INSUBCONTINENT EXCLUSIVE:
Bobby FranklinContributor
Bobby Franklin is the president and chief executive of the National Venture Capital Association and previously
served as an executive vice president for the CTIA & The Wireless Association
More posts by this contributorThe startup community must defend merit-based immigrationEnsuring foreign-born founders can grow their
startups in the U.S.President Trump time in office has been punctuated by rising tension with China on a host of economic issues
He received bipartisan criticism for the impact of tariffs on Chinese goods and the resulting retaliation against American exports.Democrats
and Republicans have also unified over concerns about how Chinese state-associated actors are using minority investments in critical
technology companies to gain sensitive information — like IP and know-how — about startups, many of them VC-backed
Policymakers are worried this technology is being used to propel Chinese advancement in emerging technology like artificial intelligence and
robotics.These concerns led to passage of theForeign Investment Risk Review Modernization Act (FIRRMA), which was signed into law by the
president on August 13.NVCAhas been at the table during FIRRMA consideration because it stands to have a significant impact on the venture
and startup ecosystem.Who in our industry needs to understand FIRRMA going forward Many more than you might think
VCs with foreign LPs, VCs with foreign co-investors or startups contemplating taking foreign capital are the prime examples, but given the
shifting startup landscape in recent years, FIRRMA will leave a broad mark.FIRRMA expands the power of theCommittee on Foreign Investment in
the U.S.(CFIUS) to scrutinize foreign investments into &critical technology& companies for national security implications
Few in the startup world have dealt with CFIUS, but those who have understand its power and implications
It the opaque government entity that blew up the Broadcom-Qualcomm transaction for national security reasons and has been called the
&ultimate regulatory bazooka.&Before FIRRMA, CFIUS reviewed foreign investments for national security considerations when the investment
resulted in foreign control of a U.S
But minority investments used to obtain sensitive information about a company have been outside the scope of CFIUS because those investments
generally don&t delivercontrolto the foreign investor.FIRRMA is intended to address this blind spot by greatly expanding the transactions
that must be disclosed to CFIUS.NVCAsecured hard-fought changes to FIRRMA to lessen the impact on our industry
The bill has come a long way from when it was introduced
For example, under the original version we were concerned foreign LPs might need to file with CFIUS because they would not meet the
exemption for passive investment
Furthermore, a sizeable chunk of foreign direct investments into startups would be picked up by the bill
Fortunately, key changes were made in the end.Ultimately, under FIRRMA, the government will now be able to review — and potentially reject
— any investment by a foreign entity in a critical technology company that gives the foreign entity:access to any material non-public
technical information of the company;membership or observer rights on the company board or equivalent governing body; orany involvement in
substantive decision-making of the company, other than through voting of sharesUnder this approach, the typical venture fund ought to be
able to avoid a CFIUS filing because its foreign LPs won&t meet the above factors
And many direct investments into startups will also avoid filing with CFIUS unless they&re leading to board seats, non-public information
about the company or decision-making capability.Still, VCs, LPs, and startups raising capital will need to navigate FIRRMA going forward to
make sure they don&t get tripped up by the new law
Doing so will likely trigger a CFIUS filing, leading to delay and expense.The fast-moving startup ecosystem will not welcome the uncertainty
that comes with a 45-day initial review that is fraught with uncertainty and costs
And that expense is no small sum, as FIRRMA sets the CFIUS filing fee at 1 percent of the value of the transaction or $300,000 — whichever
And that doesn&t include legal fees.It is imperative the venture industry remain vigilant on FIRRMA and related national security issues
The government is increasingly interested in how our world operates because emerging technology is impacting society and foreign capital is
sometimes used to launch high-growth companies.AtNVCA, we are embracing this conversation and will hold a conference named&Emerging
Technology Meets National Security&onNovember 14in DC.The NVCAwill remain deeply engaged in FIRRMA as regulations are written that will
define terms and set practices that affect the thrust of the bill
These issues are happening whether or not the venture industry is part of the conversation, but we only get a chance to impact decisions if
