According to the Wall Street Journal, a new department affiliated to CFIUS is carefully reviewing the investment status of Chinese capital in U.S. start-up technology enterprises in the past few months or even years, and may announce a large number of penalties.
According to former U.S. government officials and staff, the law enforcement agency also works closely with the FBI to track technology investments that intelligence officials believe may pose a threat to U.S. national security.
According to the research results of horizon advisory, a US consulting firm, the number of venture capital transactions between China and US companies will increase to 308 in 2020, setting a record after 2016. However, the total volume of transactions decreased, indicating that single transactions are mostly small investments and do not grant control to Chinese investors.
So, what happened? Why is Biden more hawkish than he imagined when he has just been on the stage for 12 days?
The United States is stumbling again
According to the Wall Street Journal, a national security team that tracks Chinese investment in U.S. technology companies is scrutinizing start-up investments that have been going on for months or even years.
According to current and former government officials and national security lawyers, the Cfius has set up a new law enforcement agency of about 20 people in the past two years to identify old investment transactions involving sensitive technologies that may pose a threat to national security. These people said the team focused on venture capital investment transactions, even small transactions, whose funds can be traced back to China.
CFIUS law enforcement teams work closely with the FBI to track technology investments that intelligence officials believe may pose a threat to U.S. national security, according to former government officials and former staff. The FBI maintains a master database of transactions involving foreign investors that raise security concerns, these people said. CFIUS members classify and characterize these transactions based on threat assessments provided by the FBI and other intelligence agencies. People familiar with the matter said CFIUS was concerned about early investment made by China through intermediaries, an indirect way of investment that masked the real source of funds.
CFIUS is responsible for examining whether foreign investment in US companies and real estate pose potential national security risks. CFIUS is bound to become a key force in US President Biden’s strategy to curb China’s technological ambitions. According to people familiar with the situation, CFIUS law enforcement team recently recruited personnel from venture capital companies, investment banks and professionals with technical background. Lawyers, investors and national security officials said the Cfius team had sent letters to dozens of companies and called for information on transactions with foreign investors.
Some of the early research has been going on for months because vetting VC deals can be complex and time-consuming, people familiar with the matter said. Although some research has prompted the government to launch a formal investigation, a large part of the law enforcement work is still in the early stage.
These people familiar with the matter said that it is expected that a large number of punishment decisions will be issued later this year, which may be fines, changes in corporate governance or even calls for divestment.
CFIUS’s actions in the past year have shaken the widespread skepticism in the venture capital industry, that is, whether an unreliable government agency can really intervene in the rapid transactions of start-ups and lock in suspicious sources of funds.
For example, CFIUS has reminded several start-ups that CFIUS is reviewing seed stage investments of less than $500000 involving an investor associated with China, according to a person familiar with the matter. These actions eventually led to the stranding of related transactions.
Last year, CFIUS ordered the divestiture of Chinese investors’ stakes in two semiconductor industry venture capital companies, according to a person familiar with the matter. The China related investments took place in 2018 and 2019, and relevant investors could still make profits after disposing of the shares last year, the person familiar with the matter said.
Most of China’s venture capital to the US is small
According to the research of horizon advisory, an American consulting firm focusing on China issues, the number of Chinese venture capital transactions with American companies increased to about 308 last year, the highest level since it reached an all-time high in 2016. However, Nathan picarsic, co-founder of horizon advisory, said that the total amount of investment in venture capital transactions had shrunk, indicating that most of the transactions were small-scale investments and did not give Chinese investors control of U.S. start-ups.
National security officials and others associated with CFIUS said the Biden administration will make clear which technologies are critical to the U.S. military and must be protected when investors from China, Russia and other rivals want to invest. Many of these technologies are developed by start-ups, and identifying which technologies should be protected will enable CFIUS to act quickly.
A spokesman for Biden said the administration “will ensure that CFIUS evolves into a 21st century Committee capable of properly assessing new and changing risks.”
In 2018, the bipartisan foreign investment risk review modification act expanded CFIUS’ power, allowing CFIUS to investigate minority equity investments in U.S. companies that manufacture key technologies and focus on Chinese capital.
The legislation has also led some start-ups to reject investment from China, and some investors have opted out. However, according to investors, defense officials and lawyers, many of the deals are still going on because of loopholes in the law and ambiguous consequences of bypassing CFIUS approval procedures.
Investments in start-ups are exempt from many of the disclosures required of listed companies. CFIUS launched a new confidential reporting hotline last year to help screen suspicious transactions. Executives and lawyers at start-ups say in some cases, it was the company that reported to CFIUS that a competitor was linked to a foreign investor.
CFIUS targeting venture capital has changed the minds of some start-ups. Lawyers and start-up investors say more companies seek CFIUS approval before completing deals and agreeing some concessions to win government approval, which ensures they won’t be targeted in future investigations.
Mario Mancuso, head of international trade and national security practices at Kirkland & Ellis LLP, says venture capital is very closely scrutinized. He said that on the issue of safety, it can not be overemphasized.
Why is Biden more hawkish than he imagined?
In fact, when the foreign investment risk review Modernization Act was introduced in the morning, Gao Feng, spokesman of the Chinese Ministry of Commerce, said that we have noticed the relevant statement released by the White House last night Beijing time. We will pay close attention to the legislative progress of the foreign investment risk review Modernization Act of the United States, and will assess the potential impact on Chinese enterprises.
Gao Feng said that China always believes that in the field of international investment, we should continue to promote investment facilitation, and is not in favor of tightening foreign investment conditions on the grounds of national security. China has also made clear its opposition to other obstacles set by the United States.
So why is Biden more hawkish than he imagined? As a matter of fact, just last night, Biden had a speech on foreign policy, but I don’t know why it was cancelled. In fact, judging from the recent actions of Biden administration, Trump’s trajectory towards China has not changed.
At the confirmation hearing, new secretary of state Anthony brinkin said trump was right to take a tough attitude toward China. Earlier, Gina Raimondo, the head of the US Department of Commerce, refused to promise to remove Huawei, the Chinese telecoms equipment maker, from the “entity list,” making it difficult for US companies to export technology to them.
Paul haenle, former China director of the National Security Council (NSC) under George W. Bush and Barack Obama, said Biden had “done the right thing” with China so far.
Mr. haenle said: “the trump administration is right to make a change, but the way they do it is self deceptive, very incoherent and fragmented.” He added that the new government must also work with Congress to advocate a tougher approach against China.
Analysts believe that the relationship between countries is a bit like trend investment. If there is no particularly significant change in variables, the trend is difficult to change. It may be the same with China and the United States.
Reprint indicated source：Spark Global Limited information