New Controls on Biotech Software May Restrict Exports, Trigger CFIUS Filings

On October 5, 2021, the U.S. Commerce Department’s Bureau of Industry and Security (BIS) published a final rule amending the Export Administration Regulations (EAR) to include new controls on genetic editing software and related technology. The final rule implements a decision made by the Australia Group (AG) in May 2021 to expand multilateral regulation of dual-use biological equipment―specifically, nucleic acid assembler and synthesizer software capable of designing and building functional genetic elements from digital sequence data.

Prior to this, pursuant to legislative mandate, BIS had proposed a list of emerging technologies for potential control. As part of that, BIS evaluated certain biotechnology categories including genomic and genetic engineering as an emerging technology. Certain nucleic acid assemblers and synthesizer equipment were already controlled, and BIS’ new rule now expands the export licensing requirements for nucleic acid assemblers and synthesizers to cover related software and associated technology. Further, these controls will impact future foreign investment, funding and transaction evaluations for the U.S. biotech industry.

New Commerce Control List Classifications with Highly Restrictive Controls

BIS amended the Commerce Control List (CCL), adding two new Export Control Classification Numbers (ECCNs) and associated export license requirements with broad destination restrictions for genomic and genetic software and technology.

ECCN 2D352: Software for Nucleic Acid Assemblers/Synthesizers

This new classification adds controls on software designed for nucleic acid assemblers and synthesizers (equipment already controlled by ECCN 2B352.j) that is capable of designing and building functional genetic elements from digital sequence data.

Software controlled under this classification will require an export license for countries subject to restrictions for chemical and biological weapons (CB) and anti-terrorism (AT) reasons. Specifically, the controls will apply to destinations listed in CB Column 2 of Supplement No. 1 to Part 738 – the Country Chart for the CCL. Those controls are highly restrictive, requiring an export license requirement for most countries, including China, Singapore and Israel. Countries that do not require an export license for this ECCN include the majority of NATO member states, countries in the European Union and a handful of other close allies such as Argentina, Australia, India, Japan, Mexico, New Zealand and South Korea.

ECCN 2E001: Technology for New ECCN 2D352

In addition to the new software classification, BIS amended ECCN 2E001 (which already controls technology for the development of the nucleic acid assemblers and synthesizers described in ECCN 2B352.j) to include technology for the development of software controlled by new ECCN 2D352. Like the software, this technology is controlled for CB and AT reasons. As explained above, the CB designation results in export license requirements on this technology to most countries.

Expanded CFIUS “Critical Technologies” Trigger for Foreign Biotech Funding

These new controls also will also impact future Committee on Foreign Investment in the United States (CFIUS) reviews of foreign investment in or acquisitions of U.S. biotech companies with genetic editing software or technology, potentially triggering a mandatory filing requirement.

CFIUS has jurisdiction to review transactions where a foreign person acquires control in any U.S. company, without regard to the nature of that company’s business. However, even if foreign control is not present, CFIUS also has jurisdiction over transactions where a foreign person acquires a minority position coupled with certain additional rights if the company has U.S. operations and is involved in particularly sensitive activities.

Specifically, this applies if the company is involved in critical technologies, critical infrastructure or the collection or maintenance of sensitive personal data, in which case the company is considered a “TID U.S. Business.” If, as a result of its investment, a foreign investor is granted a board seat or observer rights, access to material, nonpublic technical information, or involvement in substantive decision-making in that company, CFIUS jurisdiction will apply.

The term “critical technologies” for CFIUS purposes includes items controlled by the EAR for reasons related chemical and biological weapons proliferation. Therefore, these new export license requirements on genetic editing software or technology for CB reasons will be considered “critical technologies” and may cause a company dealing with them to be deemed a TID U.S. Business. Importantly, such a determination could result in the need to submit a mandatory CFIUS filing. This can happen in two different investment scenarios:

• Investments Conferring Control or Key Rights in a TID U.S. Business Involving Critical Technology. A mandatory filing is triggered when a covered transaction involves:
  • A U.S. business that produces, designs, tests, manufactures, fabricates or develops “critical technologies;” and
  • A “U.S. regulatory authorization” would be required to provide the critical technology to the person involved in the transaction (or to any person that holds or is part of a group of foreign persons that holds a 25% or greater voting interest in such person).
• A Foreign Government Obtains a “Substantial Interest” in a TID U.S. Business. A mandatory filing is also triggered when a foreign person in which a single foreign state (other than an excepted foreign state, presently Australia, Canada, or U.K.) directly or indirectly holds a voting interest in that foreign person of 49% or more, acquires a direct or indirect voting interest in a TID U.S. business of 25% or more. When determining an indirect voting interest, a “parent” (as defined by CFIUS) is deemed to have a 100% interest in any entities of which that person is a parent.
  

Going forward, biotech companies involved in critical technologies in the U.S. should closely analyze future foreign investment or transactions opportunities with these CFIUS implications in mind.

New Controls Imposed on a Global Scale

Unlike other recent emerging technology controls, such as 2020’s unilateral controls under ECCN 0A521 on geospatial imaging software using AI, the October 5, 2021, controls on certain biological equipment software and technology are being executed on a multilateral scale.

As noted, this action reflects the May 2021 decision by the AG, which consists of 42 participating countries and the European Union, to control these items. Consequently, the multilateral approach to this new control helps to level the playing field with global competitors outside the U.S. dealing in the same type of software and technology.

Key Takeaways

As a result of the expanding controls and jurisdiction over the U.S. biotech industry, companies working with biological equipment software or technology outlined in ECCN 2D352 or 2E001 should stay alert to:

• New export licensing requirements on cross-border research and development and other technology transfers;
  
• Certain controls that can apply to the hiring of foreign nationals to work on this technology in the U.S.; and
  
• Potential CFIUS hurdles for investments or acquisitions by foreign persons.

Questions? Please contact International Trade and Investment partners Melissa Duffy and Mark Ostrau.