Proposed Regulations and Recent Actions Signal an Increased Focus on CFIUS-Related Transactions
The U.S. Department of Treasury, as Chair of the Committee on Foreign Investment in the United States (CFIUS), recently proposed a new rule (the Proposed Rule) which would expand CFIUS’ investigation and enforcement authorities for any transaction that was not filed with CFIUS (each a “non-notified transaction”), add set timeframes for risk mitigation negotiations and increase the maximum civil, monetary penalties for non-compliance, among other changes.
05.20.24
The Proposed Rule is the first update to the foregoing since the implementation of the Foreign Investment Risk Review Modernization Act of 2018, which established CFIUS and gave it the authority to review certain transactions involving foreign investment in the U.S., including certain real estate transactions by foreign persons, in order to determine the effect of such transactions on the national security of the U.S.
In particular, the Proposed Rule would:
- Expand the type of information CFIUS can require in the course of non-notified transactions. While CFIUS’ authority to investigate a non-notified transaction is currently limited to requesting information from transaction parties that is “necessary” to determine if it constituted a “covered transaction” or “covered real estate transaction” (i.e., to determine whether the transaction was within CFIUS’ jurisdiction), under the Proposed Rule, CFIUS would be able to request information from transaction parties and for the first time–other persons–to determine if the transaction meets the criteria for a mandatory declaration and/or may threaten national security.
- Impose a three-business day deadline (subject to extension granted by CFIUS on a case-by-case basis) for transaction parties to provide a “substantive” response to mitigation proposals issued by CFIUS. CFIUS has increasingly relied on mitigation proposals in recent years to address potential threats to national security, but the current regulations are silent on any timeframe within which such transaction parties must respond to such proposals, with the only required timeframe relating to when a transaction party must provide follow-up information requested by CFIUS during the course of a transaction review.
- Increase the monetary limit for civil penalties relating to material statements or omissions in submissions, material violations of mitigation agreements and/or a failure to submit a mandatory filing, in each case, by 20 times, from $250,000 to $5 million. In addition, while civil penalties under the current regulations only apply in the context of a declaration or notice filed with CFIUS or a false certification, the Proposed Rule would expand the penalties to cover requests for information in connection with non-notified transactions, certain responses to CFIUS on its requests for information related to enforcing compliance and/or its monitoring thereof, and other responses to CFIUS requests for information generally (e.g., agency notices).
On the heels of the issuance of the Proposed Rule, President Biden issued an order prohibiting the purchase of certain real estate operated as a cryptocurrency mining facility that was located within one mile of Francis E. Warren Air Force Base in Wyoming, citing national security concerns. The real estate owner, MineOne (which is ultimately majority-owned by nationals of the People’s Republic of China), failed to file the transaction with CFIUS until after CFIUS’s non-notified team investigated the transaction as a result of a public tip. Although CFIUS is generally authorized to negotiate and enter into a mitigation agreement or take other actions to mitigate the national security risk arising from a covered transaction, in this case, CFIUS determined that mitigation of the national security risk would not be sufficient, as did the President, who ultimately decided to prohibit the transaction and require the complete divestment thereof.
Both the Proposed Rule and the recent prohibition of a covered real estate transaction serve to illustrate the increasing role that CFIUS plays and is likely to continue to play in the future in order to permit the federal government to vigilantly monitor foreign investment in the U.S., including in certain real estate transactions. As a result of this ever-increasing focus, and the potential increase in both the scope of CFIUS’s authority and costs of non-compliance if the Proposed Rule is made final, transaction parties, including real estate parties, should carefully pay attention to CFIUS considerations when evaluating transactions involving foreign person investors.
If you have any questions, Pease contact the authors Alexandra M. Hill at ahill@klehr.com or 215.606.3735, or Nicole S. Haiem at nhaiem@klehr.com or 215.569.1496 .
Co-author Alexandra Hill is a partner in the Real Estate & Finance Department. Co-author Nicole Haiem is an associate in the Corporate & Securities Department.