So you've heard a lot about CFIUS reform and the changes that may result from FIRRMA, perhaps from our prior pieces. While the President just signed FIRRMA into law on August 13, you probably know that many key FIRRMA provisions aren't yet effective because they require implementing regulations, which could take many months. That timeframe might push the casual observer toward a "big whoop" attitude—i.e., "when the precise rules come into focus, I'll start paying attention." That would be a mistake for at least three-and-a-half reasons.

First, if you work with private equity or other capital funds—as an investor or investee—CFIUS is about to start minding your business. Because of FIRRMA, even U.S. funds with foreign limited partners may become subject to CFIUS jurisdiction, and in some cases may even be required to make CFIUS filings. These funds will need to consider, as soon as possible, whether and how to insulate their foreign LPs so as to minimize the risk of CFIUS jurisdiction. These structural decisions made now will carry potentially significant consequences when rules implementing FIRRMA are finalized.

With respect to certain types of portfolio companies—those involved with "critical technologies," "critical infrastructure," or U.S. citizen personal data—CFIUS may have jurisdiction over an indirect investment by a foreign LP through a U.S. fund, even in cases where that foreign LP represents a relatively small percentage of the equity in the fund. Such an investment may be subject to CFIUS review if the foreign LP: (i) has access to "material non-public technical information" from the portfolio company; (ii) has board membership or equivalent status; or (iii) can be involved in decision-making regarding the sensitive aspects of the portfolio company.

FIRRMA does permit foreign LPs to participate in a limited partner advisory committee (LPAC) without triggering CFIUS jurisdiction, although additional requirements must be satisfied. In particular, among other requirements, the fund must: (i) be managed exclusively by a general partner that is not a foreign person; (ii) not grant control over decision-making of the fund to a foreign person or any committee on which a foreign person sits; and (iii) not grant the foreign person access to material nonpublic technical information.

In addition, if a foreign government has a "substantial stake" in the fund, or if there is an investment involving "critical technology," then at least some fund transactions may be subject to mandatory CFIUS review.

Insulating foreign LPs now, so as to minimize the risk of CFIUS jurisdiction, is accordingly a "now" task. Funds that take a "big whoop" view now may be in for a big whupping down the road.

Second, if you're planning a big transaction, be aware that the game may change under your feet. While the mandatory filing rules will not become effective for a while, transactions with long lead times need to consider the possibility that the mandatory triggers will apply before the deal closes. Transaction parties might choose to forego a CFIUS filing now, prepare for closing nine months from now, and then find that they cannot close because they have become subject to a mandatory CFIUS filing and clearance process that could extend closing by many months. That mandatory extension could cause financing to fall through or create unanticipated havoc in other ways, potentially sinking the deal.

Second and a half, there is a reasonable likelihood of mandatory filing triggers being set soon, particularly for transactions where there is a Chinese or Russian government stake.

Several weeks ago, the Trump administration considered, but decided to forego wholesale restrictions on Chinese investment into certain segments of the U.S. economy. President Trump stated that this decision was a reflection of progress made toward enactment of FIRRMA, and that upon enactment, he would direct the Administration "to implement it promptly and enforce it rigorously, with a view toward addressing the concerns regarding state-directed investment in critical technologies."

This emphasis on quickly implementing FIRRMA provisions regarding foreign government-directed investment may cause utilization of a type of 'fast track' authority in FIRRMA. CFIUS is authorized to implement "pilot programs" on a temporary basis until formal rulemakings yield permanent regulations. A pilot program can be implemented with just 30 days' advance publication in the Federal Register.

For investments with foreign government stakes, particularly Chinese or Russian government stakes, it would be foolish to assume that the mandatory triggers are merely on the distant horizon. The possibility of a mandatory CFIUS filing in the offing—via a "pilot program" rule—may affect decision-making regarding whether to submit a voluntary filing now. If there is a good chance that a filing will be required down the road, making a voluntary filing now might be more attractive.

Third, if you're inclined not to make a CFIUS filing—a decision that still may be reasonable for many transactions—be sure you've considered how FIRRMA alters the risk. Where CFIUS has jurisdiction, the risks from not filing are already increasing, in advance of implementing rules being finalized. FIRRMA infuses CFIUS with far greater resources than ever before, and much of the resource infusion will enable CFIUS to hunt for transactions that are not filed voluntarily.

Before FIRRMA, CFIUS generally did not have the capacity to track down more than a couple dozen of these "non-notified" transactions. But FIRRMA authorizes at least $20 million for CFIUS operations and requires a significant increase in the amount of sustained political energy devoted to CFIUS: two new assistant secretaries (i.e., political appointees) from the Treasury Department, by itself, must be involved in CFIUS as well as the involvement of similar level political appointees from other agencies. An assistant secretary in any administration generally has a large staff, and it is highly unusual to have a regulatory process overseen by the number of political appointees who soon will be involved routinely in CFIUS matters.

That means, almost certainly, that we will see far more examples of CFIUS compelling filings for transactions where the parties chose not to file. As CFIUS observers know, CFIUS-compelled filings often have unhappy results, sometimes including forced divestments.

Transactions hunted by CFIUS previously were like shark attacks: rare but sometimes fatal. They may soon become more like jellyfish stings: common, usually painful, and occasionally fatal. That's something to consider, even this summer, as you consider the inviting investment waters.

For more information about FIRRMA or any other CFIUS-related matter, please contact Stephen Heifetz (sheifetz@wsgr.com), Joshua Gruenspecht (jgruenspecht@wsgr.com), or any member of the national security practice at Wilson Sonsini.