Insights

As deals increase in complexity, and ownership structures are oftentimes opaque and obfuscated, it is important to be mindful of CFIUS’s continued stance of requesting identities of Limited Partners (LPs) in transactions involving investments funds.

In the past five to six years, more transactions being reviewed by CFIUS involve venture capital and private equity deals. This results in more complex ownership reviews, including CFIUS reviewing LPs in investment funds. In its 2024 Annual CFIUS Conference in Washington, D.C., CFIUS emphasized the need to provide information regarding LPs. Below are a few CFIUS pointers:

1) Provide the total number of LPs involved and a high-level description of the investors. For example, are they individual LPs, or is the fund tailored to one or two LPs, or 200-500 LPs?

2) Provide percentages and identities of investors with 5% or more interest in the fund (not just the U.S. business being acquired).

3) Provide percentages for investors involving countries of concern (e.g., China, Russia, etc.) even if lower than the 5% threshold.

4) Explain whether LPs will have access rights individually or collectively through limited partnership agreements, side letters, or similar types of documents.

Tip: Provide this above information upfront (before CFIUS asks). This will be key for CFIUS to determine if the client deal is benign. Typically, CFIUS is reviewing to ensure that LPs’ rights are those of true passive investors. In other words, CFIUS is checking that no side letters allow those passive investors to receive greater rights (e.g., board seats, observer rights, access to non-public technical information, etc.).

Importantly, CFIUS recognizes that oftentimes agreements in place contain confidentiality provisions preventing investor identity disclosures; however, CFIUS pointed out that these agreements usually also contain exceptions for disclosures required by government agencies. CFIUS also stressed that information received by CFIUS is treated as strictly confidential.

None of the above information is new. In fact, CFIUS published an FAQ on LP reviews on May 11, 2023, which we reproduce directly below for ease of reference.

Question: Does CFIUS require information on all foreign persons, such as limited partners in an investment fund, that would hold an interest in a U.S. business, whether directly or indirectly, as part of the transaction?

Answer: In addition to the information required for submission of a complete filing with CFIUS, to facilitate its review, CFIUS through the Staff Chairperson may request follow-up information with respect to all foreign investors that are involved, directly or indirectly, in a transaction, including limited partners in an investment fund.  Like other aspects of the CFIUS process, the scope of such a request depends on the facts and circumstances of each transaction.  For example, CFIUS often requests identifying information for indirect foreign person investors, including limited partners, their jurisdiction(s) of organization, and ultimate ownership, among other information, regardless of any arrangements that may otherwise limit the disclosure of such foreign person’s identity.  CFIUS may also request information with respect to any governance rights and other contractual rights that investors collectively or individually may have in an indirect or direct acquirer or the U.S. business to facilitate the Committee’s review regarding jurisdictional or national security risk-related considerations.  Such information, as with all information filed with CFIUS pursuant to 50 USC 4565, is subject to the confidentiality protections afforded by 50 USC 4565(c).

In short, parties must adequately and proactively prepare the information the Committee may request to avoid unnecessary delays during CFIUS’s national security review. Though the topic is not new, it is an important reminder that CFIUS expects full ownership disclosure and transparency. As one officer said during the conference: “if you want access to the U.S. economy, you gotta play by the rules.”

 If you have further questions on this topic, feel free to contact the attorneys at Torres Trade Law, PLLC.