Venture Capital and the Committee for Foreign Investment in the United States (CFIUS)

The Committee on Foreign Investment in the United States, or CFIUS (pronounced SIH-Fee-us) for short, is an interagency committee created by an executive order for the purpose of evaluating foreign investments in U.S. businesses for potential national security threats..

On March 5th, we gathered at Cooley’s excellent Boylston office space to dig more into the implications of recent CFIUS reform on the venture capital world — particularly the expansion of CFIUS jurisdiction to review certain investments in companies that deal in “critical technologies” under the new “Pilot Program.”

Our speaker, Christopher Kimball, spoke from his experience co-chairing Cooley’s CFIUS practice. He began by introducing CFIUS and providing an overview of the Committee’s origins.

Traditionally, CFIUS reviewed transactions that could result in a foreign investor gaining “control” over a US company. With the advent of the new Pilot Program, CFIUS has expanded jurisdiction to review non-passive investments into companies dealing in “critical technologies.

Because transactions that are subject to the Pilot Program — including many VC investments in tech companies — will trigger a mandatory CFIUS filing, investors and companies must understand how the Pilot Program works and when they must notify CFIUS of a deal before closing. The failure to file with CFIUS when there is a requirement to do so can subject the parties to financial penalties and substantive interference in the transaction by CFIUS. This is no joke — CFIUS has broad authority to interfere with transactions to address perceived national security issues, including:

· Imposing mitigating measures (forcing the U.S. company to divest sensitive assets, requiring the foreign investor to place U.S. citizens in key positions; conducting annual security audits, and limiting the foreign investor’s access to information possessed by the U.S. company);

· Prohibiting the transaction from closing; or

· Unwinding a transaction that has already closed.

Cooley Special Counsel Christopher Kimball briefs a roomful of investors

After the CFIUS overview, the conversation turned to Q&A — how some VCs are adjusting their practices to avoid falling under CFIUS’s jurisdiction. Kimball had a few observations regarding current investor practices:

· Screen out investments in U.S. critical tech companies;

· Remove or limit the involvement of foreign investors in the deal; and

· For domestic funds, limit the rights of foreign LPs.

We’re grateful to our partners at Cooley for hosting this event and continuing to support us as we bring the community together! For more information on CFIUS — and to stay apprised of the state of play in foreign investment — visit Cooley’s CFIUS page.

See you at the next NEVCA Lunch & Learn!

New England Venture Capital Association (NEVCA) members support entrepreneurs winning. Great VCs depend on great entrepreneurs.

New England Venture Capital Association (NEVCA) members support entrepreneurs winning. Great VCs depend on great entrepreneurs.