The Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA) was signed into law by the current Administration on August 13, 2018, to protect US technological superiority and address national security risks associated with the ability of foreign parties to obtain equity interests in domestic businesses and influence decisions or obtain information related to critical US technologies. However, FIRRMA poses a threat to a wide range of innovative industries, including Biotech, Aerospace, and Nanotechnology, by adding increased governmental scrutiny that may restrict the funding needed by entrepreneurs seeking to build the next-gen technologies. Without the funding necessary to take the risks necessary to develop these next-gen technologies, FIRRMA may erode the technological superiority it seeks to protect. Moreover, the pace of innovation in other parts of the world may increase as corporations are free to accept the investments that US companies are denied because of FIRRMA.

FIRRMA is designed to reform and modernize the review process of the Committee on Foreign Investment in the United States (CFIUS) and gives CFIUS authority over technology transfers. FIRRMA modified and broadened the power of the president and CFIUS by expanding the scope of foreign investments in the US subject to national security review. CFIUS’ authority applies to the technology transfers of US businesses to foreign organizations as well as domestic organizations that are controlled by a non-US person. While FIRRMA will not be fully implemented until February 2020, the US Department of the Treasury issued temporary regulations in October 2018 through a pilot program to address what it considers to be critical American technology and intellectual property from potentially harmful foreign acquisitions.

The pilot program implements two sections of FIRRMA that did not take effect upon FIRRMA’s enactment. The first section expands the scope of transactions subject to review by CFIUS to include certain investments involving foreign persons and critical technologies. The second section makes effective FIRRMA’s mandatory declarations provision for all transactions that fall within the specified scope of the pilot program. The regulations state that the pilot program establishes mandatory declarations for certain transactions involving investments by foreign persons in certain US business that “produce, design, test, manufacture, fabricate, or develop one or more critical technologies.” The language of the temporary regulations may be concerning to businesses seeking investment due to the broad language it contains and without these investments, there will be a negative impact on the types of R&D efforts that facilitate the creation of innovative technologies that generate intellectual property portfolios that can be licensed.

The regulations also state that the purpose of the pilot program is to assess and address ongoing risks to the national security of the US resulting from two urgent and compelling circumstances: (1) the ability and willingness of some foreign parties to obtain equity interests in US business in order to affect certain decisions regarding, or to obtain certain information relating to, critical technologies; and (2) the rapid pace of technological change in certain US industries. While the regulations state that the current Administration “supports protecting our national security from emerging risks while maintaining an open investment policy,” it is unclear how this Administration will utilize this program and how it may impact funding in the US and the downstream impact that this lack of funding may have on IP licensing. In the first quarter of 2018, net foreign direct investment into the US has declined from $146.5 billion in the first quarter of 2016 to $89.7 billion for the same quarter in 2017 to $51.3 billion for the first quarter of 2018.  While most of the decline is attributed to general economic factors, many believe that it also reflects fears of what the administration is going to do given their stance on China and the threat of trade wars and tariffs.

The expansion of CFIUS authority over investments through FIRRMA may lead to decreased interests from foreign individuals, business, and funds that, in part, created an environment for US businesses to secure the technological superiority this Act now seeks to protect. If that is the case, we may see significantly less investment in the industries covered by the pilot program which includes many industries at the forefront on IP licensing activity such as: Computer Storage, Semiconductor, Battery, Aerospace (Aircraft manufacturing, Space Vehicles and Propulsion), BioTech, Wireless Communication Equipment and Nanotechnology.

It is too soon to know the impact FIRRMA will have on US businesses that seek investment to fund the type of research and development necessary to maintain the pace of innovation that led to the US holding a strong position in technological advancement; however, given the current decline in funding, there is a real possibility that these new regulations that are being imposed on US innovation companies may further restrict the funding necessary to drive the US technological superiority that FIRRMA was created to protect.