Building on recent national security initiatives to shore up the protection of U.S. critical assets from strategic adversaries (notably including China and Russia), Congress is considering new government powers to review outbound U.S. investments in certain high-technology sectors.

Inbound foreign investments in key sectors are reviewed by the Committee on Foreign Investment in the United States (CFIUS). However, screening of outbound investments — a so-called “reverse CFIUS” — would be new, and could significantly impact industries ranging from aerospace and defense to fintech to pharmaceuticals.

How did we get here?

The last several years have witnessed an accelerated national security pivot from the twenty-year global war on terror to strategic competition with major state adversaries. Unclassified assessments of the U.S. national security posture reveal significant threats in domains ranging from artificial intelligence to hypersonic weapons to energy, many of which have been exacerbated by the theft of U.S. technology. The legislation proposing a “reverse CFIUS” review would seek to counter these threats by adding new controls to the flow of U.S. capital and intellectual property abroad.

The contemplated regime formally originated with the proposed National Critical Capabilities Defense Act (NCCDA), which passed the House of Representatives in February 2022 as part of the America COMPETES Act of 2022, H.R. 4521, a larger package focused on U.S. domestic semiconductor production and other aspects of U.S. competitiveness (certain elements of which, not including the NCCDA, eventually were signed into law as part of the CHIPS and Science Act in August 2022). Most notably, the NCCDA would create a Committee on National Critical Capabilities (the “Committee”), with authority to review – and block – covered outbound foreign investments.

What are the prospects for passage?

While it is not clear if the version of the NCCDA that passed the House will reach the president’s desk, there now appears to be significant momentum in support of a NCCDA-type regime. In June 2022, a bipartisan, bicameral group of lawmakers released a discussion draft revising the House’s version of the NCCDA, and there remains the possibility of executive action if Congress cannot agree on a final form of the bill. This bipartisan support remains despite strong opposition from the U.S. Chamber of Commerce and other industry associations representing potentially impacted sectors.

What can U.S. investors expect from the anticipated new regime?

Outside of investments in a handful of sanctioned countries, U.S. investments abroad heretofore have largely been free of formal national security scrutiny. If passed, the NCCDA raises the prospect of more administrative complexity and uncertainty around business planning and investments. Bottom line, an outbound screening regime would mark a new, significant national security-related check on the cross-border flow of capital and know-how.

What are “National Critical Capabilities?”

As set out in the discussion draft, the NCCDA would be limited to investments in items and technologies of strategic significance to the United States – so-called “national critical capabilities.” These include:

· Semiconductor manufacturing

· Large-capacity batteries

· Critical minerals

· Pharmaceuticals

· Artificial intelligence

· Bioeconomy

· Quantum technology

Covered sectors would also include those listed in the Critical and Emerging Technologies List Update of the National Science and Technology Council, which include advanced computing, advanced manufacturing, advanced sensing and signature management, autonomous systems, communication technologies, financial technologies, and renewable energy generation.

Who would serve on the committee?

Like CFIUS, the committee would be an interagency body comprised of several members including the U.S. Trade Representative, the U.S. Department of the Treasury, the U.S. Department of Commerce, the U.S. Department of State, the U.S. Department of Defense, and others.

What would the committee review?

Pursuant to the discussion draft under consideration, specified outbound investment in and outsourcing to specified “countries of concern” involving critical capabilities would trigger Committee review. A broader review would be authorized with respect to companies receiving certain federal funding or government contracts. The six current “countries of concern” are China, Russia, Iran, North Korea, Cuba, and Venezuela.

The following activities involving critical capabilities would trigger review by the Committee:

· Developing, manufacturing, or shifting production of a critical capability to a country of concern

· Sharing IP or know-how that enables development of a critical capability in a country of concern

· Making investments or providing guidance related to enhancing the capabilities of a country of concern with respect to a critical capability

Also, the draft legislation broadly provides for Committee review of any activity involving countries of concern by parties receiving certain federal funding or government contracts. Here, the Committee would be empowered to carry out such broad review with respect to entities:

· Receiving financial assistance under the broader legislative package regarding domestic semiconductor production; or

· Benefitting from procurement above a certain dollar threshold (yet to be determined by congressional negotiators) from U.S. national security agencies.

What would the committee be empowered to do?

The Committee will review a covered transaction on national security grounds. Where it determines that a transaction poses an “unacceptable risk,” is empowered to:

· make recommendations to the President for appropriate action under the NCCDA, the Export Control Reform Act, the International Emergency Economic Powers Act, or the Defense Production Act

· make recommendations to Congress regarding domestic production of critical capabilities

· prior to action by the President, negotiate or order measures to mitigate the risk

What’s next?

While CFIUS review is well-known in the cross-border investment context, the NCCDA’s “reverse CFIUS” process would be a new, and far-ranging element of national security review that could impact a swath of investments and business decisions. Investors and companies active in “critical capability” sectors stand to be particularly impacted by the proposed legislation, along with recipients of funding under the domestic semiconductor funding package and contractors supplying goods and services to U.S. national security agencies.

More broadly, the NCCDA can be considered to be of a piece with other recent U.S. measures intended to restrict the supply of technology to bad actors and adversaries (i.e., export controls and sanctions), secure the supply chain against threats from adversaries (i.e., the Information and Communications Technology and Services regulations), and promote resilient supply chains (Executive Order 14017, On America’s Supply Chains).

Justin A. Chiarodo is a partner at Blank Rome LLP who focuses on federal, state and local procurement law. Anthony Rapa leads the firm’s National Security team.

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