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CFIUS Update: Interim Regulations, FIRRMA Pilot Program, and Proposed Rulemaking on Emerging Technologies

November 27, 2018

On November 19, 2018, the U.S. Department of Commerce published an advance notice of proposed rulemaking (ANPRM) requesting comments before initiating a formal procedure to identify “emerging technologies” that are not yet classified for export control purposes. Launching this rulemaking is another step toward implementation of the Export Control Reform Act of 2018 (ECRA) and the Foreign Investment Risk Review Modernization Act (FIRRMA). As we described in a prior alert—CFIUS Update: Congress Enacts the Foreign Investment Risk Review Modernization Act—in August 2018, Congress enacted ECRA and FIRRMA as companion measures to enhance government authorities available to protect vital U.S. technologies, infrastructure, and sensitive information from acquisitions by foreign interests in a manner that would threaten U.S. national security.

ECRA requires the President, through an inter-agency process led by the Secretary of Commerce, to identify and to control the export, re-export, and transfer of “emerging and foundational technologies” that are essential to national security and that are not currently defined in the Defense Production Act. The ANPRM seeks public advice on how to frame the scope of “emerging” technologies; a separate inquiry will address similar questions concerning the scope of “foundational” technologies. Comments in response to the ANPRM are due on or before December 19, 2018.

The ANPRM is closely linked to the announcement on October 10, 2018, by the Committee on Foreign Investment in the United States (CFIUS) of interim regulations to begin implementation of FIRRMA. Most importantly, those regulations created a Pilot Program, effective November 10, to review certain transactions involving U.S. critical technologies. As discussed below, the ultimate outcome of the ECRA exercises to identify emerging and critical technologies will inform the breadth of critical technology transactions that are subject to mandatory declarations to CFIUS.

Together, the Pilot Program rules and the ANPRM provide substantial insights into the direction of government regulatory expansion to address national security blind spots arising in cross-border commerce, whether through under-the-radar investments or IP licensing transactions, or technological innovation that outpaces regulatory reach. The notices identify 27 industry sectors, 14 “representative technology categories,” and 46 specific examples within those categories that broadly characterize the immediate concerns of the national security community. Although the industry sectors defined by CFIUS and the categories identified in the ANPRM overlap, the detailed descriptions of the sectors and the examples within the categories reveal important contours of what may divide covered advanced technologies from those that are not.

It is important to keep in mind that the Commerce Department will also seek to define “fundamental” technologies. Those technologies almost certainly will include established technologies (i.e., beyond “emerging”) that will come under increased export controls and CFIUS oversight. And, it seems likely that CFIUS will announce additional rules to extend the Pilot Program to cover investments in critical infrastructure and those affording access to sensitive personal information.

The industries and technologies listed through the initial notices by CFIUS and the Commerce Department, together with additions from regulatory notices to come, comprise the starting point ‒ but not necessarily the outer bounds ‒ for the government’s effort to exercise oversight of transactions that may diminish strategic U.S. technological advantages or increase the vulnerability of important domestic assets. The notices offer important opportunities for innovators, manufacturers, research institutions, and others to contribute their expertise to help the agencies refine the types of transactions that will fall within regulatory control.

CFIUS Pilot Program

Non-Controlling Investments in Pilot Program U.S. Business

Prior to FIRRMA, CFIUS’ jurisdiction extended only to investments in which a foreign person acquired control of a U.S. business, and the law did not require parties to notify CFIUS of covered transactions. The Pilot Program expands CFIUS jurisdiction to cover certain investments that do not result in control by foreign persons, regardless of country of origin.

Covered non-controlling investments within the scope of the Pilot Program are those that provide the foreign investor:

  • Access to material non-public technical information in possession of the Pilot Program U.S. business;
  • Membership or observer rights on, or the right to nominate an individual to, the board of directors of the Pilot Program U.S. business;
  • Any involvement, other than voting of shares, in substantive decision-making of the Pilot Program U.S. Business regarding the use, development, acquisition, or release of critical technology.

As described below, the Pilot Program newly requires that parties notify CFIUS of covered transactions involving “Pilot Program U.S. businesses.” “Pilot Program U.S. businesses” are those that produce, design, test, manufacture, fabricate, or develop a critical technology that is: (a) utilized in connection with the business’ activity in a Pilot Program industry; or (b) designed by the business specifically for use in a Pilot Program industry.

Critical technologies include: (1) defense services and articles controlled by the International Traffic in Arms Regulations (ITAR); (2) items controlled by the Export Administration Regulations for reasons related to national security, chemical and biological weapons proliferation, nuclear nonproliferation, missile technology, regional stability, or surreptitious listening; (3) specially designed nuclear equipment, parts, and technology; (4) select agents and toxins; and (5) “emerging and foundational technologies” that are determined through the ECRA rulemakings described above.

A Pilot Program industry is one of 27 industries in which the U.S. Government believes “certain strategically motivated foreign investment could pose a threat to U.S. technological superiority and national security.” These include aircraft manufacturing, computer and computer storage manufacturing, guided missile and space vehicle manufacturing, petrochemical manufacturing, radio and television broadcasting and wireless communications equipment manufacturing, research and development in biotechnology and nanotechnology, and semiconductor-related manufacturing, among others. The full list is provided below.

The Pilot Program went into effect on November 10, 2018. Transactions completed prior to that date are outside the scope of the applicable regulations. In addition, the following transactions will also be exempt if the relevant action was taken prior to October 11: (1) transactions with a binding written agreement or other document establishing the material terms of the transaction; (2) if a party has made a public offer to shareholders to buy shares of a Pilot Program U.S. business; or (3) a shareholder has solicited proxies in connection with an election of the board of a Pilot Program U.S. business or requested the conversion of convertible voting securities.

Mandatory Declarations

Importantly, the Pilot Program implements a requirement for mandatory declarations of both controlling and non-controlling investments in Pilot Program U.S. businesses, unless the parties file a formal notice with CFIUS. “Declarations” are new to the CFIUS process. As contemplated by FIRRMA, declarations are short forms of the formal notifications required to initiate a CFIUS review, five pages in length. A template for declarations, outlining the information that parties must include, is available on the CFIUS website.

Declarations must be filed at least 45 days prior to a transaction’s completion date. CFIUS then has 30 days to take one of four actions: (1) request the parties file a notice; (2) inform the parties that the declaration is insufficient for CFIUS to complete action and advise that the parties may file a notice; (3) initiate a formal review of the transaction; or (4) clear the transaction. Importantly, a transaction that is cleared on the basis of a declaration alone is not eligible for the regulatory safe harbor available to parties that file a notice.

Parties that are required to file a mandatory declaration and fail to do so may incur a civil monetary penalty up to the value of the transaction.

Other Amendments to CFIUS Regulations

The October 10 CFIUS interim rule also implemented certain provisions of FIRRMA that became immediately effective when FIRRMA was enacted on August 13. The amendments include: (1) updating definitions in the regulations consistent with the language in FIRRMA, including “covered transaction,” and “critical technologies”; (2) extending the CFIUS review period from 30 to 45 days, which CFIUS has been in effect since August 13; (3) defining the “extraordinary circumstances” under which a CFIUS investigation can be extended by one 15-day period; and (4) permitting parties to a joint voluntary notice to stipulate that a transaction is “covered,” which may expedite a CFIUS review.

The ANPRM

The Department of Commerce’s November 19 ANPRM seeks public comment on criteria for defining and identifying emerging technologies that will be subject to export controls. As described in our prior alert, rather than expand CFIUS authority, Congress enacted ECRA, which authorizes Commerce to establish controls on the export, re-export, or transfer of emerging and foundational technologies that are deemed essential to the national security of the United States./p>

In the ANPRM, Commerce explained that the process for identifying emerging and foundational technologies must consider the following:

  • The development of emerging and foundational technologies in foreign countries;
  • The effect export controls may have on the development of such technologies in the United States; and
  • The effectiveness of export controls on limiting the proliferation of emerging and foundational technologies in foreign countries.

Commerce compiled a list of representative technology categories based on categories of technology that are currently subject to the Export Administration Regulations but controlled only to embargoed countries, countries designated as supporters of international terrorism, and restricted end-uses or end-users. The full list is provided below.

Commerce requested comments on how to define emerging technology, what criteria to apply to determine whether there are specific technologies within the representative general categories that are important to U.S. national security, and other categories of technology that warrant review as an emerging technology. Comments must be submitted to Commerce on or before December 19, 2018.

Pilot Program Industries

NAICS Code Industry Description (U.S. Census Bureau)
336411 Aircraft Manufacturing This U.S. industry comprises establishments primarily engaged in one or more of the following: (1) manufacturing or assembling complete aircraft; (2) developing and making aircraft prototypes; (3) aircraft conversion (i.e., major modifications to systems); and (4) complete aircraft overhaul and rebuilding (i.e., periodic restoration of aircraft to original design specifications).
336412 Aircraft Engine and Engine Parts Manufacturing This U.S. industry comprises establishments primarily engaged in one or more of the following: (1) manufacturing aircraft engines and engine parts; (2) developing and making prototypes of aircraft engines and engine parts; (3) aircraft propulsion system conversion (i.e., major modifications to systems); and (4) aircraft propulsion systems overhaul and rebuilding (i.e., periodic restoration of aircraft propulsion system to original design specifications).
331313 Alumina Refining and Primary Aluminum Production This U.S. industry comprises establishments primarily engaged in one or more of the following: (1) refining alumina (i.e., aluminum oxide) generally from bauxite; (2) making aluminum from alumina; and/or (3) making aluminum from alumina and rolling, drawing, extruding, or casting the aluminum they make into primary forms. Establishments in this industry may make primary aluminum or aluminum-based alloys from alumina.
332991 Ball and Roller Bearing Manufacturing This U.S. industry comprises establishments primarily engaged in manufacturing ball and roller bearings of all materials.
334112 Computer Storage Device Manufacturing This U.S. industry comprises establishments primarily engaged in manufacturing computer storage devices that allow the storage and retrieval of data from a phase change, magnetic, optical, or magnetic/optical media. Examples of products made by these establishments are CD-ROM drives, floppy disk drives, hard disk drives, and tape storage and backup units.
334111 Electronic Computer Manufacturing This U.S. industry comprises establishments primarily engaged in manufacturing and/or assembling electronic computers, such as mainframes, personal computers, workstations, laptops, and computer servers. Computers can be analog, digital, or hybrid. Digital computers, the most common type, are devices that do all of the following: (1) store the processing program or programs and the data immediately necessary for the execution of the program; (2) can be freely programmed in accordance with the requirements of the user; (3) perform arithmetical computations specified by the user; and (4) execute, without human intervention, a processing program that requires the computer to modify its execution by logical decision during the processing run. Analog computers are capable of simulating mathematical models and contain at least analog, control, and programming elements. The manufacture of computers includes the assembly or integration of processors, coprocessors, memory, storage, and input/output devices
336414 Guided Missile and Space Vehicle Manufacturing This U.S. industry comprises establishments primarily engaged in (1) manufacturing complete guided missiles and space vehicles; and/or (2) developing and making prototypes of guided missiles or space vehicles.
336415 Guided Missile and Space Vehicle Propulsion Unit and Propulsion Unit Parts Manufacturing This U.S. industry comprises establishments primarily engaged in (1) manufacturing guided missile and/or space vehicle propulsion units and propulsion unit parts; and/or (2) developing and making prototypes of guided missile and space vehicle propulsion units and propulsion unit parts.
336992 Military Armored Vehicle, Tank, and Tank Component Manufacturing This U.S. industry comprises establishments primarily engaged in manufacturing complete military armored vehicles, combat tanks, specialized components for combat tanks, and self-propelled weapons.
221113 Nuclear Electric Power Generation This U.S. industry comprises establishments primarily engaged in operating nuclear electric power generation facilities. These facilities use nuclear power to produce electric energy. The electric energy produced in these establishments is provided to electric power transmission systems or to electric power distribution systems.
333314 Optical Instrument and Lens Manufacturing This U.S. industry comprises establishments primarily engaged in one or more of the following: (1) manufacturing optical instruments and lenses, such as binoculars, microscopes (except electron, proton), telescopes, prisms, and lenses (except ophthalmic); (2) coating or polishing lenses (except ophthalmic); and (3) mounting lenses (except ophthalmic).
325180 Other Basic Inorganic Chemical Manufacturing This U.S. industry comprises establishments primarily engaged in manufacturing basic inorganic chemicals (except industrial gases and synthetic dyes and pigments).
336419 Other Guided Missile and Space Vehicle Parts and Auxiliary Equipment Manufacturing This U.S. industry comprises establishments primarily engaged in (1) manufacturing guided missile and space vehicle parts and auxiliary equipment (except guided missile and space vehicle propulsion units and propulsion unit parts); and/or (2) developing and making prototypes of guided missile and space vehicle parts and auxiliary equipment.
325110 Petrochemical Manufacturing This U.S. industry comprises establishments primarily engaged in (1) manufacturing acyclic (i.e., aliphatic) hydrocarbons, such as ethylene, propylene, and butylene made from refined petroleum or liquid hydrocarbons; and/or (2) manufacturing cyclic aromatic hydrocarbons, such as benzene, toluene, styrene, xylene, ethylbenzene, and cumene made from refined petroleum or liquid hydrocarbons.
332117 Powder Metallurgy Part Manufacturing This U.S. industry comprises establishments primarily engaged in manufacturing powder metallurgy products using any of the various powder metallurgy processing techniques, such as pressing and sintering or metal injection molding. Establishments in this industry generally make a wide range of parts on a job or order basis.
335311 Power, Distribution, and Specialty Transformer Manufacturing This U.S. industry comprises establishments primarily engaged in manufacturing power, distribution, and specialty transformers (except electronic components). Industrial-type and consumer-type transformers in this industry vary (e.g., step up or step down) voltage but do not convert alternating to direct or direct to alternating current.
335912 Primary Battery Manufacturing This U.S. industry comprises establishments primarily engaged in manufacturing wet or dry primary batteries.
334220 Radio and Television Broadcasting and Wireless Communications Equipment Manufacturing This U.S. industry comprises establishments primarily engaged in manufacturing radio and television broadcast and wireless communications equipment. Examples of products made by these establishments are transmitting and receiving antennas, cable television equipment, GPS equipment, pagers, cellular phones, mobile communications equipment, and radio and television studio and broadcasting equipment.
541713 Research and Development in Nanotechnology This U.S. industry comprises establishments primarily engaged in conducting nanotechnology research and experimental development. Nanotechnology research and experimental development involves the study of matter at the nanoscale (i.e., a scale of about 1 to 100 nanometers). This research and development in nanotechnology may result in development of new nanotechnology processes or in prototypes of new or altered materials and/or products that may be reproduced, utilized, or implemented by various industries.
541714 Research and Development in Biotechnology (except Nanobiotechnology This U.S. industry comprises establishments primarily engaged in conducting biotechnology (except nanobiotechnology) research and experimental development. Biotechnology (except nanobiotechnology) research and experimental development involves the study of the use of microorganisms and cellular and biomolecular processes to develop or alter living or non-living materials. This research and development in biotechnology (except nanobiotechnology) may result in development of new biotechnology (except nanobiotechnology) processes or in prototypes of new or genetically-altered products that may be reproduced, utilized, or implemented by various industries.
331314 Secondary Smelting and Alloying of Aluminum This U.S. industry comprises establishments primarily engaged in (1) recovering aluminum and aluminum alloys from scrap and/or dross (i.e., secondary smelting) and making billet or ingot (except by rolling); and/or (2) manufacturing alloys, powder, paste, or flake from purchased aluminum.
334511 Search, Detection, Navigation, Guidance, Aeronautical, and Nautical System and Instrument Manufacturing This U.S. industry comprises establishments primarily engaged in manufacturing search, detection, navigation, guidance, aeronautical, and nautical systems and instruments. Examples of products made by these establishments are aircraft instruments (except engine), flight recorders, navigational instruments and systems, radar systems and equipment, and sonar systems and equipment.
334413 Semiconductor and Related Device Manufacturing This U.S. industry comprises establishments primarily engaged in manufacturing semiconductors and related solid-state devices. Examples of products made by these establishments are integrated circuits, memory chips, microprocessors, diodes, transistors, solar cells, and other optoelectronic devices.
333242 Semiconductor Machinery Manufacturing This U.S. industry comprises establishments primarily engaged in manufacturing wafer processing equipment, semiconductor assembly and packaging equipment, and other semiconductor making machinery.
335911 Storage Battery Manufacturing This U.S. industry comprises establishments primarily engaged in manufacturing storage batteries.
334210 Telephone Apparatus Manufacturing This U.S. industry comprises establishments primarily engaged in manufacturing wire telephone and data communications equipment. These products may be stand-alone or board-level components of a larger system. Examples of products made by these establishments are central office switching equipment, cordless and wire telephones (except cellular), PBX equipment, telephone answering machines, LAN modems, multi-user modems, and other data communications equipment, such as bridges, routers, and gateways.
333611 Turbine and Turbine Generator Set Units Manufacturing This U.S. industry comprises establishments primarily engaged in manufacturing turbines (except aircraft) and complete turbine generator set units, such as steam, hydraulic, gas, and wind.

Representative Technology Categories

  1. Biotechnology, such as:
    1. Nanobiology;
    2. Synthetic biology;
    3. Genomic and genetic engineering; or
    4. Neurotech
  2. Artificial intelligence (AI) and machine learning technology, such as:
    1. Neural networks and deep learning (e.g., brain modelling, time series prediction, classification);
    2. Evolution and genetic computation (e.g., genetic algorithms, genetic programming);
    3. Reinforcement learning;
    4. Computer vision (e.g., object recognition, image understanding);
    5. Expert systems (e.g., decision support systems, teaching systems);
    6. Speech and audio processing (e.g., speech recognition and production);
    7. Natural language processing (e.g., machine translation);
    8. Planning (e.g., scheduling, game playing);
    9. Audio and video manipulation technologies (e.g. voice cloning, deepfakes);
    10. AI cloud technologies; or
    11. AI chipsets.
  3. Position, Navigation, and Timing (PNT) technology.
  4. Microprocessor technology, such as:
    1. Systems-on-Chip (SoC); or
    2. Stacked Memory on Chip.
  5. Advanced computing technology, such as:
    1. Memory-centric logic.
  6. Data analytics technology, such as:
    1. Visualization;
    2. Automated analysis algorithms; or;
    3. Context-aware computing.
  7. Quantum information and sensing technology, such as:
    1. Quantum computing;
    2. Quantum encryption; or
    3. Quantum sensing.
  8. Logistics technology, such as:
    1. Mobile electric power;
    2. Modeling and simulation;
    3. Total asset visibility; or
    4. Distribution-based Logistics Systems (DBLS).
  9. Additive manufacturing (e.g. 3D printing).
  10. Robotics, such as:
    1. Micro-drone and micro-robotic systems;
    2. Swarming technology;
    3. Self-assembling robots;
    4. Molecular robotics;
    5. Robot compliers; or
    6. Smart Dust.
  11. Brain-computer interfaces, such as:
    1. Neural-controlled interfaces;
    2. Mind-machine interfaces;
    3. Direct neural interfaces; or
    4. Brain-machine interfaces.
  12. Hypersonics, such as:
    1. Flight control algorithms;
    2. Propulsion technologies;
    3. Thermal protection systems; or
    4. Specialized materials (for structures, sensors, etc.).
  13. Advanced Materials, such as:
    1. Adaptive camouflage;
    2. Functional textiles (e.g., advanced fiber and fabric technology); or
    3. Biomaterials.
  14. Advanced surveillance technologies, such as:
    1. Faceprint and voiceprint technologies.

This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Theodore Kassinger, an O’Melveny partner licensed to practice law in the District of Columbia and Georgia, Greta Lichtenbaum, an O’Melveny partner licensed to practice law in the District of Columbia, David J. Ribner, an O’Melveny counsel licensed to practice law in the District of Columbia and New York, McAllister Jimbo, an O’Melveny associate licensed to practice law in California and the District of Columbia, and Mary Pat Dwyer, an O’Melveny associate licensed to practice law in the District of Columbia and Pennsylvania, contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.

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