In response to the Chinese Communist Party‘s technology ambitions, the Biden administration is recruiting for the Committee on Foreign Investment in the United States (CFIUS) to review Chinese investments in U.S. startups that were agreed upon months, if not years, ago.
The Wall Street Journal, citing current and former government officials and national security lawyers, said CFIUS has created a new enforcement unit over the past two years, made up of about two dozen people, to root out old investment deals involving sensitive technology that could pose a threat to U.S. national security. The team targets venture capital investments from China, the men said.
CFIUS is responsible for reviewing foreign investments in U.S. companies and real estate for potential national security risks. The agency is expected to be key to the Biden Administration‘s strategy to curb the Communist Party’s technology ambitions. Its enforcement team’s recent hires include professionals from venture capital firms, investment banks and technology backgrounds, according to people involved in the effort. Lawyers, investors and national security officials say this CFIUS team has sent letters and made calls to dozens of companies asking for information about their dealings with foreign investors.
Some of the initial investigations have been underway for months because reviewing venture capital deals can be complex and Time-consuming, people familiar with the matter said. While some CFIUS investigations have led to formal government inquiries, most enforcement efforts are in the early stages.
CFIUS works with the Federal Bureau of Investigation (FBI), sources close to the investigation said. The FBI maintains a database of transactions involving foreign investors. members of CFIUS rank these investors based on threat assessments provided by the FBI and other intelligence agencies. CFIUS focuses on early-stage Chinese investments that are made through intermediaries and conceal their true source of funding.
CFIUS has alerted several startups that it is reviewing seed-stage investments under $500,000 that involve investors with ties to the Chinese Communist Party, killing those deals, according to a person familiar with the matter.
Last year, CFIUS ordered the divestiture of Chinese investors’ stakes in two semiconductor companies. These Chinese investments occurred in 2018 and 2019.
National security officials and others involved in CFIUS say the Biden administration will clarify which technologies are critical to the U.S. military and should prevent investors from the Chinese Communist Party, Russia and other adversaries.
The bipartisan Foreign Investment Risk Review Modernization Act, passed in 2018, expanded CFIUS’s powers to include reviewing foreign venture capital investments in key U.S. technology companies and focused on investigating funding from China.
The act has led some startups to reject Chinese funding. But there are still companies that are holding out for deals with the Chinese Communist Party.
Over the past year, CFIUS leaders have been trying to make these consequences clear to the startup industry and “really get that part of the market to understand that there are risks. You can take money from one investor, and the next thing you know, you could be ordered to divest.” A senior outgoing Treasury official said this month.
The senior Treasury official said the number of staff working on CFIUS matters at Treasury has expanded from about a dozen to about 70 since 2018. An additional $40 million in the department’s 2020 and 2021 budgets has fueled the team’s growth.
Most of the venture capital investments from China last year were smaller investments that did not give control to Chinese investors, but they can still be a problem because they can sometimes be traced to Communist government-guided funds, according to research by Horizon Advisory, a U.S. strategy consulting firm. Such funds are set up to advance technology in China, and they may channel their investments through U.S. seed and angel investors.
Lawyers and startup investors say a growing number of companies are seeking CFIUS approval before completing deals and agreeing to make concessions to win government approval to ensure they are not targeted by future investigations.
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