Building on recent national security initiatives to bolster protection of critical US assets from strategic adversaries (particularly China and Russia), Congress is considering new government powers to review outbound investments from USA in certain high-tech sectors.
Incoming foreign investments in key sectors are reviewed by the Committee on Foreign Investment in the United States (CFIUS). However, the projection of outgoing The investments, so-called “reverse CFIUS,” would be new and could have a significant impact on industries ranging from aerospace and defense to financial technology and pharmaceuticals.
How did we get here?
Recent years have seen an accelerating shift in national security from the twenty-year global war on terror to strategic competition with major state adversaries. Unclassified assessments of the US national security posture reveal significant threats in domains ranging from artificial intelligence to hypersonic weapons to energy, many of which have been exacerbated by the theft of US technology. Legislation proposing a “reverse CFIUS” review would seek to counter these threats by adding new controls on the flow of US capital and intellectual property abroad.
The contemplated regime formally originated with the proposed National Critical Capabilities Defense Act (NCCDA), which was passed by the House of Representatives in February 2022 as part of the America COMPETES Act of 2022, HR 4521 , a broader package focused on domestic US semiconductor production and other aspects of US competitiveness (certain elements of which, not including the NCCDA, eventually became law as part of the CHIPS Act and Science in August 2022). In particular, the NCCDA would create a National Critical Capabilities Committee (the “Committee”), with authority to review and block covered foreign investments.
What are the prospects for approval?
While it is unclear whether the version of the NCCDA that the House passed will make it to the President’s desk, there now appears to be significant momentum in support of an NCCDA-type regime. In June 2022, a bipartisan, bicameral group of lawmakers released a discussion draft revising the House NCCDA version, and the possibility of executive action remains if Congress cannot agree on a final form of the bill. bill. This bipartisan support remains despite strong opposition from the US Chamber of Commerce and other industry associations representing potentially affected sectors.
What can US investors expect from the planned new regime?
Outside of investments in a handful of sanctioned countries, US investments abroad have so far been largely free from formal national security scrutiny. If passed, the NCCDA raises the potential for increased administrative complexity and uncertainty around business planning and investments. In short, an exit control regime would mark a significant new national security-related control on the cross-border flow of capital and knowledge.
What are “national critical capacities”?
As stated in the discussion draft, the NCCDA would be limited to investments in items and technologies of strategic importance to the United States, so-called “national critical capabilities.” These include:
High capacity batteries
· Pharmaceutical products
· Artificial intelligence
Sectors covered would also include those listed on the National Science and Technology Council Update List of Critical and Emerging Technologies, including advanced computing, advanced manufacturing, advanced sensing and signature management, autonomous systems, communication technologies, financial technologies and renewable energy generation. .
Who would serve on the committee?
Like CFIUS, the committee would be an interagency body made up of several members, including the US Trade Representative, the US Department of the Treasury, the US Department of Commerce, the Department of State of the US, the US Department of Defense and others.
What would the committee review?
According to the discussion draft under consideration, specified outbound investment and outsourcing to specific “countries of interest” involving critical capabilities would trigger the Committee’s review. A broader review would be authorized with respect to businesses that receive certain federal funds or government contracts. The current six “countries of concern” are China, Russia, Iran, North Korea, Cuba and Venezuela.
The following activities involving critical capabilities would trigger review by the Committee:
Develop, manufacture or shift production of a critical capability to a country of interest
Share IP or technical knowledge that enables the development of a critical capacity in a country of interest
Make investments or provide guidance related to enhancing the capabilities of a country of interest with respect to a critical capability
In addition, the bill makes extensive provision for review by the Committee on none activity involving countries of interest by parties receiving certain federal funds or government contracts. Here, the Committee would be empowered to conduct such a broad review with respect to entities:
· Receive financial assistance under the broader legislative package with respect to domestic production of semiconductors; either
· Profit from acquisitions above a certain dollar threshold (yet to be determined by congressional negotiators) from US national security agencies.
What would the committee be empowered to do?
The Committee will review a covered transaction for national security reasons. When you determine that a transaction presents an “unacceptable risk”, you have the power to:
make recommendations to the president for appropriate action under the NCCDA, the Export Control Reform Act, the International Emergency Economic Powers Act, or the Defense Production Act
make recommendations to Congress regarding the domestic production of critical capabilities
· before the action of the President, negotiate or order measures to mitigate the risk
While CFIUS review is well known in the context of cross-border investment, the NCCDA’s “reverse CFIUS” process would be a far-reaching new element of national security review that could affect a host of investment and business decisions. . Investors and companies active in “critical capacity” sectors will be particularly affected by the proposed legislation, along with recipients of funding under the domestic semiconductor financing package and contractors supplying goods and services to US national security agencies
More broadly, the NCCDA can be seen as part of other recent US measures aimed at restricting the supply of technology to bad actors and adversaries (namelyexport controls and sanctions), secure the supply chain against adversary threats (namelythe Information and Communications Technologies and Services Regulation), and promote resilient supply chains (Executive Order 14017, In US supply chains).
Justin A. Chiarodo is a partner at Blank Rome LLP, focusing on federal, state, and local contracting law. Anthony Rapa leads the company’s Homeland Security team.