Are CFIUS Regulations Relevant to Latin American Entrepreneurs and Investors?

The Committee on Foreign Investment in the United States (“CFIUS”) is a federal interagency group with broad authority to evaluate whether foreign investments in U.S. businesses and certain real estate transactions could impair the national security of the U.S.

On August 9, 2023, President Biden issued an executive order addressing outbound U.S. foreign direct investments aimed at the development of critical technologies in “countries of concern”, which initially include China, Hong Kong and Macau. The new rules may cover investments in Latin American businesses with a presence in, or having investments from, China, Hong Kong or Macau. 

Pursuant to the President’s constitutional authority, the International Emergency Economic Powers Act, and the National Emergencies Act, the President declared a national emergency and determined the need to address the “actions of countries of concern which seek to . . . exploit U.S. outbound investments to develop sensitive technologies and products critical for military, intelligence, surveillance, and cyber-enabled capabilities.” The new framework prohibits investments by U.S. persons involving “covered national security technologies and products,” defined as “sensitive technologies and products in the semiconductors and microelectronics, quantum information technologies, and artificial intelligence (AI) sectors that are critical for [Chinese] military, surveillance, or cyber-enabled capabilities.” 

The program establishes certain notification requirements and prohibitions concerning “U.S. person” investments, and some foreign investments with a nexus to a U.S. person, in China, Hong Kong and Macau. Such investments include private equity, venture capital, and mergers and acquisitions, as well as greenfield investments, joint ventures, and certain debt financing transactions by U.S. persons.  Treasury expects to create a carveout exception for specific types of transactions, including certain investments into publicly traded securities or into exchange-traded funds, U.S. person passive limited partnership interests below a certain forthcoming threshold, and intracompany transfers from a U.S. parent to a subsidiary located in the designated countries.  Certain other enumerated carveouts to the definition of “covered transaction” are expected to include inter-university research collaborations; procurement of inputs for covered national security technologies; intellectual property licensing arrangements; secondary activities to a covered transaction like bank lending or transmittal of payments by a bank and underwriting. Carve outs tend to be limited in nature, as is shown by recent prosecutions carried out by the U.S. Department of Justice of certain clandestine Chinese and Russian activities within the academic context.

Below you will find some suggestions for Latin American based businesses and investors on how to approach the expanded scope of CFIUS:

• Determine whether a transaction you contemplate entering into constitutes a “covered transaction” under the new regulatory framework, particularly whether it may enhance or materially benefit China, Hong Kong or Macau’s “military, surveillance, or cyber-related capabilities.” 
• When calculating the transaction costs of an investment in a non-U.S. target company take into account that initial, or subsequent rounds of investments, may be subject to the outbound CFIUS framework and trigger regulatory review which would entail compliance costs or enforcement penalties that could affect the value of the investment. 
• Consider the application of this framework when valuing target companies that may seek funding from U.S. investors in the future and include appropriate representations and warranties in the relevant agreements as to both the structure of the target entity and the burden for conducting and complying with any subsequent CFIUS enforcement action or penalties.
• Bear in mind that other countries have similar regulations in place and accordingly have the ability to review outbound foreign investments.

​Prohibited investments under the new framework are generally targeted towards military, defense and intelligence applications, however the line between these applications and civilian applications can be blurry and as a result subsequent rounds of more detailed rulemaking are likely to follow. 

If you have a Latin America based business, or you are an investor looking to invest in a company with a direct or indirect link to China, Hong Kong or Macau, it is important to monitor the CFIUS regulations. We can help you navigate the CFIUS rules as they are enacted, so as to achieve a compliant business/investment.