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CFIUS Proposes Mandatory Declaration Requirement Based on U.S. Export Control Criteria

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On May 21, 2020, the U.S. Department of the Treasury published a proposed rule that would revise the mandatory declaration requirement for foreign investments involving a U.S. business that produces, designs, tests, manufactures, fabricates, or develops one or more critical technologies.

Currently, a key element of the mandatory declaration requirement is whether the U.S. business engaged in the specified activities involving critical technologies utilizes that critical technology, or designs the technology specifically for use in, one or more industries identified by North American Industry Classification (NAICS) codes.

Under the proposed rule, this industry test is removed. Instead, a declaration would be mandatory if a “U.S. regulatory authorization” would be required to export or reexport the critical technology to the foreign investor and certain foreign persons in its ownership chain.

The proposed rule defines “U.S. regulatory authorization” to include licenses or authorizations under the four main U.S. export control regimes:

  • A license or other approval (e.g., approved technical assistance agreements or manufacturing license agreements) issued by the Department of State under the International Traffic in Arms Regulations (ITAR);
  • A license from the Department of Commerce under the Export Administration Regulations (EAR);
  • A specific or general authorization required from the Department of Energy pursuant to 10 CFR Part 810, except the general authorization at 10 CFR 810.6(a) for the export of certain controlled nuclear technology to specified countries or entities; or
  • A specific license from the Nuclear Regulatory Commission pursuant to 10 CFR Part 110.

Importantly, the proposed rule does not take into consideration any license exemptions available under the ITAR and only excludes from the definition of U.S. regulatory authorization the following license exceptions in the EAR:

  • License Exception TSU (15 CFR 740.13);
  • License Exception ENC, paragraph (b) (15 CFR 740.17(b)); and
  • License Exception STA, paragraph (c)(1) (15 CFR 740.20(c)(1)).

The impact of this change will vary depending on the technology involved in the transaction and the home country of the foreign investor. For example, most encryption technology classified under Export Control Classification Number (ECCN) 5E002 cannot be exported to end users in China using subpart (b) of License Exception ENC. However, transactions involving foreign parties from allied nations, especially those that are in Country Group A:5 but are not “excepted foreign investors” (e.g., France, Germany, Italy, Japan, India, etc.) may not be subject to the mandatory filing requirement where the critical technology involved is eligible for export pursuant to License Exception STA.

In determining whether a particular transaction could trigger the mandatory declaration requirement, the proposed rule specifies which foreign persons in the ownership chain should be analyzed for export licenses and authorizations. The proposed rule establishes a threshold of a 25% direct or indirect voting interest, which it refers to as “voting interest for purposes of critical technology mandatory declarations.” For entities whose activities are primarily directed, controlled, or coordinated by or on behalf of a general partner, managing member, or equivalent, the applicable threshold is a 25% interest in the entity’s general partner, managing member, or equivalent.

CFIUS is accepting comments on the proposed rule until June 22, 2020. If issued in final form, the new mandatory declaration requirement based on U.S. export control criteria would apply as of the effective date of the final rule. In the meantime, the existing mandatory filing requirement based on NAICS codes remains in effect.