US Foreign Investment: An Update for the ‘Dog Days’ of Summer

As we enter the ‘dog days’ of summer, we just want to report on a few developments related to foreign investment reviews in the United States.

CFIUS FAQs on LP Involvement in Covered Transactions and Mandatory Filings

CFIUS recently posted on its website updated responses to Frequently Asked Questions, including two regarding information on limited partners (“LPs”) with interests in covered transactions and the “completion date” in the context of mandatory filings.

• CFIUS clarified that it may request follow-up information with respect to all foreign investors involved in a transaction, including LPs in an investment fund. This clarification by CFIUS does not actually change much in terms of actual practice. Although initial CFIUS filings ask for ownership above specified thresholds, once a CFIUS case has begun, CFIUS can ask follow-up questions regarding essentially any aspect of the transaction. In the past, this has included questions on granular details about the makeup and ultimate ownership of LP structures. As Assistant Secretary for Investment Security Paul Rosen recently underscored in congressional testimony, CFIUS is primarily concerned with ultimate ownership in this context, which the FAQ itself also notes.

• Second, in another new FAQ CFIUS states that the “completion date” in the context of mandatory filings is “the earliest date upon which any ownership interest is conveyed, assigned, delivered, or otherwise transferred to a person” pursuant to 31 C.F.R. § 800.206. It also states, however, that for transactions where the ownership interest is conveyed before the foreign person receives the rights, the completion date is “the earliest date upon which the foreign person acquired any of the equity interest.” This means that filings must be submitted 30 days prior to the acquisition of any equity investment by the foreign person.

This interpretation can create serious issues for companies under financial strain. In the past, companies might negotiate a rapid equity infusion, but the investor would receive only “springing” governance rights that would take effect later following CFIUS clearance. Now, if a pre-closing CFIUS filing was required, that filing would have to take place before the equity infusion.

The FAQ further states, however, that timing issues associated with contingent equity interests are still governed by 31 C.F.R. § 800.308.  As a result, we may witness the increased use of convertible debt instruments qualifying for delayed review.

More CFIUS Enforcement, But No Details

Press reports in April indicated that CFIUS had issued its first enforcement penalties under the new guidelines released in October 2022, following related remarks from Assistant Secretary Rosen at a conference. However, the details of such enforcement activity were not made public, unlike the previous penalties for non-compliance with CFIUS-ordered final or interim mitigation conditions. If the unpublished enforcement actions were for additional mitigation compliance problems, that’s not really news. But if the recent penalties were in response to failures to submit mandatory filings, these would be the first such penalties of that kind. We await CFIUS’s disclosure of the nature the penalties, and hope the disclosure includes sufficient context to help guide parties’ future decisions.

State Foreign Investment

Following concerns arising from CFIUS’s lack of jurisdiction over Fufeng’s investment in rural land in North Dakota (which happens to be located near a US Air Force base), the State of Florida decided to proactively take matters into its own hands by enacting its own state-based foreign investment regime. The new law, which came into effect on July 1st, restricts the issuance of state-level government contracts or economic development incentives to, and real property ownership by, individuals and entities associated with foreign “countries of concern” (i.e., China, Russia, Iran, North Korea, Cuba, Venezuela, and Syria). How the regime will work in practice is yet to be seen, and even whether it will last – members of Congress have already introduced legislation that would use federal preemption to stop state laws like Florida’s SB 264 that prohibit or otherwise restrict the purchase of real property of an individual based on their country of citizenship. In the meantime, we expect more states to try to enact their own state-level restrictions on various forms of foreign investment.

Outbound Foreign Investment Regime… Still Waiting

And of course, we would be remiss not to mention the much-anticipated outbound foreign investment regime (aka, “reverse CFIUS”), which we cover in our blogpost here. The regime is expected to be initiated by Executive Order. The latest rumors suggest President Biden could issue the order at the beginning of September, though a number of details are still being worked out. To be continued… 

CFIUS Annual Report to Congress… Stay Tuned

With the beginning of August rapidly approaching, we expect CFIUS to release the unclassified version of its annual report to Congress very soon. Watch this space for our blog post covering key points from the annual report.