The U.S. Department of the Treasury recently released its Committee on Foreign Investment in the United States (CFIUS) 2023 Annual Report to Congress. The report provides an anonymized summary of CFIUS’ foreign investment review caseload over the 2023 calendar year—revealing key trends in CFIUS filings and case resolutions, including expanded options for mitigation of national security concerns, the basis of guidance on mandatory filing compliance, an uptick in filings requested by CFIUS for non-notified transactions, and increased enforcement and penalties including for violations of mitigation agreements. 

Number of Transactions Reviewed Down Overall—but Review Frequency Persists

Overall, CFIUS reviewed 342 covered transactions (a combination of shorter-process Declarations and longer-process Notices), a significant drop from 2022, which set a record high of 440. However, against a stalled M&A market in 2023, it is unlikely that the decrease indicates any slowdown in the CFIUS review process or that parties are opting against submission of CFIUS filings. For example: 

• Notices filed by Acquirers from the United Arab Emirates (UAE) doubled in number compared to 2022.
• The number of mandatory Declarations submitted in 2023 increased compared to 2022.
• CFIUS issued definitive clearance in 76% of Declaration cases, compared to 58% in 2022, possibly resulting from increased CFIUS resources and a more efficient review process.
• CFIUS required mitigation measures to resolve national security concerns in about one in five cases, roughly the same ratio as in 2022.

In general, the most frequent filers of declarations and/or notices reflect traditional sources of investment (Canada, UK) as well as countries of particular interest to CFIUS (China, UAE):

Non-Notified Transactions Under Scrutiny

CFIUS continues to actively engage in efforts to identify non-notified transactions. The Annual Report confirms that CFIUS used a wide variety of methods to identify transactions that were not declared or notified through formal filings, including interagency referrals, tips from the public, classified reporting, media reports, voluntary self-disclosures, congressional notifications, and review of multiple commercial and proprietary databases.

CFIUS considered thousands of potential non-notified transactions and conducted informal investigations to determine whether or not to open an official inquiry. Ultimately, the Committee opened 60 non-notified inquiries, down from the prior year, but 13 of those inquiries (22%) resulted in a request for a formal filing, a marked increase from 2022. The Annual Report also noted that there were an additional three instances where parties opted to voluntarily file a Declaration or Notice prior to receiving a formal request from CFIUS. 

Increased Fines & Tightening of Transaction Structures

Enforcement around mandatory filing requirements and compliance with mitigation agreements reached new levels in 2023. The Committee has increased its resources, and CFIUS member agencies that lead on monitoring mitigation agreements are maintaining a steady pace of company site visits. CFIUS disclosed that it imposed four fines for violations of mitigation agreements in 2023—double the prior total of two fines issued in its history. CFIUS also undertook investigations and issued formal determinations of non-compliance with mandatory filing provisions. Relatedly, CFIUS noted that it has received its first voluntary self-disclosure for failure to make a mandatory filing.

While those determinations carried no fines, CFIUS’s investigations prompted the issuance of clarifying guidance (via an FAQ published on its website) on what the Committee considers the “completion date” of a transaction for purposes of mandatory declarations, which must be filed at least 30 days prior. In that guidance, CFIUS clarified that the completion date is the earliest date the foreign person acquires an equity interest even if the corresponding rights that trigger a mandatory filing are not conveyed until after CFIUS clearance. Notably, this guidance had a significant impact on the use of “springing rights,” which were commonly used to allow the financial elements of a transaction to close while holding back certain CFIUS triggering rights (such as a board seat or board observer rights) until the parties obtained CFIUS clearance.

Multi-Agency Focus on Foreign Investment in Emerging Technology Companies

Outside of the established CFIUS review process, other government agencies are paying close attention to trends in foreign investment, and some are ringing alarm bells. In late July, the Office of the Director of National Intelligence’s (ODNI) National Counterintelligence and Security Center (NCSC) issued a joint bulletin with ODNI’s Office of Economic Security and Emerging Technology (OESET), the Air Force Office of Special Investigations (AFOSI), and the Naval Criminal Investigative Service (NCIS) warning U.S. emerging technology startups about the threats those companies face from “investment by foreign threat actors.” Drawing particular attention to investment from China, the bulletin observed that foreign venture capital and private equity investors can structure transactions to avoid CFIUS scrutiny but still exert harmful influence on a U.S. startup company.

The bulletin highlighted threats including:

• The risk of foreign threat actors obtaining a U.S. startup’s proprietary data during a disingenuous investment diligence process, withdrawing from the investment, and then using the information to compete against the U.S. company in the global market. 
• Undue foreign influence on key business decisions at the expense of the U.S. startup.
• Advancement of the economic and military capabilities of a foreign threat actor’s nation through data and technology acquired from U.S. startups.
• The risk of losing U.S. federal contracts or funding if a U.S. startup has foreign influence.

The bulletin cautions U.S. startups to evaluate red flags in foreign investments that involve complex ownership structures, investments through intermediaries or as limited partners with significant influence, requests for sensitive data as part of an investment and during diligence, and transactions where a foreign investor offers a quick infusion of cash to a struggling company. Notably, concerns around potential for foreign influence through limited partnership arrangements also have arisen in inquiries from CFIUS, as well as from the U.S. Department of Defense’s Defense Counterintelligence and Security Agency (DCSA) when evaluating indicia of foreign ownership, control or influence (FOCI) over a U.S. company during the Facility Clearance (FCL) application process.