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How will the new US rules on foreign investment affect private equity?

The Committee on Foreign Investment in the United States (CFIUS) has issued a final set of regulations to implement the Foreign Investment Risk Review Modernization Act (FIRRMA).

The new rules which were revealed on Monday and will come into effect in February, are geared towards increased investigation of foreign investors whose potential stakes in US businesses could pose a national security threat.

According to Jeremy Swan, managing principal of CohnReznick’s Financial Sponsors & Financial Services Industry and leader of the firm’s M&A Consulting Services Practice, the proposed final FIRRMA regulations have expanded CFIUS’ authority beyond control investments and transactions to include certain non-control transactions.

“The regulations have led some funds with significant investment by entities outside of the US, UK and Canada to restructure their investment vehicles to ensure that safe harbour rules are satisfied and foreign investors are siloed from the influence and decision making processes that could lead to the disapproval by CFIUS and ultimate unwinding of a transaction,” said Swan.

Going forward, global investors will need approval from CFIUS – a panel of national security experts – prior to investing into a US-based business that deal with personal data or technology used by the US military.   

The new FIRRMA regulations now potentially limits fund investment in certain companies, that handle critical technologies’ companies dealing with  infrastructure or that collect US citizens personal data that may be exploited in a manner that threatens national security.

This has implications for European investors as well. “Funds in the US who are fundraising outside of the US must be cognisant of these new regulations and ensure that foreign investors (other than those in the UK and Canada) will not have access to information, board influence or decision making at the portfolio company level that would lead to a prohibited transaction,” explained Swan.

Critical areas that are affected by The Treasury Department’s new rules unveiled earlier this week include the telecom, energy, transportation, health, and genetic testing industries.

“Going forward, private equity firms as well as companies seeking to sell in today’s market must be aware of the regulations and the potential pitfalls involved in transferring ownership to foreign persons as defined by FIRRMA,” Swan continued. 

He also said that companies that are “in high growth mode that cannot afford time consuming roadblocks to a transaction must understand whether a transaction could be in violation of the FIRRMA regulations and subject to review by CFIUS as the review can severely delay a transaction even if it may eventually lead to an approval.”

The final regulations follow a proposal that was first launched in September for public comment, and implement a 2018 law that deals with foreign acquisition of US companies.

“The committee appears to have sought to balance encouragement of an open investment environment while targeting critical areas of national security concern,” Hogan Lovells lawyer Anne Salladin told The Wall Street Journal earlier this week.

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