Every founder and operator who has raised funding knows the excitement of receiving an investment term sheet or indication of interest.
Not to be overlooked in the process of comparing terms such as valuation and control rights, is a clear-eyed, careful examination of sourcing—U.S. companies need to ask not only “how much” and “when” but also “where”—as in, “where is the money coming from?”
In this article, we highlight several regulatory regimes that transaction parties should consider when U.S. space-focused companies evaluate taking foreign investment. The overview below underscores both the distinct nature of the relevant regimes and their intersectionality.
While space-focused U.S. companies should consider each of the various regimes cited below when evaluating investment from non-U.S. sources, transaction parties should weigh them all in relation to the most central U.S regulatory regime concerning foreign investment, namely the Committee on Foreign Investment in the United States
(CFIUS). Keep in mind, to the extent a space-focused U.S. company is taking foreign investment, regulatory authorities are likely to be more interested (relative to other industries) given that the national security implications are likely to be greater.
1. What U.S. regulatory regimes are relevant when U.S. space company is taking foreign investment and/or dealing with foreign entities?
U.S. companies operating in the space industry that are seeking to take or maintain foreign investment can trigger and/or be subject to a number of ongoing responsibilities under differing U.S. regulatory authorities. As discussed in greater detail below, these regimes can have unique triggers based on the specific facts of the case (e.g., corresponding to the level of foreign investment), the ongoing responsibilities related to foreign ownership, and who is responsible for submitting (i.e., a joint filing from all the transaction parties, or a unilateral filing obligation of the U.S. space company taking foreign investment). Key regimes that transaction parties should keep in mind when dealing with foreign investment and/or foreign operations include:
(i) Defense Counterintelligence and Security Agency (DCSA) and the National Industrial Security Operating Manual (NISPOM): DCSA is a federal security and defense agency of the United States Department of Defense. DCSA is the government’s largest security and counterintelligence agency and is responsible for a number of security-related functions, primarily security clearance vetting and protection of the nation’s classified facilities. The NISPOM is the set of rules that governs basic DCSA functions. Under the NISPOM, one of DCSA’s core roles is to monitor private entities that perform classified work for the federal government for foreign ownership, control, or influence (FOCI) (which includes many space companies). Per DCSA, a company is considered to be operating under FOCI whenever a foreign interest has the power, direct or indirect, to direct or decide matters affecting the management or operations of the company in a manner which may result in unauthorized access to classified information or may adversely affect the performance of classified contracts.1 Notification to DCSA may be required if there is a change in foreign ownership of an entity that deals in classified information. A company that maintains a facility security clearance — i.e., one that has the right to perform on classified contracts — is obligated under the NISPOM to keep DCSA continually updated in advance of various kinds of changes.2
These include changes in FOCI as a result of foreign investment. The reporting obligations under this regime are company-led, but such reporting could touch on equities of the foreign investor.
(ii) Directorate of Defense Trade Controls (DDTC): SDDTC is a division of the Department of State responsible for regulating the flow of defense-related technology through the application of the International Traffic in Arms Regulations (ITAR). The ITAR, in turn, is the U.S. regulatory regime designed to restrict and control the export of defense and military related technologies to safeguard U.S. national security. If a space-focused U.S. entity is ITAR- registered, that entity must provide notification to DDTC under certain scenarios if there are material changes of circumstances, including changes to information previously provided by an ITAR registrant during its initial registration. In particular, a registrant must provide to DDTC a written notification when there has been a change in ownership or control.3 A registrant must also notify DDTC at least 60 days in advance of any “intended sale or transfer to a foreign person of ownership or control of the registrant.” Notably, “foreign control” means one or more foreign persons have the authority or ability to establish or direct the general policies or day-to-day operations of the firm.4 “Foreign control” is presumed to exist where foreign persons own 25% or more of the outstanding voting securities of a company, unless one U.S. person controls an equal or larger percentage. The reporting obligations under this regime are also company-led, and again such reporting could touch on equities of the foreign investor.
(iii) Federal Communication Commission and Team Telecom: The FCC is an independent agency of the U.S. federal government that regulates communications—including communications between earth and space over the public airwaves—across the United States. Space-focused U.S. entities that hold certain specific kinds of FCC licenses have a legal obligation to obtain FCC approval before changing control or seeking foreign investment above a certain size; failure to do so could result in penalties and/or the suspension of the license. The FCC reviews foreign investment in FCC licensees through authorities granted under the Communication Act of 1934, as amended, and the rules and regulations promulgated thereunder. These rules apply, in particular, to FCC non-common carrier space station and earth station licenses (the kinds of licenses that typically permit a satellite operator to broadcast from space to earth and back). Through the Communications Act and the related rules, the FCC has indicated that approval of the FCC is required in advance of an entity under 25% or greater foreign ownership being granted (or obtaining through transfer) the most typical kinds of satellite-related licenses.5 If a license-holding entity of this type has foreign ownership that exceeds the 25% threshold, the FCC must approve the foreign ownership interest through the material on that point contained in the relevant FCC application. In addition to review by the FCC itself, the FCC also refers cases of significant foreign ownership to the collection of executive branch agencies colloquially called “Team Telecom” so that they may perform any necessary national security review.6 In general, the FCC does not refer non-common-carrier Earth station and space station license transfers to Team Telecom (as such applications fall outside the set of applications for which the regulations require such a referral), but the FCC still reserves discretion to do so as needed.
National Oceanic and Atmospheric Administration (NOAA): NOAA is an agency within the U.S. Department of Commerce. Among its many roles (including monitoring oceanic conditions and the U.S. environmental satellite programs) NOAA provides licensing of private remote sensing space systems. Pursuant to the National and Commercial and Space Act, the CRSRA division of NOAA oversees the licensing of the operations of private space-based remote sensing systems.7 The CRSRA regulations overseeing licensing regulations and policies were updated in 2020.8 Notably, in that update NOAA articulated revised requirements pertaining to the notification mandates associated with a change in foreign ownership. Whereas the former regulations were more prescriptive about foreign ownership filings, the new regulations only require a company to report ownership interests (foreign and domestic) of ten percent or greater, and even then only if the overall U.S. ownership is not at least fifty percent.9 This also is a U.S. company-led obligation.
2. There appear to be a number of relevant regimes. Can I deal with them all at once?
As you can see, there are a number of regimes that could be relevant when a space-focused U.S. entity is taking or has taken foreign investment. While some might broadly share similarities (e.g., requiring notification if taking new foreign investment), it is important to note that the reporting triggers are each unique depending on the U.S. regulatory authority in question and, at a minimum, each require dealing with the individual agencies separately through their own application and/or reporting channels.
Nevertheless, while the triggers and reporting mechanisms can all be specific to a particular U.S. regulatory regime, transaction parties should think about them holistically and how the regimes may interact, particularly through individuals at separate regulatory agencies sharing information about transactions throughout the U.S. government; e.g., authorities at NOAA or DCSA may share information received in an ownership update/filing with CFIUS, which could lead to a further, more complicated, review of the transaction. Most importantly, transaction parties should coordinate their assessments when considering foreign investment with the overarching and most comprehensive foreign investment national security process that is relevant in the United States—namely, CFIUS.
3. What is CFIUS? What transactions can it review, and what powers does it have?
CFIUS is an interagency committee, and the key regulatory authority, responsible for reviewing foreign investment into the United States. The Committee has broad discretionary power to determine whether those investments pose national security risks, and the CFIUS process can impact the timing and likelihood of closing a transaction. Many transactions can be reviewed by CFIUS (i.e., the Committee has authority to review a broad range of “covered transactions”) but only some covered transactions are filed with CFIUS. This is a joint filing obligation between the company and the investor.
The Committee has jurisdiction over many foreign acquisitions of and investments into U.S. businesses. Many joint ventures and most convertible notes, licensing agreements, debt issuances, and the like fall outside of the set of covered transactions. Depending on the specific rights acquired, however, CFIUS could still have jurisdiction over some transactions in each of those categories. Moreover, the Committee has jurisdiction over any transaction that, in its opinion, has been entered into to evade its review, so caution is always warranted.
CFIUS generally reviews transactions from the broad vantage point of analyzing the “threat” posed by the foreign investor or acquiror and the “vulnerability” of the U.S. business. To the extent CFIUS has jurisdiction over a transaction and assesses high level of “threat” and/or “vulnerability,” it can impose conditions on the transaction parties, including potentially placing onerous conditions on space-focused U.S. entities and/or their foreign investor, including, in cases where CFIUS is particularly concerned, forced divestment for the foreign entity. At a minimum, transaction parties should assess whether a foreign investment or acquisition would trigger a mandatory CFIUS filing, and gauge overall CFIUS risk (including an assessment of the potential “threats” and “vulnerabilities” of the transaction).
Conclusion
This brief overview has hopefully driven home the point that that U.S. space- focused companies may be subject to a range of regulatory concerns when evaluating foreign investment. The bottom line is that for any investment or acquisition involving a U.S. business in the space industry and a foreign entity, parties should assess as early as possible, with the aid of experienced counsel, the wide range of regulatory regimes.
While every situation will be unique, parties can expect the relative complexity of the analysis to be driven by the number and type of relevant regimes that could be implicated, the national security implications/sensitivity of the transaction, the profile of the U.S. business and foreign persons, and the transaction parties’ collective sensitivity to national security regulatory risk.
In the fundraising process, when the hoped for answers to “how much” and “when” are “as much and as soon as possible,” it can take difficult to grapple with questions that may lead to less funding and more delays. However, for U.S. space companies, there is no shortcut when it comes to foreign investment, and the question of “where” must always be top-of-mind.
References
1 https://www.dcsa.mil/mc/isd/foci/
2 See 32 C.F.R. Part 117.
3 22 C.F.R. § 122.4.
4 22 C.F.R. § 120.37.
5Specifically, Section 310(b)(4) of the Communications Act establishes a 25% benchmark for investment by foreign individuals, corporations, and governments indirectly into entities that control certain kinds of FCC licenses—e.g., common carrier, broadcast, and certain aeronautical licenses. While satellite companies most commonly hold non-common-carrier space station and/or earth station licenses—i.e., licenses not directly spoken to in Section 310(b) (4), the Commission has interpreted its general mandate under Section 310(d) to review transfer applications to ensure that “the public interest, convenience, and necessity will be served” by FCC grant to apply to the non-common-carrier satellite sector as well. As a consequence, the rules also require reporting of foreign ownership information at the same 25% threshold for such satellite operators.
6Under the FCC’s general “public interest, convenience, and necessity” standard, the FCC is obliged to consider all potential consequences of a license acquisition or transfer, including those related to national security. However, citing its limited expertise in the national security sector, the FCC generally outsources its review of national-security-related considerations to the Departments of Justice, Defense, and Homeland Security. The same divisions of those three agencies responsible for participation in the CFIUS process also maintain special teams devoted to reviewing these FCC referrals, known collectively as “Team Telecom.”
7 https://www.nesdis.noaa.gov/commercial-space/regulatory-affairs/ licensing
8 See 15 C.F.R. § 960 et seq.
9See id., Appendix A to Part 960, Part A.2
Curt Blake
Author Curt Blake, Senior Columnist to SatNews Publishers, is Senior Of Counsel at Wilson Sonsini Goodrich & Rosati. He is an attorney and senior executive with more than 25 years of experience leading organizations in high-growth industries— and more than 10 years as the CEO of Spaceflight, Inc.— at the forefront of the New Space revolution. Curt has extensive expertise in strategic planning, financial analysis, legal strategy, M&A, and space commercialization, with deep knowledge about the unique challenges of New Space growth and the roadmap to success in the that ecosystem.
The views expressed in this article reflect those of the author himself and do not necessarily reflect the views of his employer and its clients.