Foreign investors in U.S. private equity, real estate and venture capital deals are facing new regulations that could impact the terms, timing and even viability of those investments.
Earlier this month, the Treasury Department unveiled new regulations for how the federal government reviews foreign investment in the U.S. The rules, which take effect Feb. 13, were mandated by the bipartisan Foreign Investment Risk Review Modernization Act of 2018 that expanded the ability of the interagency Committee on Foreign Investment in the United States, or CFIUS, to review transactions based on the degree of control of a foreign investor or government.
The primary focus of a CFIUS review will be transactions involving critical technology and infrastructure or operations that collect sensitive personal data on U.S. citizens and the degree of foreign control of those arrangements. Critical infrastructure sectors include telecommunications, utilities, energy and transportation.
But CFIUS officials, who represent several key agencies including the Department of Defense and Department of Commerce, also gained the authority to reject certain investments that are not passive but don't rise to the level of control, and to scrutinize real estate transactions near sensitive government facilities such as military sites.
"It is really a significant expansion. Now, even non-controlling interests may be subject to CFIUS review," said Jeremy Zucker, co-chair of Dechert LLP's international trade and government regulation practice in Washington. "Investors need to think carefully about CFIUS risk early in the process and perform a transaction-specific analysis," he said.
Representatives for investor groups and investment firms were relieved to see some changes and clarifications in the final rules that "go a long way to ensuring that the new regulations will not frustrate passive foreign investment in the U.S.," said Jason Mulvihill, chief operating officer and general counsel of the private equity advocacy group American Investment Council in Washington.
Since limited partners are typically passive investors, their investments would not fall under the new "covered investments" criteria for CFIUS review, unless critical technologies are involved or a foreign government acquires a substantial interest in them.