DealLawyers.com Blog

Five years ago, the Treasury Dept. announced an initiative to enhance its efforts to identify and investigate CFIUS “non-notified” transactions. A recent Cooley memo reviews the firm’s experiences with non-notified CFIUS inquiries since the beginning of the enforcement initiative, and identifies trends, outcomes and investigatory practices that it has observed. Here’s an excerpt summarizing the firm’s general observations:

As may be expected, our experience reveals a focus on investments from China, with about 56% of our inquiries involving Chinese investors. (Singapore placed second in our data, appearing in 14% of our matters.) We also observed a focus on US businesses that operate in industries generally perceived to present national security vulnerabilities (i.e., life sciences, cybersecurity, AI, semiconductors and battery technologies). In this sense, our data reflect non-notified outreach consistent with the policy motivations behind the Foreign Investment Risk Review Modernization Act (FIRRMA) and its implementing regulations.

Perhaps surprising however, is the proportion of “TID [Tech, Infrastructure, Data] US businesses” to non-TID US businesses that CFIUS has targeted with non-notified inquiries. In our matters, most (i.e., 58%) of the US businesses did not deal in “critical technology,” “critical infrastructure” or “sensitive personal data.” We regard this statistic to indicate that a company’s “TID” status is a poor proxy for the presence of perceived national security vulnerabilities. This stands to reason, as many companies with “critical technology” (e.g., common encryption functionality in software) do not present colorable national security issues, whereas other companies (e.g., in the life sciences industry) may have sensitive know-how with national security implications, but no critical technology.

Also notable is the size (measured by dollar value) of the transactions targeted with non-notified inquiries. Several of the transactions in our data set involved venture investments under $1 million. As with a company’s “TID” status, transaction size seems to be a poor proxy for the presence of national security concerns arising from a transaction. What is certain from our experience, however, is that non-notified inquiries can impose disproportionate burdens on small venture-backed US businesses. When a relatively small transaction is targeted with a non-notified inquiry, the cost of responding to CFIUS can represent a significant portion of the total transaction costs of the deal.

The memo also addresses the CFIUS inquiry process for non-notified deals, which apparently leaves much to be desired. Cooley says that the Q&A process itself is quite burdensome, often is not initiated until years after closing, involves significant imbalances in the time provided to respond to inquiries and the time that Treasury takes to respond, and lacks finality.

– John Jenkins