Seeking Foreign Investments? New Law Says You May Have to Wait
Unbeknownst to many, a wrench has been thrown into the funding plans of many U.S. startups and other growing U.S. companies by virtue of President Trump's enactment of the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA), which expands significantly the jurisdiction of the Committee on Foreign Investment in the United States (CFIUS). The law, under which a pilot program went into effect this past November, mandates that foreign investors file paperwork with CFIUS for the Committee's review and approval if they are investing in a U.S. company involved with technologies related to one of the 27 industries identified. Notably, foreign investors are required to file this paperwork regardless of whether the investment provides the investor with control of the U.S. company, which historically has been a condition for CFIUS review. FIRRMA will not only give the U.S. federal government more control over foreign investments, but it will also create hurdles that some foreign investors may not want to attempt to jump over and will cost many startups precious time that they likely cannot afford during critical development stages. These effects are only magnified by the current U.S. government shutdown.
Considering that 8.5% of the U.S. labor force in 2016 had jobs resulting from foreign investment (International Trade Administration of the Department of Commerce, 2016) and that foreign-owned affiliates in the U.S. contributed nearly $895 billion to the U.S. economy in 2015 (Bureau of Economic Analysis of the Department of Commerce), it is fair to say that a lot is at stake and the reverberations of the little-known FIRRMA and its requirements likely will be felt for years to come.
The law complements many attempts by the U.S. federal government to protect national security and the innovation and intellectual property of growing U.S. companies in industries such as defense, and biotechnology, among others. The pilot program was implemented and has operated at a time when trade discussions between China and the United States are particularly tense, including as a result of U.S. officials' legitimate concerns regarding Chinese intellectual property infringement and forced technology transfer. See a recent related article written by Verrill Dana's John Powell.
Only time will tell if FIRRMA will prove successful in protecting U.S. interests from the risks that foreign investment poses or if the law will be amended materially following the pilot program, which is scheduled to end no later than March 5, 2020.
If you have any questions regarding FIRRMA or working with a foreign investor, contact a member of Verrill Dana's Business & Corporate Group.