What to Know about CFIUS

Key takeaways

CFIUS reviews foreign investments in U.S. businesses for national security concerns.
Recent reforms have expanded CFIUS's oversight to a wider range of industries, especially those involving sensitive data.
Mandatory filings are now required for specific types of investments, increasing compliance responsibilities for businesses.
Founders should consult legal experts when considering foreign investment to navigate CFIUS implications.
Strategic structuring of investments can help mitigate risks associated with CFIUS regulations.

Summary

Introduction to CFIUS and FIRRMA

The podcast opens with a discussion about the Committee on Foreign Investment in the United States (CFIUS) and its regulatory function to review foreign investments concerning national security. Katie Haun interviews Michael Leiter, a partner at Skadden Arps, who outlines the historical context and evolution of CFIUS from its inception to its recent reforms under the Foreign Investment Risk Review Modernization Act (FIRRMA). Leaders of different government agencies have historically debated the necessity and risks of foreign investment, especially from countries like China.

Regulatory Changes and Their Impacts

As of September 2019, substantial reforms have navigated the landscape of CFIUS's review process, with an emphasis on technology and data considerations. Michael emphasizes that CFIUS regulations now encompass a variety of industries beyond military and aerospace, including Fintech and crypto sectors. Particularly, those who handle personally identifiable information (PII) are scrutinized under the new regulations, highlighting the need for businesses in various sectors to consider compliance.

Mandatory Filings and Compliance

One of the vital reforms has transitioned CFIUS from a voluntary filing procedure to mandatory filing categories for certain investments. Companies dealing in critical technology or sensitive data are now required to submit filings to CFIUS, with penalties for non-compliance. Michael explains the implications for startups and smaller companies, where investments may inadvertently invoke CFIUS regulation, especially if a foreign investor has any control or access rights.

Strategic Advice for Founders

The conversation shifts towards practical advice for founders concerned about navigating the complex CFIUS landscape. Michael suggests that even early-stage companies should engage with legal counsels to evaluate foreign investment offers carefully. He advises structuring investments to minimize risks associated with CFIUS, such as delaying board seats for foreign investors until after regulatory processes or considering phased investments to avoid triggering mandatory filings.

The Broader Implications on Investment Strategies

The final discussion reflects on the broader implications of CFIUS reforms on global investment strategies. Michael highlights that these regulations signify a shift in how U.S. firms must consider their investor base, partnerships, and even potential exits, as the criteria for what constitutes a U.S. business becomes increasingly flexible. He indicates that the evolving landscape calls for ongoing vigilance and strategic planning to navigate compliance effectively.

Show notes

When innovation and capital go global, so do restrictions on trade, foreign investment, and more. Over the past couple years, U.S. policymakers have expanded the scope of the Committee on Foreign Investment in the U.S. (CFIUS) through the Foreign Investment Risk Review Modernization Act (FIRRMA) of 2018 which was recently updated through proposed reforms this September 2019.

So what does this all mean for tech founders taking investments from, or doing joint ventures with, foreign entities -- or just doing business globally in general? What does and doesn't CFIUS cover, and how might one structure partnerships strategically as a result? In this episode, a16z general partner Katie Haun interviews Michael Leiter (of law firm Skadden Arps) who specializes in CFIUS as well as matters involving U.S. national security and cybersecurity, cross-border transactions, aerospace and defense mergers and acquisitions, and government relations and investigations.

The Q&A took place in September 2019 as part of an event hosted by Andreessen Horowitz.

The views expressed here are those of the individual AH Capital Management, L.L.C. (“a16z”) personnel quoted and are not the views of a16z or its affiliates. Certain information contained in here has been obtained from third-party sources, including from portfolio companies of funds managed by a16z. While taken from sources believed to be reliable, a16z has not independently verified such information and makes no representations about the enduring accuracy of the information or its appropriateness for a given situation.

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