Considerations for US Businesses when Attracting Foreign Investors
by Emma Frisch, Law Clerk
International Trade Law
Securing investment in your business is crucial. However, if that capital comes from a foreign investor, then a different framework of rules apply, which can occasionally create additional difficulties. When attracting foreign investment, it is crucial to understand the permissible thresholds of investment and the type of role these foreign investors can play before your business becomes bogged down in bureaucratic compliance issues. These additional compliance protocols stem from the Committee on Foreign Investment in the United States (CFIUS), which balances the advancement of both national security and economic prosperity. CFIUS is a US federal interagency group with the authority to review foreign investment in US businesses and certain real estate transactions to ultimately evaluate whether that investment has any implications for US national security. The stakes are high for any business that relies on foreign investors because an adverse CFIUS finding can result in either a block or reversal of the investment. Thus, to smoothly acquire foreign investment without triggering CFIUS, a business should consider these three important elements: the nature of the investor, their prospective stake in your business, and the type of information that they may access.
First, the nature of the investor includes its composition and nationality. For instance, there will be different degrees of permissibility depending on whether the foreign investor is an individual, another corporation or a state-owned enterprise (SOE). Additionally, the nationality of the investor is crucial because investments from entities with certain nationalities may be blocked outright (i.e., nationals from sanctioned countries like Russia), meanwhile investors from other countries may enjoy more lenient standards (i.e., Canadian investors).
Second, the stake in your business refers to the level of ‘control’ the foreign investor may have and their percentage of ownership. An investor can have substantial interest, majority interest, minority interest or passive investment. Generally, passive investments and minority interest shareholders will not attract the attention of CFIUS. CFIUS does not have authority to review passive investments, making this the best option. A passive investor is one who does not intend to exercise control, lacks governance rights and does not have access to certain technical information.
Finally, the type of information the foreign investor can access affects the application of CFIUS rules. Simply put, the foreign investor should not have access to confidential information from the business such as nonpublic technical information or trade secrets. The industry sector of your business also affects the degree of sensitivity surrounding information. For example, businesses involved in manufacturing defense articles, ITAR restricted products, or critical technologies, critical infrastructure or sensitive personal data will face stricter requirements.