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Blog: The Buyout Board | 08 August 2018
The Foreign Investment Risk Review Modernization Act (FIRRMA), included in the reconciled Conference Report of the FY19 National Defense Authorization Act, substantially expands the jurisdiction of the Committee on Foreign Investment in the United States (CFIUS), but exempts from CFIUS’s review certain foreign investments made through U.S. investment funds.
“Other investments” covered under CFIUS
The “other investments” category of covered transactions is a new trigger for CFIUS and, importantly, does not require that the foreign investor have any ability to control the U.S. business. These “other investments” will include any direct or indirect investment by a foreign person (a term that CFIUS will define by regulation) in a U.S. business that: i) owns, operates, manufactures, supplies, or services critical infrastructure; ii) produces, designs, tests, manufactures, fabricates, or develops one or more critical technologies; or iii) maintains or collects sensitive personal data of U.S. citizens that may be exploited in a manner that threatens national security, if the investment would afford the foreign person:
Exemptions for investment funds
The Conference Report excludes from the “other investments” category of covered transactions any indirect investments in a U.S. business by a foreign person through an investment fund that affords the foreign person (or a designee) membership as a limited partner or equivalent on an advisory board or committee of the fund if:
This investment fund carve-out may not always be available. For example, a number of funds establish a general partner or managing member offshore and therefore would not satisfy factor (1). Also, in some funds, limited partners do have access to material nonpublic technical information, and therefore factor (5) would not be satisfied. In addition, it is likely that certain funds, such as some special purpose vehicles, funds-of-one, and separately managed accounts, may not satisfy factor (4), as the foreign person may retain the ability to “control the fund."
Nonetheless, this carve-out both provides a much clearer set of standards for determining whether a U.S. investment fund’s investment in a U.S. business will subject its foreign limited partners to CFIUS’s jurisdiction and also should be available to a large number of funds.
For a full analysis on this issue, please see our publication by clicking here.