The Concept of CFIUS and Mitigating Financial Risk of Foreign Investments

Updated: Mar 31, 2021

The Committee on Foreign Investment in the United States (CFIUS) was established in 1975 and is chaired by the Secretary of the Treasury. The CFIUS is tasked with reviewing foreign investments involving the United States and that may concern national security.

It comprises additional members from 16 U.S. governmental departments and agencies:

  • Treasury

  • Labor

  • Justice

  • Homeland Security

  • Defense

  • State

  • Energy

  • Commerce

  • Director of the Office of Science and Technology Policy

  • US Trade Representative

  • Representatives from other federal agencies also hold “observer” status

CFIUS focuses on the technology and/or funds used in the acquisition of U.S. companies and businesses. It also looks at the data collected by different companies and applications that may pose a threat to national security.

Review Process:

The review standard involves looking at defense production capacity, transactions involving foreign government and military services, and impact on U.S. national security and technological leadership. The review is a 4-step process as follows:

  1. Voluntary Proposal: Parties may submit a declaration notifying CFIUS of a covered transaction in order. The process is largely voluntary, though mandatory declarations are sometimes required if the covered transactions involve critical technologies, etc.

  2. Review Period (~45 days): Under 31 C.F.R. § 800.502, a review period of up to 45 days begins upon acceptance.

  3. Investigation Period (~45 days): According to Section 721 of the Defense Production Act of 1950, an investigation should be undertaken and completed up to 45 days.

  4. Presidential Investigation Period (~15 days): The Executive Order 11858 permits CFIUS to refer a transaction to the President. The President is required to announce a decision within 15 days.

CFIUS on Chinese Investments:

Since the establishment of CIFUS, it has been closely focusing and scrutinizing Chinese transactions. Among all the cases on record, the number of transactions involving Chinese buyers is the largest, which is about 50% more than the runner up buyers from other countries. In 2018, the U.S. proposed the Foreign Investment Risk Review Modernization Act (FIRRMA), which changed the CFIUS reviews process for a country of “special concern”. China is one such country.

In 2020, China's overall investment is at only $5 trillion in the U.S., hitting a new low since the 2008 financial crisis. According to research provider Rhodium Group, Chinese venture-capital investment in the U.S. has dropped to $800 million in the first half of 2020, a figure not seen for the past 6 years. On the other hand, venture-capital investment in China by U.S. firms hit a 4-year low of $1.3 billion.

In order to prioritize and protect American interests and restrict China's five-year plan, CFIUS plans to review bilateral transactions involving core and cutting-edge technologies, including semiconductors, aviation, etc. With the rollout of new regulations, the level of liquidity risk in cross-border activity has increased. In this environment, the majority of investors are skeptical about investing due to the uncertainty involved in these transactions.

Bridge Point of View:

With stringent rules in place for foreign investments and excessive scrutiny involved, investors have become skeptical about foreign investments. With the hassle and the risks involved, the investors are wary of putting their money in companies that might be prone to review by the CFIUS. In the second part of this two-part series, we delve deeper into the political climate between the United States and China and how it has impacted trade between the two countries.