CFIUS Privately 'Warning' Investors About Springing Rights Deals, Law Firm Says
The Committee on Foreign Investment in the U.S. is reaching out to companies to warn them of a recent frequently asked question from May that may create “significant obstacles” for tech startups and others trying to raise capital, Wilson Sonsini said in a client alert last week. The CFIUS guidance clarified that the completion date of a transaction is the date when the foreign person obtains any equity interest in the U.S. business, and law firms at the time warned the clarification could lead to problems for parties that for years relied on "springing rights" for minority investments -- deals that allow an investor to acquire equity but not in a way that would make their stake a covered transaction under CFIUS (see 2305300058).
Sign up for a free preview to unlock the rest of this article
Export Compliance Daily combines U.S. export control news, foreign border import regulation and policy developments into a single daily information service that reliably informs its trade professional readers about important current issues affecting their operations.
“Two months later, it is clear CFIUS intends to enforce the change seemingly sought through the issuance of that FAQ -- we’re aware of many private CFIUS communications warning of such enforcement,” Wilson Sonsini said. The firm said the new approach “may create significant obstacles for precisely the entities CFIUS is apparently trying to protect -- start-ups in ‘critical technology’ sectors trying to raise enough capital to become successful commercial enterprises.”
Under the new CFIUS FAQ, U.S. critical technology companies may run into difficulties when looking to raise funds “by packaging together investments from many investors,” which the firm said is “common.” Now, “many foreign investors will have to sit on the sidelines because the deal cannot be closed quickly with an obligatory CFIUS process standing in the way. That increases the cost of capital for many cash-starved businesses.”
Wilson Sonsini said it’s surprised CFIUS has “sought to change, via a website FAQ, a key definition” that CFIUS practitioners “have relied upon for years to structure deals with deferred rights.” The firm noted that courts have ruled FAQs and “similar informal guidance insufficient to override regulations (in part because of due process concerns).”