CFIUS and Implications for Fund Managers/Investment Funds

The Committee on Foreign Investment in the United States (CFIUS) final rules became effective February 13 of this year.   These new regulations have implications for U.S.-based investment funds and private equity funds. 

The changes include:

• Certain non-controlling interests will be subject to CFIUS review;
• Certain deals must be filed with CFIUS;
• Clarifications for investment funds including when a fund’s non-U.S. limited partner may be subject to CFIUS review and when a non-U.S. fund entity (e.g., Cayman entity) may be deemed a U.S. person falling outside of CFIUS.

The final rules determined that an investment fund is not a foreign person even if it is incorporated in a non U.S. country if:

• The funds activities/investments are primarily directed, controlled and coordinated by the general partner in the U.S. or
• A majority of the equity interests in the fund is owned by U.S. nationals.

The new rules have added to CFIUS’s purview certain investments by foreign investors even if they do not have “control.”  To fall within CFIUS’s jurisdiction, a transaction must meet the following tests:

1. The investment must be a U.S. business that develops critical technology, performs critical infrastructure functions or collects certain sensitive personal data of more than one million persons.
2. The investment must afford a non-U.S. person access to material nonpublic technical data, membership or observer rights on a board of directors or involvement in substantive decision making of the technology, infrastructure and data (TID)S. business.

The final regulations also provided for a specific safe harbor from CFIUS for U.S. controlled investment funds that fall under the “covered investment” definition due to their foreign LPs.  Furthermore, the regulations impose mandatory filings in certain transactions, which puts additional compliance and due diligence burden on foreign investors.

Accordingly, fund managers should consider:

• CFIUS implications when establishing the rights of LPs in any new funds;
• If non-U.S. investors in a fund will cause the fund to be a non-U.S. person under the regulations;
• Involving experts in the pre-investment process to understand and limit CFIUS implications and allotting sufficient time for a CFIUS review, whether mandatory or voluntary;
• Structures that would limit non-U.S. LPs rights over and access to portfolio companies.

A recent (May 21, 2020) proposed rule change by the U.S. Department of Treasury may make filings mandatory if the target company produces, designs, manufactures or develops a technology that would require a license to export to the foreign investor’s principal place of business, or the foreign person’s nationality is different than the place of business. The changes would rely on U.S. export control regulations and regimes to determine when parties must notify CFIUS of a covered transaction.

CFIUS has solicited comments on this but has not yet made a final determination.