May 31, 2023

New CFIUS Guidance on Date for Submission of Mandatory Filings

A new FAQ on the CFIUS website reads as follows:

How does CFIUS determine the ‘completion date,’ in assessing whether a mandatory filing should be submitted, where the foreign person first acquires equity interest but will not receive CFIUS triggering rights until after CFIUS’s review?

The “completion date” is the earliest date upon which any ownership interest is conveyed, assigned, delivered, or otherwise transferred to a person [31 C.F.R. § 800.206]. In a transaction where the ownership interest is conveyed before the foreign person receives the corresponding rights, the “completion date” is the earliest date upon which the foreign person acquired any of the equity interest.  For example, if Company A acquired a 25 percent ownership interest in Company B on July 1, but its right to control Company B was deferred until after CFIUS reviews the transaction, the “completion date” for the transaction is July 1.  If the transaction is subject to the mandatory declaration requirement pursuant to 31 C.F.R. § 800.401, the latest date that the parties can file the transaction with CFIUS is June 1.  Note that contingent equity interests are assessed separately under 31 C.F.R. § 800.207.

As this White & Case article highlights, this represents a change with respect to an existing practice that CFIUS has generally permitted. Here’s an excerpt from the article:

Since mandatory filing requirements first took effect in 2018, parties to certain minority investments requiring more immediate funding (e.g., venture-capital investments in startups) have commonly utilized constructs that would allow the investor to provide the capital for the investment but not obtain any CFIUS triggering rights until the mandatory-filing waiting period expired or CFIUS cleared the transaction. Parties have similarly often used springing rights—including multi-investment-tranche—structures to fund minority investments and delay CFIUS triggering rights while voluntary CFIUS reviews were pending.

These springing-rights structures have sought to address CFIUS requirements and considerations while pragmatically managing transaction timing needs. In practice, for the nearly five years in which mandatory filings have applied, CFIUS has generally permitted springing rights—and to our knowledge, CFIUS has never penalized parties that utilized springing rights for mandatory filings. Accordingly, while the new FAQ references the language of the existing regulatory definition of “completion date,” it represents a significant change in CFIUS practice that will impact a range of foreign investors and US businesses.

. . . Most significantly, this will impact the timeline for minority investments that trigger mandatory filing requirements. Specifically, foreign investors in transactions triggering a mandatory filing will not be able to acquire equity interests—even on an initially purely passive basis—in US businesses until at least 30 days after the filing is made with CFIUS. This may cause delays in certain venture capital investments and other funding transactions where timing is often critical, presenting substantial challenges to deal completion.

– Meredith Ervine