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In August 2018 Congress enacted the Foreign Investment Risk Review Modernisation Act (FIRRMA) and the Export Control Reform Act (ECRA) to address a slew of national security concerns principally relating to China. However, it still remains unclear how quickly, and fully, the Department of Commerce intends to carry out its statutory mandate to control so-called 'emerging' and 'foundational' technologies.
In FIRRMA and ECRA, Congress essentially gave the Department of Commerce the authority to decide how narrowly or widely to set the jurisdiction for the Committee on Foreign Investment in the United States (CFIUS) over non-passive minority investments involving emerging and foundational technologies. Yet, at times, the department has seemed almost paralysed by this question.
The Department of the Treasury (as chair of CFIUS) released comprehensive draft regulations to implement FIRRMA on 17 September 2019 (for further details please see "Treasury releases comprehensive rewrite of CFIUS regulations, flood of filings expected in 2020"). After a 30-day comment period, CFIUS had to consider more than 80 public comments and deliberate how to adjust the draft regulations before their finalisation. These draft regulations will significantly expand CFIUS's jurisdiction in several areas, one of which is non-passive minority investments involving critical technologies. Stakeholders in the CFIUS process should be aware that the grouping of technologies included in CFIUS's definition of 'critical technologies' remains in a state of flux and will likely expand at some point.
The six-part definition of 'critical technologies' provided in CFIUS's draft regulations is quite precise and includes emerging and foundational technologies controlled pursuant to Section 1758 of ECRA. This part of the definition - specifically, emerging technologies - drove much of the congressional concern during the development of FIRRMA. Congress was deeply concerned about the investment-driven transfer of technology to China, particularly technologies such as:
- AI;
- additive manufacturing;
- quantum computing;
- autonomous vehicles;
- augmented or virtual reality (AR and VR);
- robotics; and
- blockchain technology.
These concerns were partly based on analysis conducted by the Department of Defence that was subsequently made public. Ultimately, Section 1758 of ECRA was a compromise that Congress agreed in order to address some of those concerns.
Department of Commerce's uncertain implementation of ECRA
In November 2018 the Department of Commerce took a visible step towards implementing Section 1758 of ECRA, issuing an advance notice of proposed rulemaking (ANPRM) to seek public comments on criteria for identifying emerging technologies under ECRA. The department solicited input to determine whether there were specific emerging technologies that were essential to US national security and listed 14 technology categories to illustrate potential technologies that may be controlled. These categories included:
- biotechnology;
- AI;
- AR and VR;
- data analytics technology;
- additive manufacturing;
- quantum information and sensing technology; and
- advanced surveillance technologies.
Despite Department of Commerce officials indicating for several months that new regulations on emerging technologies would be issued before the end of 2019, as of 18 December 2019 the department had yet to issue any proposed regulations governing emerging technologies. Specifically, the department has indicated that it will announce regulations controlling emerging technologies on a rolling basis, with the first tranche suspected to include:
- additive manufacturing;
- AI; and
- quantum computing.
In contrast, an ANPRM on foundational technologies has yet to be issued.
Reportedly, a significant cause of the delay is internal disagreement within the Trump administration. Meanwhile, key members of Congress are getting impatient and have begun applying pressure on the Department of Commerce to move forward.
Until there is some resolution of the impasse at the Department of Commerce, US companies that are involved in any of the 14 areas of technology listed in the department's November 2018 ANPRM should continue to monitor the situation. New export controls on emerging technologies could impact not only US companies' plans for raising capital, but also their ability to export products overseas and engage foreign nationals in the United States.
What if Department of Commerce imposes controls on emerging and foundational technologies?
As technologies become controlled pursuant to ECRA, they will automatically be covered under FIRRMA's definition of 'critical technologies'. In turn, that will sweep additional non-passive minority investments involving the newly controlled technologies into CFIUS's jurisdiction. Under CFIUS's draft regulations, certain investments in US companies that produce, design, test, manufacture, fabricate or develop any critical technologies will fall within the new jurisdiction. US companies involved in the emerging technologies at issue will need to assess whether certain inbound investments might then trigger CFIUS jurisdiction.
Will there still be mandatory CFIUS filings for certain technology investments?
Under the draft CFIUS regulations, most filings would remain voluntary and there would be no mandatory filing requirement for critical technology transactions. However, CFIUS has retained the possibility that this might change in the final regulations. In the explanatory section of the draft regulations, CFIUS indicated that it is still considering whether to continue the mandatory filing requirement from the critical technologies pilot programme. For now, that programme and its mandatory filing requirement remain in effect. Still, CFIUS may yet phase out most, or all, of that programme, especially where it would be redundant with the final comprehensive regulations. These are expected to take effect no later than 13 February 2020.
Even after CFIUS promulgates its new permanent regulations in early 2020, its jurisdiction over non-passive minority investments is unlikely to cover many emerging technologies until the Department of Commerce implements regulations adding export controls on emerging technologies. Therefore, CFIUS's effective purview over this category of transactions will mostly be limited to investments in US businesses involved in technologies that are already regulated under legacy export controls (eg, those listed on the Department of Commerce Control List and controlled pursuant to multilateral regimes).
