Earlier this year, the Department of the Treasury announced that the Committee on Foreign Investment in the United States (CFIUS) had determined that New Zealand and the United Kingdom had satisfied the criteria with respect to excepted foreign states (EFS) under CFIUS regulations, which ensures those countries’ continued status as EFS pursuant to CFIUS regulations and the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA).¹ As a result of this action, all four Five Eyes allies (i.e., Australia, Canada, New Zealand, and the United Kingdom) remain EFS, meaning qualifying investors who can demonstrate strong ties to these countries as defined in specific regulations are exempt from CFIUS’s expanded jurisdiction over noncontrolling minority investments and mandatory filing requirements under FIRRMA, which requires a filing for covered transactions involving certain United States businesses in critical technologies, critical infrastructure, and sensitive personal data.² EFS controlling investments are still within CFIUS jurisdiction, and therefore, foreign investors from the Five Eyes countries may still choose to submit such investments for voluntary CFIUS review. However, the EFS exemption provides a useful safe harbor, particularly for investors from EFS countries taking minority interests in industries involving emerging technologies or personal data.

1. Regulations issued under FIRRMA in 2020 carved out investments made by certain “excepted investors” who are associated with EFS from covered investments that invoke CFIUS’ mandatory filing requirement.³ Under current regulations, an “excepted investor” can be:
   1. A foreign national who is exclusively a national of one or more EFS;
   2. A foreign government of an EFS; or
   3. An entity that meets each of the following conditions with respect to itself and each of its parents:
      1. Organized under the laws of an EFS or in the United States;
      2. Has its principal place of business in an EFS or in the United States;
      3. Seventy-five percent or more of the members and 75% or more of the observers of the board of directors or equivalent governing body of such entity are:
         1. United States nationals; or
         2. Nationals of one or more EFS who are not also nationals of any foreign state that is not an EFS;
      4. Any foreign person that individually, and each foreign person that is part of a group of foreign persons that, in the aggregate, holds 10% or more of the outstanding voting interest of such entity; holds the right to 10% or more of the profits of such entity; holds the right in the event of dissolution to 10% or more of the assets of such entity; or otherwise could exercise control over such entity, is:
         1. A foreign national who is a national of one or more EFS and is not also a national of any foreign state that is not an EFS;
         2. A foreign government of an EFS; or
         3. An entity that is organized under the laws of an excepted foreign state or in the United States and has its principal place of business in an excepted foreign state or in the United States; and
      5. The minimum excepted ownership⁴ of such entity is held, individually or in the aggregate, by one or more persons, each of whom is:
         1. Not a foreign person;
         2. A foreign national who is a national of one or more EFS and is not also a national of any foreign state that is not an EFS;
         3. A foreign government of an EFS; or
         4. An entity that is organized under the laws of an EFS or in the United States and has its principal place of business in an EFS or in the United States.⁵

Notwithstanding that a foreign investor may otherwise qualify as an “excepted investor” based on the criteria above, there are situations that can disqualify a foreign investor from such status (Disqualifying Circumstances). For example, if (a) such an investor is listed on either the Department of Commerce, Bureau of Industry and Security Unverified List, or Entity List in 15 CFR part 744, or (b) within the five years prior to the completion date of the covered transaction, such person was subjected to punitive actions or informed of wrongdoings by CFIUS or certain federal government departments.⁶ In addition, if a foreign investor no longer meets all the criteria for qualifying an “excepted investor” as set forth in (1), (2), or (3)(i) through (iii) above or is disqualified from such status due to Disqualifying Circumstances within three years after the completion date of the covered transaction, the foreign investor is not an excepted investor with respect to the covered transaction from the completion date onward,⁷ in which case CFIUS would have jurisdiction over the transaction and, potentially, a CFIUS member agency may trigger a post-closing review.⁸ Although such scenarios are likely to be quite rare, CFIUS regulations provide for such contingencies so as to avoid parties from non-EFS countries seeking to use an EFS structure to attempt to avoid national security scrutiny.

¹https://home.treasury.gov/news/press-releases/jy1262
²31 CFR § 800.211
³31 CFR § 800.211
⁴31 CFR § 800.233
⁵31 CFR § 800.219(a)
⁶31 CFR § 800.219(c)
⁷31 CFR § 800.219(d)
⁸31 CFR § 800.501(c)(2)(i)