What is CFIUS and do I need to worry about it?
Takeaway: The Committee on Foreign Investment in the United States (CFIUS) plays a significant role in reviewing foreign investments into U.S. businesses for national security implications. Startups accepting investment (particularly foreign investment) may either elect to file a preemptive application with CFIUS for approval or, more commonly, not file an application and live with the risk that CFIUS may review the transaction down the road. If CFIUS determines that the transaction provides sufficient control to a foreign person, it may require the investor’s rights be adjusted or even that the transaction be unwound.
The Committee on Foreign Investment in the United States (CFIUS) may seem like a distant concern for most startups, yet its implications can be significant, particularly for businesses involved in certain sectors or receiving foreign investments.
What is CFIUS?
CFIUS is an inter-agency committee of the U.S. federal government authorized to review certain transactions involving foreign investment in the U.S. and its implications on national security. Chaired by the Secretary of the Treasury, it includes representatives from 16 U.S. departments and agencies, including Defense, State, Commerce, and Homeland Security.
The mandate of CFIUS is to assess transactions where a foreign individual or company could gain control over a U.S. business. 'Control' in this context is broad and does not necessarily require a majority stake. Any deal that could give a foreign entity the power to determine important matters concerning the U.S. business can come under the purview of CFIUS.
What does CFIUS regulate?
The sectors most affected by CFIUS scrutiny are those that have implications for national security. This includes advanced technologies (such as artificial intelligence, cybersecurity, biotech, nanotech, and information technology), infrastructure, energy, and others that involve sensitive personal data. If your startup operates in these sectors and is considering foreign investment, CFIUS implications become especially relevant.
What can CFIUS do?
If a transaction falls under the jurisdiction of CFIUS and it determines that the transaction presents national security risks, it has the power to impose measures to mitigate those risks. This can include requiring that certain rights or operations be withheld from the foreign investor, or, in extreme cases, recommending that the transaction be blocked or unwound.
The impact of CFIUS on startups can be significant. The review process can be lengthy and create uncertainty, potentially deterring investors. However, the process also provides a way for companies to secure a 'safe harbor' from future CFIUS action by voluntarily submitting to a CFIUS review and receiving clearance.
What are startups’ options?
Startups involved in foreign investment transactions have a couple of strategic options concerning the Committee on Foreign Investment in the United States (CFIUS).
Voluntary Filing: Startups can opt to make a voluntary filing with CFIUS. By doing so, they initiate a review process where the committee evaluates the proposed transaction for any potential national security concerns. This can be a complex, expensive, and time-consuming process that involves extensive information sharing about the startup's operations and the specifics of the transaction. However, if CFIUS concludes the review and clears the transaction, the parties involved receive a "safe harbor" - a guarantee that CFIUS will not later challenge the transaction unless there was a misrepresentation or omission of material facts during the review process. This option provides certainty for startups and their investors, but it does require time and resources to navigate.
Do not File: On the other hand, startups and their investors may choose not to file a notice with CFIUS, particularly if they believe the transaction presents a low risk of national security concerns. This could streamline the investment process, as it avoids the potentially lengthy CFIUS review. However, this approach carries a risk - CFIUS retains the right to review any transaction within its jurisdiction, whether a filing was made or not. If CFIUS later identifies a transaction that it believes should have been filed, it can initiate a review, even after the transaction has closed. In extreme cases, if the committee determines that the transaction presents national security risks, it can unwind the transaction.
In deciding between these options, startups should consider factors such as the nature of their business, the country of the foreign investor, the structure of the transaction, and the potential implications for national security. Startups are encouraged to consult with legal counsel experienced in CFIUS matters to help navigate these choices and mitigate risks.
Conclusion
Startups considering foreign investment should take into account the potential CFIUS implications. Working with experienced advisors to navigate the process is critical to mitigating risks and delays. As the global landscape continues to evolve, understanding and addressing CFIUS considerations can provide an important advantage for startups navigating the complex world of foreign investment.