TerraLex Guide to Foreign Direct Investment - NEW

FDI is primarily regulated at the federal level in the United States. CFIUS (Committee on Foreign Investment in the United States) is an interagency committee chaired by the Secretary of the Treasury. CFIUS reviews certain foreign investments in the U.S. for potential national security risks and also assesses transactions involving U.S. businesses and real estate to determine their effect on national security. Transactions may be blocked or unwound.

A party to an FDI project files file either a Declaration or a Notice with CFIUS, depending upon the investment transaction to be reviewed. Declarations and Notices may be voluntary or mandatory, depending upon whether the matter is a “covered transaction” involving foreign government investment in a U.S. business, investments in a U.S. business with critical technology, critical infrastructure, or sensitive personal data.

There are certain individual state rules on FDI, which vary greatly, and typically impose restrictions on purchase of agricultural land, sites near military bases or critical infrastructure. For example, Alabama prohibits foreign principals from acquiring agricultural or forest property, land near military bases and critical infrastructure. AL law defines a “foreign principal” as a political party, its members, a government, or any government official of the "countries of concern" (China, Iran, North Korea, and Russia). The term also includes any country or government on a U.S. Department of the Treasury Office of Foreign Assets Control (OFAC) sanctions list.

Florida restricts property acquisition or ownership by “China foreign principals.”

There are a number of other states with similar restrictions.

CFIUS (see previous answer)

Informal inquiries are possible, and even encouraged. A party can file a draft Declaration or Notice prior to a formal filing.

i. If the transaction constitutes a covered real estate transaction under 31 C.F.R. Part 802, meaning that the real estate is located within the proximity requirements specified in Appendix A to Part 802 with respect to designated U.S. military installations. Further a foreign person will acquire property rights described in 31 C.F.R. § 802.233, including the right to (i) access the real estate; (ii) exclude others from the property; and (iii) make physical improvements.

ii. If a TID U.S. business (a U.S. company that deals with Technology, Infrastructure, or Data) is to be acquired, CFIUS has authority to review the investment. A TID U.S. Business is one that is involved in certain critical technologies, critical infrastructure, or sensitive personal data of U.S. citizens.

Whether the FDI transaction poses a risk to U.S. national security.

For mandatory CFIUS filing, a pre closing filing is required 30 days pre-closing. Voluntary filings are also typically made pre closing to obtain a safe harbor. Parties may satisfy the mandatory obligation by submitting either a short form declaration or a full notice.

Declarations: CFIUS conducts a 30 day assessment of a declaration. During or at the end of that period, CFIUS may request the filing of a full notice.

Full notice: 45 day review, which can (but not always) be followed by a 45 day investigation and, in extraordinary circumstances, a single 15 day extension of the investigation.

Note: Parties may not close a transaction requiring a mandatory filing until CFIUS provides written confirmation that it has concluded its review.

CFIUS charges a filing fee for full Notices (no fee for Declarations). The fee is tiered by the “value of the transaction,” and must be paid before a Notice will be accepted.

Fee schedule based on the value of the transaction as defined in the regulations:

• Less than $500,000: $0
• $500,000 to < $5,000,000: $750
• $5,000,000 to < $50,000,000: $7,500
• $50,000,000 to < $250,000,000: $75,000
• $250,000,000 to < $750,000,000: $150,000
• $750,000,000 and above: $300,000

CFIUS requires detailed information about the parties, the transaction, ownership and governance rights, export controls, government touchpoints, data and infrastructure exposure, and certifications. Declarations are concise; notices are comprehensive.

CFIUS notices are generally joint filings where the parties to the transaction work together to submit. However, if a party to the transaction will not participate, CFIUS allows one party to make a solitary submission. At its discretion, CFIUS then has the ability to request written notices from the non-filing parties. Note that each party is required to file when the filing is mandatory.

Failure to make a required CFIUS filing, or making one late, can carry serious civil, financial, and transactional consequences under federal law. Here are the potential consequences for failure to file or late filing:

• civil monetary penalties up to the greater of $250,000 or the full value of the transaction
• CFIUS can reopen and review the transaction
• forced mitigation measures
• an order for the buyer to divest or a complete unwinding of the transaction
• potential criminal exposure
• reputational and commercial harm

Yes. If you submit a mandatory CFIUS filing, the parties are legally required to suspend (not close) the transaction until CFIUS clears it. Early closing is treated as a major enforcement violation and can result in full transaction unwinding and massive penalties, even years later.

Here, “suspension” includes:

• No legal transfer of ownership
• No voting or governance rights
• No access to sensitive data, non-public technical information or operational systems
• No technology transfer
• No board seats
• No integration

Remember that only final CFIUS clearance provides protection from future review. Early closing destroys that safe harbor.

In the United States, and similarly in many other jurisdictions worldwide, the authority’s power to review non-mandatory transactions is very broad and largely discretionary. In short, even if a transaction does not meet the thresholds for mandatory filing, CFIUS can still review it, investigate it, impose conditions, or even unwind it after closing.

Mandatory filings cover only a subset of transactions. CFIUS jurisdiction extends well beyond those to include any acquisition of control by a foreign person of a U.S. business, certain non-controlling investments in sensitive U.S. business, some real estate transactions near sensitive sites and others.

CFIUS can initiate review at any time, even when a filing is not required.

To address national security risks, CFIUS may take several actions. These are comprised of suspension of the covered transaction, referral of the transactions to the President of the United States and mitigation measures. In fact, under the regulations, in order to mitigate national security risk CFIUS has significant authority to negotiate, enter into or impose, and enforce any agreement or conditions with any party to the covered transaction. These decisions are based on a risk – based analysis. 31 C.F.R § 800.102 and § 802.102. Mitigations measures and conditions are entered into and imposed also when parties abandon a transaction. 50 U.S.C. §4565. For example, in 2024, some CFIUS imposed mitigation measures and conditions included:

1. Establishing guidelines and terms for handling existing or future contracts with the U.S. Government or its contractors.
2. Ensuring access to technology, systems, facilities, projects, or sensitive information is provided only to authorized personnel.
3. Following National Industrial Security Program Operating Manual (“NISPOM”) requirements to limit foreign influence.
4. Prohibiting or limiting the transfer of certain intellectual property.
5. Prohibit conflict of interests involving third party monitors and third-party auditors.
6. Notifying the U.S. government before entering into agreements with persons from certain countries.
7. Restricting facilities, data, and storage location to the territory of the United States.

Mitigation measures and conditions are monitored for compliance. There are consequences for non- compliance; civil liability is $250,000” (U.S. Dollars) per violation or “the value of the transaction, whichever is greater” for gross negligence, or intentionally violation of a material provision of mitigation measures or of a material condition entered into or imposed before December 26, 2024. And liability for violations of material mitigation measures or conditions entered into or imposed on or after December 26, 2024, is the greatest of:

1. $5,000,000.00 U.S. Dollars;
2. The value of the person’s interest in the U.S. business at the time of violation;
3. The value of the transaction filed with CFIUS;

In addition to the regulatory outlined actions, CFIUS in its 2022 Enforcement and Penalty Guidelines (“Guidelines”) identified the below conduct that may also constitute a violation:

1. Failure to file.
2. Failure to comply with CFIUS mitigation agreements, conditions, or orders
3. Material misstatement, omission, or false certification.

Furthermore, the Guidelines describe CFIUS penalty process and strongly encourage entities to self-disclose. Currently, CFIUS is committed to increase enforcement while “refining its enforcement regulations and tools.”

Not all is lost when CFIUS acts. A finding or action by CFIUS is subject to judicial review. Such action or finding may be brought only in the United States Court of Appeals for the District of Columbia Circuit. If the courts determines that the information is necessary to resolve the challenge to CFIUS findings, protected, classified, or privileged information is maintained under seal. That information is submitted to the court ex parte or in camera.

Once the parties decide that a transaction is a covered transaction, parties must also decide whether to file for a CFIUS review. Generally, CFIUS review is voluntary, except for a TDI U.S. business that require mandatory filing (mandatory declarations). Under FIRRMA, parties can file a short form declaration or a formal notice. Both must be filed online via the Case Management Systems portal.

Declaration filing and timeline

When parties file a declaration, CFIUS will review the declaration for completeness and complete the assessment period within thirty (30) days. A signed certification must be submitted together with the declaration. Note, however, mandatory declarations must be submitted thirty (30) days before the completion of the transaction. Failure to file a mandatory declaration will result in enforcement actions.

Notice and timeline

Parties filing a notice with CFIUS must provide a signed certification and offer detailed, complete and accurate information about all the parties to the transaction. CFIUS review period for notices is forty – five (45) days. CFIUS has an obligation to notify the parties if a transaction is not a covered transaction and if it decides not to investigate. When a transaction involves important national security matters CFIUS will issue a forty – five (45) day investigation. The investigation begins when the notice review period ends.

Overall, CFIUS is bound by law to maintain the confidentiality of the information it receives, and it is prohibited from publicly disclosing it. Information and documents submitted to CFIUS are exempt from disclosure under the Freedom of Information Act, 5 U.S.C. § 552. Parties to a transaction, however, may publicly disclose the information; if so, that material consequently is reflected in CFIUS public statements.

A. Foreign investors may need to file notifications with the Directorate of Defense Trade Controls (DDTC) at the Department of State if the transaction involves companies registered under the International Traffic in Arms Regulations (ITAR).

B. Investments in companies with a facility security clearance require notification to the Defense Counterintelligence Security Agency under the National Industrial Security Program Operating Manual (NISPOM).

C. Certain U.S. securities regulations may affect foreign participation in certain investment offerings. For example, offerings under Regulation D, Rule 506(c) must include specific documentation for non-U.S. persons.

D. In the U.S. there is an outbound “CFIUS” program. Effective on January 2, 2025, the U.S. Department of the Treasury established the Outbound Investment Security Program. The program addresses national security concerns related to certain U.S. investments in sensitive technologies in China, Hong Kong and Macau.

The program prohibits or requires notification of certain direct and indirect outbound investments by U.S. persons in China, Hong Kong or Macau relating to semiconductors and microelectronics, quantum information technologies, and artificial intelligence. The program applies to investments, acquisitions, mergers, joint ventures, and other specified transactions.

The program applies to transactions involving entities of the government of a country of concern; persons owned by, controlled by, or subject to the jurisdiction of a country of concern; and other persons specified by the Treasury Department.

E. Note that any change in control will require licensing changes for any export controlled technology under the Export Administration Regulations (EAR) managed by the Bureau of Industry and Security (BIS) at the Department of Commerce (DOC).

F. The Department of Commerce’s Bureau of Economic Analysis (BEA) requires the reporting of certain statistical data on foreign direct investment in the United States. This includes reporting data when a foreign entity acquires a U.S. business, when a foreign entity or its existing U.S. affiliate establishes a new legal entity, or when an existing U.S. affiliate of a foreign entity expands its U.S. operations. The filing is due no later than 45 days after the date of the investment transaction.