Term Sheets: What do I need to know about CFIUS?
This week we continue our series on key VC financing deal terms.
This week’s question: What do I need to know about CFIUS?
Our answer: The Committee on Foreign Investment in the United States (CFIUS) is a federal interagency committee that reviews certain transactions involving foreign investment in the United States to assess national security risks. If your startup has any level of foreign investment and operates in a sensitive area such as data, semiconductors, biotech, or defense-related, then your startup may be subject to CFIUS scrutiny. This matters because CFIUS has the power to block, modify, or unwind a transaction with a foreign investor if that investor obtains (as defined in the Defense Production Act) (i) control, (ii) access to any material non-public technical information, (iii) membership or observer rights to the Board of Directors or equivalent governing body, or (iv) any involvement in the substantial decision-making of your startup regarding critical technology, sensitive personal data, or critical infrastructure (collectively, “DPA Triggers”). If your startup has a foreign investor, we recommend consulting with CFIUS-specialist counsel to determine whether the financing is subject to CFIUS review and to provide next steps which may include making voluntary or mandatory CFIUS filings depending on your startup’s situation.
Key Considerations
1. Covered Transactions. Keep in mind that “Covered Transactions” apply to a broad category of transactions because CFIUS review relies on the totality of rights granted to foreign investors. As a result, investments can still be considered “Covered Transactions” subject to CFIUS if the investor obtains any DPA Triggers even if they seem inconsequential or such investor only owns a relatively small amount of your startup’s stock.
2. Decision on Mandatory v. Voluntary Filing. If your startup is involved or engaged in critical technologies, infrastructure, or sensitive personal data as defined by the DPA, then your startup most likely needs to make a mandatory CFIUS filing. However, even if you don’t believe your startup operates in these sensitive fields, your CFIUS-specialist counsel may still recommend making a voluntary filing as a way to mitigate risk and avoid the onerous CFIUS penalties.
3. Workarounds for DPA Triggers. To minimize the risk of CFIUS review, you should push for foreign investors to waive or avoid DPA Triggers. For example, you can offer them workaround options such as non-voting stock and providing them with more robust information rights so they maintain their upside and adequately monitor the performance of their investment.
Why It Matters
You should care about CFIUS because it is a powerful organization that disrupt your financing, even if you only have a very early-stage startup. Moreover, CFIUS review can take months which can delay cash infusions to your startup, deter additional investors, or raise red flags during diligence. By working with a CFIUS-specific attorney, you help ensure that you properly eliminate or workaround any relevant DPA Triggers, and you can proactively and preemptively structure the financing’s terms to avoid unwanted CFIUS surprises.
