US cracks down on investors with Russian, Chinese links


Enhanced regulations governing the Committee on Foreign Investment in the US (CFIUS) go into effect today. How does this affect Israeli investors?

On February 13, 2020, enhanced regulations governing the Committee on Foreign Investment in the United States (CFIUS) will go into effect that increase its authority to review and approve proposed foreign investments in US businesses or real estate. CFIUS has broad jurisdiction and in practice has recently subjected transactions involving Chinese or Russian investors or acquirers to heightened scrutiny to counter perceived threats from those countries. Israeli investors or companies should be aware that CFIUS may encumber their future US investments, especially if those Israeli parties accept funding from or maintain relevant affiliations with Chinese or Russian persons. Israeli financial and strategic investors in US businesses or real estate and joint ventures should consider CFIUS implications early in securing funding and structuring transactions. CFIUS due diligence would especially be relevant in instances where the US business is involved with critical technology, critical infrastructure, or sensitive data or if the US real estate is located close to sensitive US government or other sites as prescribed in the regulations.

CFIUS is empowered to review foreign investments in US businesses (including US operations of foreign businesses) that could result in foreign control of the US business or provide foreign persons with certain non-controlling rights such as access to material nonpublic technical information, board membership or observer rights, or substantive decision-making authority regarding certain topics. CFIUS typically either approves the transaction or imposes conditions to mitigate national security risk.

Although CFIUS has long had authority to unwind, block, or mitigate the risk posed by a transaction where a foreign person gains control of a US business, the new regulations broaden CFIUS’s jurisdiction over certain non-controlling investments and require mandatory filings for some transactions. Israeli investors should be cautious that even minor investments in US businesses may require filing with CFIUS or otherwise face significant penalties, including fines up to the value of the transaction or divestiture.

CFIUS filings are currently mandatory for certain types of investments in US critical technology companies involved with relevant industries listed in the CFIUS regulations. As of February 13th, mandatory filings will also apply with respect to certain investments in a US business involved with critical technology, critical infrastructure, or sensitive data if a foreign government has a "substantial interest" in the investor. These mandatory filing requirements highlight CFIUS’s key national security concerns, which range from traditional threats posed by foreign control or access to defense, telecommunications, or energy locations and infrastructure, to more modern threats posed by aggregated data about US citizens or transfer of sensitive technology.

CFIUS may review covered transactions at any time - including those already consummated - and actively seeks out transactions about which it was not notified. This incentivizes parties to voluntarily undergo CFIUS review in exchange for eliminating the risk of future CFIUS review and mitigation. This future CFIUS risk for completed transactions should be a key consideration for private equity and other repeat investors.

The new rules also contain some exemptions. Investment funds with US general partner(s) and limits on the information and control rights of foreign limited partners may avoid CFIUS review for non-controlling investments. The new regulations also designate Australia, Canada, and the United Kingdom as "excepted foreign states," providing qualified investors from those countries with a similar exemption.

Published by Globes, Israel business news - - on February 13, 2020

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