Under the Foreign Investment Risk Review and Modernization Act (“FIRRMA”), the government will be able to review and reject foreign, minority investors when such investment gives the foreign investors (1) Access to material, non-public, technical information of the company in which they are investing, (2) Membership, nomination rights or observation rights on the company’s governing body, or (3) The ability to direct the decisions of the U.S. target with regard to sensitive critical infrastructure, critical technology or sensitive personal data., in a manner other than merely voting their shares. This expands the old CFIUS regulation that only applied when foreigners bought controlling stakes. FIRRMA came into effect on August 13, 2018.
FIRRMA generally applies to “crucial technology companies” and “crucial infrastructure companies.” It does not specifically mention China, but it is clear that China is considered a major threat and Chinese investors and companies will receive heightened scrutiny. For example, if an American company was seeking to compete with Northrop Grumman, Raytheon or Lockheed Martin and had hired many experts in defense contracting but still needed capital, that company’s directors may want to raise money through offering stock. If citizens or government agencies from places like China, Iran or Venezuela sought to purchase the stock, FIRRMA would likely allow U.S. regulators to block the purchases because of the national security nature of the company’s work.
“Critical technology” includes technology listed on the U.S. Munitions List, the Commerce Control List and “emerging and foundational technologies.” The U.S. Munitions List generally covers military and space-related technologies. The Commerce Control List covers things that have nuclear, technology, marine and national defense implications. The emerging and foundational technologies are likely to include high-tech, secret computing technology and artificial intelligence among other things.
Covered “sensitive personal data” is information relating to Americans that could potentially endanger national security. Some types of information that is included is banking, health, insurance and work records of Americans. This type of information would be desirable for hostile actors who wish to exploit the U.S. government and American citizens through fraud and extortion schemes.
FIRRMA seeks to mitigate the chances of hostile foreign nationals and governments getting their hands on sensitive information and applies to all transactions after August 13, 2018. Companies operating in the “crucial technology” space that are seeking funding and attracting interested investors from outside the United States should understand whether FIRRMA applies to their transaction before going too far down the path with potential international investors.
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