In late February, the White House issued a National Security Presidential Memorandum outlining its objectives for welcoming international investment in the U.S. and strengthening its private and public capital markets. However, while affirming its commitment to maintaining an open investment environment, the memorandum acknowledges that foreign investment can be accompanied by national security threats. It outlines policies intended to place further restrictions on investment and M&A (mergers and acquisitions) activity by foreign adversaries and extend more favorable treatment to U.S. allies and firms that distance themselves from adversaries.
While the memorandum itself doesn’t adopt any new regulations or propose a timeline for doing so, those contemplating investment in the U.S. market soon should be aware of the key objectives it sets out. Mostly notably, it imposes further restrictions on Chinese investment in the U.S., proposes a new “fast track” process for allies to facilitate greater investment in key sectors, and eliminating the “greenfield” exception. As the Committee on Foreign Investment in the United States (CFIUS) is expected to initiate a rulemaking process to implement the memorandum’s aims in the near term, being prepared will help investors and businesses avoid running afoul of potential new restrictions or regulatory requirements.
A Focus on China
While the memorandum defines the term “foreign adversaries” to include a number of nations such as the Islamic Republic of Iran and the Russian Federation, much of its language focuses on the People’s Republic of China (PRC). It cites the intention of the administration to “use all necessary legal instruments” to prevent those affiliated with the PRC from investing in U.S. technology, critical infrastructure, healthcare, agriculture, energy, raw materials, and other strategic sectors. Similarly, the U.S. will work to reduce outbound investments in China’s military-industrial sector, restricting activity in areas such as semiconductors, aerospace, advanced manufacturing, artificial intelligence, biotechnology, and more. To do so, the administration will consider restricting certain investment types, including private equity, venture capital, greenfield investments, corporate expansions, and investments in publicly traded securities.
In addition, the administration seeks to protect U.S. farmland and real estate near sensitive facilities from adversarial investment and intends to attempt to strengthen CFUIS authority over greenfield investments to restrict access to sensitive technologies, particularly artificial intelligence. The elimination of the greenfield exception that formerly exempted startups and new ventures from CFUIS’s jurisdiction could now expose many more transactions to CFUIS review.
Fostering Foreign Investment in the U.S.
Stating that “investment in our economy from our allies and partners … supports the national interest,” the memorandum also lays out steps intended to foster foreign investment in the U.S., including:
- A new “fast track” process: The memorandum calls for the U.S. to create an expedited fast-track process to facilitate more investment from specified allied and partner sources in U.S. businesses involved with advanced technology and other important sectors. However, those seeking to take advantage of this process will be subject to certain security provisions, including that investors avoid partnering with U.S. foreign adversaries. This standard may be difficult for investment funds with global operations to meet. In addition, it is unclear how this new process would align with the current “Excepted Investor” framework for Five Eyes nations.
- Simplified mitigation agreements: Citing investor uncertainty and the administrative burden of current mitigation agreements as obstacles to foreign investment, the memorandum specifies that such agreements should consist of clear, concrete steps for compliance.
- Continued encouragement of passive investment: Passive investment—that is, investment with no voting, board, or other governance rights and that do not provide nonpublic access to sensitive information—is welcomed from all foreign persons. Potentially, however, this type of investment could still attract scrutiny if it is made by foreign adversaries.
It remains to be seen how implementation of the presidential memorandum will translate these policy aims into updated regulations. In the meantime, those contemplating inbound or outbound transactions that may be affected should monitor developments closely to assess the potential impact.
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