability to require information from “other persons” who are not transaction parties, including by way of legally binding subpoena, with a penalty of up to US$5,000,000 if such information is not provided or is misleading or contains material omission, is potentially significant in practice. It would allow CFIUS to make broad queries to market participants, instead of having to find by itself and then focus on the transaction parties. For example, it would allow CFIUS to broadly query the venture capital and private equity firms in Silicon Valley, New York, Boston, and other hubs about the shareholding structure of start-ups and established companies alike, along with information on the investors who have invested in them. Specifically, it could require an established Silicon Valley venture capital fund to reveal the capitalization table of all of its portfolio companies, allowing CFIUS to focus on the ones with Chinese shareholders. The result may be CFIUS finding more investors from “countries of concern”, and the companies who have received their investment, leading to more investigations of transaction parties in previously non-filed transactions.

The Proposed Rules are not final rules, but if the past practice on the detailed CFIUS regulations issued after FIRRMA’s passage is any guide, the final rules will look substantially similar to the Proposed Rules. What remains to be seen is what happens when CFIUS, upon its examination of more transactions, discovers Chinese investors who are “entirely passive”, thereby theoretically excluding CFIUS from jurisdiction. The potential for more CFIUS inquiries and investigations may also ostensibly create more opportunities for investors who are not from “countries of concern”.
 

For more information on how we can help you navigate US-China tensions, please contact Charles Wu at Charles.Wu@clydeco.com