The US economy unquestionably relies on global markets and international business. Especially with the ability of technology to eliminate international borders and barriers to entry, businesses are forced to consider trends, competitors, and customer behavior across the world.

However, taking a global approach to conducting business complicates things, particularly regarding early stage tech companies and venture capital investors.

In this post, I want to highlight CFIUS (The Committee on Foreign Investment in the United States) and how working with international partners, customers, or investors has grown very complex and political in recent years.

What is CFIUS

CFIUS is an interagency committee focusing on national security. The committee reviews certain transactions involving foreign investment in the United States. The overarching goal is to review mergers, acquisitions, and takeovers by foreign entities of companies participating in interstate commerce in the United States, and to determine the effects of such transactions on national security. Regarding national security, the focus is limiting the potential for foreign investors to acquire American IP or personal data of American citizens or companies. However, there is also concern legislation relating to CFIUS and/or limiting foreign investment creates a barrier to legitimate business opportunities and international cooperation.

CFIUS operates pursuant to §721 of the Defense Production Act of 1950, and as implemented by Executive Order 11858, regulations at 31 C.F.R. Part 800, and 31 C.F.R. Part 801.

Relevant Legislation

Foreign Investment Risk Review Modernization Act of 2018 — CFIUS’ power was expanded to address national security concerns relating to foreign investment. This summary does a great job providing the most important information. On a high level, receiving an investment from a foreign investor is more scrutinized now than ever before, particularly causing concerns for venture capital firms and tech startups that rely on foreign investors for funding.

Proposed Regulations Implementing FIRRMA — There are two key categories of transactions being regulated by CFIUS — real estate transactions and “other transactions.” The second category is very broad encompassing transactions regarding technology and personal data thus impacting venture capital and tech startups. A brief overview of two proposed regulations by the Treasury Department lays out the regs. One proposed regulations addresses part 800 of FIRRMA which governs investments in technology and data. This regulation will offer heightened security for foreign investment in the US venture space, but will limiting foreign capital create an overall negative impact on the industry? Are the national security concerns applied to passive investments in venture funds and tech startups serious enough to support the burden on the industry?

Does the government go too far? Well… it depends.

National security is no light issue. The possibility of foreign entities acquiring all or part of a tech company that gathers large amounts of personal data on Americans simply to use that data for ulterior motives (rather than help build the company) is a real issue. Meanwhile, the economy is global in nature and will rely on investments not only from domestic investors but also international and foreign entities.

Venture funds likely have less risk in providing a serious national threat. Foreign entities passively investing in US venture funds is crucial to provide necessary capital to emerging companies creating a substantial positive impact on and growth of the US economy. In part, this poses less risk, because the foreign investors may get financial information on the venture fund they invest in, as well as returns on their investment, but not much else. They shouldn’t have access to IP created by portfolio companies or personal data those companies collect assuming the fund is your typical VC fund. Limiting investments in venture funds under FIRRMA may be an unnecessary burden.

That said, the possibility of a foreign entity acquiring a tech company for IP and personal data is very real. The legislation seems to point more towards acquisitions and takeovers where the foreign entity would obtain control of the company. Regulating and reviewing these transactions seems more than reasonable. However, foreign entities also make direct investments into emerging companies. Limiting an investment where a foreign entity acquires a minority interest may go too far.

While this post would ideally address the entirety of the national security concerns while balancing the overarching economic impact of supporting investments in emerging ventures, this is no small issue. Venture funds seem to pose less national security risk while direct investments into tech companies are a little more complex.

What Happens Next?

The proposed regulations discussed above define how “other transactions” will be treated going forward. For more information on the topic I recommend the National Venture Capital Association which follows and advocates on behalf of the venture industry. I would love to hear your thoughts on foreign investment into US venture and tech startups. Let me know what you think!

Startup & VC Attorney @ Michael Best & Friedrich | Angel Investor @ The Mango Group | Founder and Advisor @ HSAD Network | OSU Law Alum | Opinions my own