On May 11, 2023, the Committee on Foreign Investment in the United States (“CFIUS”) issued a Frequently Asked Question (“FAQ”), which calls into question the use of “springing rights,” a broadly used instrument to expedite financings while complying with mandatory filing requirements. The FAQ addresses the timing for when a filing must be made for a transaction triggering a mandatory filing. Since implementation of the mandatory filing requirements, transaction parties have used springing or deferred rights to allow financings to proceed while those rights triggering a CFIUS filing are deferred or held in abeyance until after CFIUS clearance.
Background on CFIUS Mandatory Filing Requirements
CFIUS regulations require mandatory filings when (1) a foreign person acquires certain governance (including a board observer) or information rights in a business that develops, tests or produces critical technology in the United States, or (2) when a foreign government acquires 25% or more of the voting interest in a US business that develops critical technology in the United States, operates critical infrastructure in the United States or collects/maintains sensitive personal data of US citizens (i.e., is a “TID US Business”).
CFIUS mandatory filings must be made at least 30 days prior to the “completion date,” which is defined as the “earliest date upon which any ownership interest, including a contingent equity interest, is conveyed, assigned, delivered, or otherwise transferred to a person, or a change in rights that could result in a covered control transaction or covered investment occurs.” 31 C.F.R. § 800.206.
The FAQ clarifies that mandatory filings must be made before a transaction’s “completion date,” and the completion date is the earliest date upon which any equity interest, including contingent equity interest, is transferred. The FAQ provides an example in which a foreign person acquires 25% equity with a deferred right to “control,” and notes that the filing must be made before the acquisition of the equity. A 25% voting interest would, by itself, typically be considered “control” (e.g., a CFIUS triggering right).
The FAQ leaves some uncertainty regarding the use of springing rights outside of the transfer controlling equity interests. The FAQ does not address the second half of the “completion date” definition (as appears in § 800.206), which refers to “a change in rights.” That part of the definition provides that the completion date is when “a change in rights” resulting in a covered transaction “occurs.” Thus, it remains unclear whether the completion date for acquisition of a passive interest (e.g., 5% voting interest), combined with a deferred CFIUS triggering right (e.g., a board observer), would be at the time of the acquisition of the equity (which by itself is not a covered transaction), or only when the change in rights “occurs” after CFIUS clearance.