The Buyout Board – Private equity funds, venture capital funds, hedge funds, and other investment funds receive carve-outs from expanded CFIUS jurisdiction

The Foreign Investment Risk Review Modernization Act (FIRRMA), included in the reconciled Conference Report of the FY19 National Defense Authorization Act, substantially expands the jurisdiction of the Committee on Foreign Investment in the United States (CFIUS), but exempts from CFIUS’s review certain foreign investments made through U.S. investment funds.

The Buyout Board – Private equity funds, venture capital funds, hedge funds, and other investment funds receive carve-outs from expanded CFIUS jurisdiction

FIRRMA expands the types of transactions that will fall under CFIUS’s jurisdiction (i.e., “covered transactions”) to include, among other things “any other investment” regarding critical infrastructure, critical technologies, or sensitive personal data of U.S. citizens.

“Other investments” covered under CFIUS

The “other investments” category of covered transactions is a new trigger for CFIUS and, importantly, does not require that the foreign investor have any ability to control the U.S. business. These “other investments” will include any direct or indirect investment by a foreign person (a term that CFIUS will define by regulation) in a U.S. business that: i) owns, operates, manufactures, supplies, or services critical infrastructure; ii) produces, designs, tests, manufactures, fabricates, or develops one or more critical technologies; or iii) maintains or collects sensitive personal data of U.S. citizens that may be exploited in a manner that threatens national security, if the investment would afford the foreign person:

  1. Access to “material nonpublic technical information” in the possession of the U.S. business that relates to certain critical infrastructure or critical technologies (“financial information regarding the performance of a United States business” is exempted); 
  2. Membership or observer rights on the board of directors or equivalent body of a U.S. business, or the right to “nominate” an individual to such a body; or 
  3. Any involvement in “substantive decisionmaking,” except the voting of shares, relating to certain personal data, critical technologies, or critical infrastructure.

Exemptions for investment funds

The Conference Report excludes from the “other investments” category of covered transactions any indirect investments in a U.S. business by a foreign person through an investment fund that affords the foreign person (or a designee) membership as a limited partner or equivalent on an advisory board or committee of the fund if:

  1. the fund is managed exclusively by a general partner, a managing member, or an equivalent; 
  2. the general partner, managing member, or equivalent is not a foreign person; 
  3. the advisory board or committee on which the foreign person sits does not have the ability to approve, disapprove, or otherwise control investment decisions of the fund or decisions by the general partner, managing member, or equivalent related to entities in which the fund is invested; 
  4. the foreign person does not otherwise have the ability to control the fund, including the authority: to approve, disapprove, or otherwise control investment decisions of the fund; to approve, disapprove, or otherwise control decisions made by the general partner, managing member, or equivalent related to entities in which the fund is invested; or to unilaterally dismiss, prevent the dismissal of, select, or determine the compensation of the general partner, managing member, or equivalent;
  5. the foreign person does not have access to “material nonpublic technical information” as a result of its participation on the advisory board or committee; and 
  6. the investment “otherwise meets the requirements” of this section (e.g., the foreign person is not a member of the US. business’s board of directors).

This investment fund carve-out may not always be available. For example, a number of funds establish a general partner or managing member offshore and therefore would not satisfy factor (1). Also, in some funds, limited partners do have access to material nonpublic technical information, and therefore factor (5) would not be satisfied. In addition, it is likely that certain funds, such as some special purpose vehicles, funds-of-one, and separately managed accounts, may not satisfy factor (4), as the foreign person may retain the ability to “control the fund."

Nonetheless, this carve-out both provides a much clearer set of standards for determining whether a U.S. investment fund’s investment in a U.S. business will subject its foreign limited partners to CFIUS’s jurisdiction and also should be available to a large number of funds.

For a full analysis on this issue, please see our publication by clicking here.

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