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Treasury Unveils Proposed Foreign Investment Review Regulations

The U.S. Treasury Department on 17 September issued proposed regulations to implement the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA). Interested parties may submit comments on these regulations by 17 October and the final rule must enter into force by 13 February 2020.

A Treasury fact sheet indicates that while the Committee on Foreign Investment in the United States (CFIUS) already reviews transactions that could result in foreign control of a U.S. business, the new regulations authorise CFIUS to review non-controlling investments that could afford a foreign investor (i) access to any material non-public technical information in the possession of the U.S. business; (ii)  membership or observer rights on the board of directors or equivalent governing body of the U.S. business, or the right to nominate an individual to a position on the board of directors or equivalent governing body; or (iii) any involvement, other than through voting of shares, in substantive decision-making of the U.S. business.

Covered businesses include those involved in:

  • the use, development, acquisition, safekeeping or release of sensitive personal data of U.S. citizens maintained or collected by the U.S. business;
  • the use, development, acquisition or release of critical technologies; or
  • the management, operation, manufacture or supply of critical infrastructure.

These industries are referred to by commentators as “TID U.S. businesses”, for technology, infrastructure or data.

Treasury defines “sensitive personal data” as data that (i) target or tailor products or services to sensitive populations, including U.S. military members and employees of federal agencies involved in national security; (ii) collect or maintain such data on at least one million individuals; or (iii) have a demonstrated business objective to maintain or collect such data on greater than one million individuals and such data is an integrated part of the U.S. business’s primary products or services. The categories of data include types of financial, geolocation and health data, among others. Genetic information is included in the definition regardless of whether it meets the requirements of points (i), (ii) or (iii) above.

A pilot programme went into effect last October requiring mandatory filings for foreign companies purchasing stakes in U.S. firms in 27 key industries, including telecom and semiconductors. According to a frequently-asked-questions document issued by Treasury, CFIUS continues to evaluate the pilot programme on critical technologies and no changes are envisaged at this time.

Treasury notes that while certain CFIUS filings remain voluntary, FIRRMA creates a mandatory declaration requirement for specified covered transactions where a foreign government has a “substantial interest.” The regulations also provide a new option to initiate other CFIUS reviews via a short-form voluntary declaration in lieu of a longer joint voluntary notice.

While current CFIUS rules related to the purchase of a controlling interest in a U.S. company will continue to apply for all purchasers, the new rules requiring CFIUS involvement in non-controlling purchases will not  apply to all investors. The FAQs insist that there is no “white list” or “black list” applying to any person or country, but the FIRRMA regulations are described as not applying to certain foreign persons defined as “excepted investors” from certain “excepted foreign states.” Any such eligible investors and foreign states must meet strict criteria to qualify for this status. The FAQs clarify that a list of factors will be posted on Treasury’s website outlining what the CFIUS will consider when making a determination on whether a foreign state has established and is effectively utilising a robust process to assess foreign investments for national security risks and to facilitate co-ordination with the United States on matters relating to investment security.

The list of excepted foreign states will be published by February 2020, though presumably subject to change as necessary. Close U.S. allies are more likely to qualify on “co-ordination grounds,” and based on congressional testimony and press reports it is unlikely that the list of excepted foreign states will include mainland China.

Treasury also announced new FIRMMA real estate regulations applicable to purchases in certain locations. Whereas CFIUS currently only reviews real estate acquisitions if part of a business transaction is subject to its jurisdiction, any real estate purchase may now be covered if the property is within one mile (1.6 kilometres) of the boundary of many military installations, with certain military sites subject to an “extended range” of up to 100 miles (160 kilometres). The regulations also cover purchases near most larger airports and seaports based on U.S. Department of Transportation criteria. Certain purchases may be exempt under certain criteria, such as if only one housing unit is purchased.

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