AI transcript
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0:00:21 – Hi everyone, welcome to the A6NC podcast.
0:00:23 Today’s episode is all about SIFIUS,
0:00:25 the Committee on Foreign Investment in the United States
0:00:27 and their proposed updates to FERMA
0:00:30 or the Foreign Investment Risk Review Modernization Act
0:00:34 of 2018, which took place in September 2019.
0:00:36 The conversation was hosted by Andreessen Horowitz
0:00:38 as part of an event for founders and others
0:00:41 with general partner Katie Hahn interviewing Michael Leiter,
0:00:44 a partner at law firm Scad and Arps et al.
0:00:47 who covers national security, cybersecurity and privacy,
0:00:50 SIFIUS and more, which is what this Q&A is all about,
0:00:52 covering what it involves and doesn’t
0:00:54 to how to think about and structure your business
0:00:56 and partnerships strategically as a result.
0:01:00 But the conversation begins with what SIFIUS is.
0:01:02 – So SIFIUS stands for the Committee on Foreign Investment
0:01:04 in the United States.
0:01:08 And the basic function of SIFIUS is to review
0:01:11 any foreign investment in a U.S. business
0:01:13 that produces national security concerns.
0:01:15 So that sounds relatively basic.
0:01:17 It’s this big interagency body,
0:01:19 everything in Washington is interagency,
0:01:21 but you know– – How many agencies?
0:01:22 – And how many agencies? – 13 agencies.
0:01:26 It’s run by the Department of Treasury unsurprising
0:01:28 because it’s about foreign investment in the United States.
0:01:31 And it has traditionally sort of split
0:01:33 between two different camps.
0:01:35 Historically, it was those parts of the U.S. government
0:01:38 that wanted foreign investment in the United States,
0:01:40 Treasury, the U.S. Trade Representative,
0:01:43 State Department, like their job is to do this.
0:01:47 And those agencies that didn’t necessarily want investment
0:01:51 were at least more concerned about security.
0:01:53 So thank Department of Defense, Department of Justice,
0:01:55 now Homeland Security and elements
0:01:57 of the intelligence community.
0:02:00 Central Intelligence Agency, NSA,
0:02:02 organizations like that, FBI.
0:02:04 So once upon a time, we were really, really worried
0:02:06 about the semiconductor industry moving
0:02:08 from the United States to Japan.
0:02:10 So SIFIUS was fundamentally created
0:02:13 to start to limit that movement of technology
0:02:16 from the U.S. to Japan, and that was generally being done
0:02:18 through limiting Japanese acquisition
0:02:21 of certain businesses here in the United States.
0:02:23 So that’s now pretty ancient history.
0:02:29 Fast forward to when Katie and I were in government, 2006,
0:02:31 what is SIFIUS concerned with then?
0:02:34 It’s post-9/11 to buy Port’s World,
0:02:37 decides that they want to buy American ports.
0:02:41 Washington says, wait, that has to be bad too.
0:02:44 So in post-9/11 era, SIFIUS honestly
0:02:47 focuses on things like that, worrying
0:02:51 about critical infrastructure and the Emiratis buying that.
0:02:54 Fast forward to today, and the joke I often use
0:02:56 is, although it’s the Committee on Foreign Investment
0:02:59 in the United States, largely, it’s
0:03:01 Chinese foreign investment in the United States.
0:03:05 And what has changed is not just that political lens,
0:03:07 but what’s really changed and what
0:03:11 starts to really affect, I hate to say it, all of you,
0:03:17 is the changes in technology, the expansion of data,
0:03:21 the ability to use data in a huge variety of ways
0:03:25 that was never present 20 or 30 years ago, 10 years ago.
0:03:28 Now means that the US government is
0:03:32 focused on a huge range and fundamentally every sector
0:03:33 of society.
0:03:36 So SIFIUS is not limited to technology.
0:03:38 It’s not limited to aerospace and defense
0:03:40 and military technology.
0:03:42 It’s true, not everything is covered by SIFIUS,
0:03:46 but you have to assume it is if you’re involved in technology.
0:03:48 You touch data.
0:03:50 You own any real estate.
0:03:52 You do any work with the US government,
0:03:55 or you have anything else.
0:03:59 You can even get into the world of dog food.
0:04:03 Ooh, do the seals buy dog food from you
0:04:05 for their bomb-sniffing dogs?
0:04:09 So there’s no limitation on the sector.
0:04:11 There’s no limitation on the size of the deal.
0:04:14 You mentioned that this all came about during the Japanese
0:04:18 semiconductor era, but now it’s undergone some reforms
0:04:21 and then some new implementing proposed regulations.
0:04:23 So I want to talk about those reforms.
0:04:26 But before I do, you just mentioned data.
0:04:30 What about verticals like FinTech or crypto companies
0:04:31 who might have PII?
0:04:36 Yeah, so really, we’ve seen this for several years now
0:04:40 about a focus on personally identifiable information.
0:04:43 And SIFIUS has looked at this through a very broad lens.
0:04:44 So once upon a time, it was, again,
0:04:47 if I knew everything about Katie in one place,
0:04:49 maybe SIFIUS would care.
0:04:49 You probably do.
0:04:51 I do.
0:04:52 And I have stories for you.
0:04:54 So there are a number of things that
0:04:56 have happened which have really highlighted
0:05:00 how sensitive SIFIUS is about data that is collected.
0:05:02 First of all, there’s this thing called cybersecurity.
0:05:06 And what we’ve seen over the past, again, five to 10 years,
0:05:09 is obviously not just the ubiquity of data,
0:05:12 but the key vulnerability of data across every sector.
0:05:17 And we’ve seen countries, especially China, Russia,
0:05:21 and other others, use cyber attacks and cyber
0:05:23 penetrations for their benefit.
0:05:25 And not just their national security benefit,
0:05:27 but also their economic benefit.
0:05:30 Everyone remember the OPM hack, Office of Personnel Management?
0:05:33 So if you start to put these pieces together,
0:05:35 you understand how foreign adversaries
0:05:38 can take advantage of lots and lots of data
0:05:41 in different places and piece that together.
0:05:44 So in terms of FinTech, all financial information,
0:05:47 that’s been a clear area of focus for SIFIUS.
0:05:49 And the good news is these new regulations
0:05:55 do sort of carve out standard consumer credit card information
0:05:57 as an area of specific concern.
0:05:59 But beyond that, they specifically
0:06:04 cite things like credit reports, broader financial data.
0:06:08 So I think anyone in this sector working in FinTech
0:06:12 is inevitably going to have more than just your 16-digit credit
0:06:13 card number.
0:06:16 And that will absolutely be considered sensitive data
0:06:18 to SIFIUS.
0:06:20 SIFIUS also, in its newest regulations,
0:06:23 try to say, OK, well, it’s not really everything.
0:06:25 It’s only if you have a lot of it.
0:06:28 Everyone remember Austin Powers, how much money he asks for?
0:06:30 $1 million.
0:06:35 And they’re like, guys, $1 million isn’t a lot.
0:06:37 So what does SIFIUS come up with for the number
0:06:39 of people’s personal data?
0:06:42 1 million people.
0:06:43 That’s not a joke.
0:06:44 It really is.
0:06:47 And it’s not even if you have a million people’s data.
0:06:49 It’s if you have a stated business purpose
0:06:51 to get to a million people.
0:06:53 Who here doesn’t?
0:06:55 So again, these are draft regulations.
0:06:58 But it gives you a sense of, to some extent,
0:07:00 the dichotomy between how you’re seeing business,
0:07:02 how you’re trying to grow a business,
0:07:06 and how, from a Washington National security perspective,
0:07:08 everything starts to get encompassed.
0:07:11 And also financial technologies, as you know,
0:07:13 I have a real interest in crypto.
0:07:15 Obviously, I want to talk a little bit about how
0:07:18 SIFIUS reforms could affect the crypto industry.
0:07:22 I’ll save that for later in our discussion of what
0:07:23 is the US business?
0:07:25 And indeed, in the context of crypto,
0:07:27 what is even a business at all?
0:07:29 But tell us about the reforms.
0:07:32 Like, what’s new?
0:07:35 And why are we hearing about SIFIUS so much more?
0:07:38 I think we’ve seen two major factors which
0:07:42 have driven everyone listening about SIFIUS.
0:07:44 Chinese are a global competitor for the United States.
0:07:46 They’re also a global partner in some ways,
0:07:48 certainly in investment and technology.
0:07:52 But stated Chinese policy is about being
0:07:54 a global competitor on a bunch of technological fronts.
0:07:57 And that really motivated the Congress
0:08:01 to be fearful of China and start to limit Chinese influence
0:08:04 in US business, which brought about one
0:08:06 of the only bipartisan things that
0:08:07 just happened over the past three years, which
0:08:09 was reform of SIFIUS.
0:08:11 So that was kind of the driving impetus for it.
0:08:13 What did it actually change?
0:08:14 A couple of things.
0:08:16 First, SIFIUS has always been purely voluntary.
0:08:18 Can you unpack that a little bit?
0:08:19 What do you mean purely voluntary?
0:08:23 Yeah, so if Alibaba shows up and buys one of you
0:08:26 tomorrow prior to SIFIUS reform, it
0:08:30 was up to you and Alibaba to go and actually submit
0:08:32 something to SIFIUS or not.
0:08:36 And that did mean that the vast majority of transactions
0:08:38 were never seen by SIFIUS.
0:08:39 And every once in a while, SIFIUS
0:08:42 would go out and grab and pull a company in.
0:08:43 But again, there was no requirement
0:08:45 to ever present your matter.
0:08:47 And when you present a matter to SIFIUS,
0:08:49 it’s fundamentally the two parties coming together.
0:08:51 You describe the US business.
0:08:53 You describe the foreign acquirer.
0:08:56 You describe the transaction, the motivation for the transaction.
0:08:59 And there’s a process whereby SIFIUS reviews that
0:09:00 for national security concerns.
0:09:04 And SIFIUS can then either say, you’re good.
0:09:06 SIFIUS can say, you’re very, very bad.
0:09:09 And we’re going to ask the president to block it.
0:09:12 And the president can, under his Article 2 authority,
0:09:14 block the transaction from occurring.
0:09:17 Or what happens most often in a sense of transactions
0:09:21 is that SIFIUS says, well, you can do the transaction,
0:09:24 but we’re going to impose some mitigation
0:09:26 to reduce the national security risk.
0:09:27 And that can mean a lot of things.
0:09:30 That can be a separate board of US citizens overseeing
0:09:31 the company.
0:09:33 It could be limitations on access to technology,
0:09:36 controls over the data, all sorts of things.
0:09:38 So that’s how SIFIUS always operated.
0:09:41 People came to SIFIUS, presented their transaction,
0:09:44 and one of those three things generally happened.
0:09:46 If, since it was voluntary, did you
0:09:49 see companies that would have otherwise fallen
0:09:51 under the jurisdiction of SIFIUS saying,
0:09:53 I want to fly under the radar?
0:09:53 Absolutely.
0:09:58 So it happened all the time that people wouldn’t actually
0:09:59 go to SIFIUS.
0:10:02 So especially smaller transactions.
0:10:04 I mean, you have a big market transaction,
0:10:06 and it’s all over the front page of the finance times
0:10:08 in the Wall Street Journal, a little harder
0:10:09 to fly under the radar.
0:10:11 But for a long time, especially on smaller transactions,
0:10:12 it wasn’t occurring.
0:10:16 Now, why even go then if it’s voluntary?
0:10:20 Because there’s no statute of limitations on SIFIUS.
0:10:24 So if you don’t go to SIFIUS at any time the US government
0:10:27 can knock on your door and say, hey, Katie,
0:10:29 that deal you did three years ago?
0:10:31 We want to investigate that deal.
0:10:34 And ultimately, SIFIUS has the authority
0:10:37 to force divestiture, unwind the transaction,
0:10:39 or impose mitigation.
0:10:42 And if you’re a company and you’re taking money
0:10:44 or you’re buying something, that’s
0:10:48 a pretty uncomfortable place to be for the rest of time.
0:10:49 And especially if you’re a company that
0:10:53 is doing other transactions in the United States,
0:10:56 it gets harder and harder to say, ah, let’s not worry about it.
0:11:00 But the reforms, again, did several things here
0:11:02 that have changed this.
0:11:05 First, there are pieces of SIFIUS that are now mandatory.
0:11:06 So not voluntary.
0:11:07 Not voluntary.
0:11:09 And if you don’t show up, you can
0:11:14 be fined up to $250,000 or the value of the transaction.
0:11:16 And so it’s just like any other compliance scheme
0:11:18 at that point, export control or something else.
0:11:20 And that’s not every transaction,
0:11:25 but it does involve a lot of what people in the valley do.
0:11:29 In particular, it’s mandatory if the company operates
0:11:32 in a certain sensitive sector that’s listed by SIFIUS.
0:11:37 And if you produce or design, export control technology.
0:11:40 That sounds like military stuff, but it’s not just that, right?
0:11:40 Exactly.
0:11:41 It’s not just military stuff.
0:11:44 It’s also a huge range of other things
0:11:46 that are controlled by the Commerce Department
0:11:47 as dual-use technology.
0:11:49 So what does that include?
0:11:52 Things like encryption.
0:11:54 Your software has a certain level of encryption.
0:11:57 Your software is export-controlled.
0:11:59 That means if there’s an investment in that company
0:12:01 over a certain size or giving that
0:12:03 for an investor certain rights, it’s
0:12:06 a mandatory filing with SIFIUS.
0:12:08 What other kinds of things for companies
0:12:11 that you see out in the valley would be relevant that now,
0:12:13 under these new reforms, would be covered?
0:12:13 Yeah.
0:12:18 So today, it’s certain sensors, LIDAR, for example.
0:12:20 The high-end types of LIDAR defined
0:12:24 by certain wavelength for distance, those are controlled.
0:12:29 LIDAR that you use for your standard autonomous vehicle
0:12:32 test projects now, not controlled.
0:12:36 So it turns out that the export control regime actually
0:12:40 covers fundamentally everything that anyone makes.
0:12:42 And you either get classified under what’s
0:12:46 known as EAR-99, non-export-controlled,
0:12:48 or if there’s something more sensitive about technology,
0:12:51 it can be export-controlled to certain countries
0:12:52 for national security.
0:12:58 So it ranges from computing power, battery storage, sensors.
0:12:59 It’s everything.
0:13:02 Now, if you’re doing straight software,
0:13:07 it tends not to unless you get into the world of encryption.
0:13:09 Can you talk a little bit more about that
0:13:11 and about what now I know as part of the reforms
0:13:13 are if it’s a sensitive technology?
0:13:14 Yeah, so–
0:13:15 How is that defined?
0:13:17 Yeah, I assume there are kind of three stages.
0:13:18 I’ve talked a lot about the historical,
0:13:20 all the just voluntary stuff.
0:13:22 Then we had the reform in 2018, which
0:13:25 starts to really edge more into this world of sensitive
0:13:28 technology, which is, if it’s export-controlled
0:13:31 and you work in a certain sector, mandatory.
0:13:34 The reform continues because this is Washington.
0:13:36 So the law was passed in 2018.
0:13:38 There are still regulations being promulgated
0:13:40 to implement that law.
0:13:42 And those are the draft regulations you mentioned
0:13:43 that came out.
0:13:45 On going throughout that, there is also
0:13:48 reform of all US export control.
0:13:50 And this is where I think a lot of people
0:13:54 are going to be affected in the valley more than ever before.
0:13:56 The Commerce Department is now defining
0:14:01 what it means to be foundational and emerging technology.
0:14:02 Exactly what foundational emerging
0:14:04 is still to be defined.
0:14:08 But if your technology falls into that TBD category,
0:14:10 and that should be out in the next four to six months,
0:14:14 then any transaction there puts you back
0:14:15 into that mandatory bucket.
0:14:18 So what are the areas of foundational emerging
0:14:22 technology that we know the US government is most focused on?
0:14:27 Artificial intelligence, machine learning, autonomy, right.
0:14:28 What about sensors?
0:14:30 So very, very high-end battery technology
0:14:32 has always been sensitive.
0:14:34 And the export control rules literally
0:14:37 get down to how much battery storage do you have for the weight?
0:14:41 What’s the weight to storage capacity?
0:14:43 So this is all quite purposeful.
0:14:44 What is going on?
0:14:46 This is not an accident, because the view
0:14:49 is in Washington and from Syphius
0:14:53 that our global competitors, in particular China,
0:14:57 have focused on early-stage startups
0:14:59 who are developing technology, or the engine of innovation
0:15:02 in our society, coming in early investors,
0:15:04 getting access to that technology.
0:15:07 It’s not being reviewed for national security purposes.
0:15:09 And eventually, that technology is
0:15:13 moving across to foreign companies and, in some cases,
0:15:15 foreign militaries.
0:15:18 It’s actually a very strongly worded, pretty powerful article
0:15:22 in the Wall Street Journal about Chinese civil military
0:15:26 cooperation and investments in US companies.
0:15:30 But we are now in a place where, in terms of reforms,
0:15:32 some more stuff is mandatory.
0:15:35 More stuff is going to become mandatory.
0:15:37 And one thing we didn’t talk about is,
0:15:40 Syphius is not any investment.
0:15:41 It’s not any investment.
0:15:42 What’s covered?
0:15:46 So first of all, you have– think about it as kind of at least
0:15:47 two things, and then there’s a plus.
0:15:49 One is there’s got to be a US business.
0:15:51 A US business is somebody in the US
0:15:53 who’s engaged in interstate commerce.
0:15:55 There’s not a whole lot more definition than that.
0:16:01 It doesn’t matter if it’s, say, a French company that
0:16:04 has a US office and they’re doing business in the US.
0:16:07 If someone goes to buy that French company,
0:16:10 Syphius has nothing to do with that French acquisition,
0:16:13 but it still gets to look at, if it wants to,
0:16:16 the US element of that transaction.
0:16:18 So effectively, what you’re saying
0:16:20 is you don’t need to be a Delaware corporation.
0:16:21 Exactly.
0:16:23 You just have to be doing business in the US.
0:16:24 You have to be doing business here.
0:16:26 Now, that does mean if you’re just selling assets,
0:16:28 you’re not selling a business, it’s a general matter
0:16:29 that’s not covered.
0:16:32 By the way, it also doesn’t affect green field investments.
0:16:34 So foreign company can come here,
0:16:38 start– flatten a lot in Palo Alto,
0:16:41 build everything, start everything on their own.
0:16:43 No Syphius, except maybe the real estate.
0:16:45 We’re not going to worry about that for now.
0:16:48 Second, it’s got to be a foreign business.
0:16:50 You’ve got to have a foreign person making the acquisition
0:16:51 or the investment.
0:16:53 And what does it mean to be foreign?
0:16:57 So US business bought by another US business,
0:16:59 but the US business has a foreign parent?
0:17:00 That’s foreign.
0:17:03 So Syphius looks to the ultimate parent
0:17:09 and the ultimate ownership of the acquirer or the investor.
0:17:13 So foreign, private equity, foreign venture capital,
0:17:14 that’s all foreign.
0:17:15 And you said acquisition, but this
0:17:18 does importantly come up with investments, too, right?
0:17:21 So it doesn’t need to just be an acquisition.
0:17:22 Straight acquisition is easy.
0:17:25 That’s definitely Syphius.
0:17:28 Traditionally, Syphius was only about controlling transactions.
0:17:32 What does controlling mean to you, Katie, as someone in venture?
0:17:33 That you have a vote on a board.
0:17:35 You have more than 51%.
0:17:37 There’s the case.
0:17:39 You have more than 51%.
0:17:42 For Syphius, controlling for Syphius purposes.
0:17:44 So again, you have to have a controlling investment
0:17:47 by a foreign person in a US company.
0:17:52 Controlling for Syphius, more than 9.9% equity.
0:17:59 Or less than 9.9% equity with some other initiative of control.
0:18:02 So 8% in a board seat, controlling investment.
0:18:03 So it can be–
0:18:05 What, in addition to board seats,
0:18:07 are in-dish of controlling investment?
0:18:11 So anything in commitment letter, side-letter MOU,
0:18:13 which suggests some ability, decision-making authority
0:18:16 beyond standard minority protections.
0:18:19 That’s kind of the general rule.
0:18:21 But it gets even better, guys.
0:18:25 One of the big changes in Syphius, in the reform,
0:18:27 it was always about controlling.
0:18:30 So again, it was a pretty low bar, 9.9%.
0:18:32 That’s not what anyone normally thinks about control.
0:18:34 But in this case, it is.
0:18:37 The reform adds an entire category
0:18:39 of non-controlling investments.
0:18:41 If you’re involved, if your business does technology,
0:18:43 we’ve already talked about what that means
0:18:46 to be involved in critical technology.
0:18:48 If you’re involved in critical infrastructure–
0:18:50 and that’s a really detailed list we won’t go through–
0:18:55 or if you are a data company–
0:18:57 remember our data discussion, all those different categories,
0:18:59 one million, that sort of thing.
0:19:05 If you’re any of those, even a less than 10% investment
0:19:09 in you, if the foreign investor has board-seat,
0:19:15 board observer, ability to influence decision-making
0:19:19 or control decision-making, or if they
0:19:24 have access to material, non-public technical information,
0:19:27 any of those things, they can be at 2%.
0:19:31 If you’re a data company, they get some technology information,
0:19:33 that’s a covered investment.
0:19:36 So what you’ve seen, again, I think
0:19:38 you’ve now seen most of the movie,
0:19:42 is it starts with this relatively narrow swath
0:19:44 of defense technology information,
0:19:48 and is now moved into even small investments
0:19:51 if there are certain rights in almost everything
0:19:53 that occurs here.
0:19:55 There’s at least a voluntary filing,
0:19:59 and more and more, there are also some mandatory filings.
0:20:03 So mandatory filings, I’m sure Sifias and the government
0:20:06 have a nimble process for reviewing
0:20:09 all of these mandatory filings they’re not going to have?
0:20:11 When I think US government, I think nimble.
0:20:13 Nimble, agile.
0:20:16 OK, so we know about what historically the process has
0:20:16 been.
0:20:18 I guess you don’t know what it’s been, the review process,
0:20:22 with these new reforms, and presumably a lot more transactions
0:20:23 being submitted.
0:20:24 What was the historical process?
0:20:26 Yeah, so historically, the process
0:20:29 has been, we estimate, in most cases,
0:20:31 about four to six months start to finish.
0:20:34 Now, if you’re in the valley, four to six months
0:20:36 is like life or death.
0:20:38 Obviously, larger deals, it actually
0:20:41 tends to align relatively well with things like Hart-Scout
0:20:42 or Dino antitrust.
0:20:44 So it isn’t always a huge problem in larger deals,
0:20:46 but for smaller deals, it is.
0:20:49 And that four to six months constitutes kind of from sign
0:20:50 to close.
0:20:51 You’re prepping the documents.
0:20:53 You’re sending the documents to Sifias.
0:20:54 They review it.
0:20:55 There’s a back and forth.
0:20:57 They finally accept it formally.
0:21:00 So that whole thing takes sort of a month.
0:21:04 The acceptance, they then review it for 45 days.
0:21:08 At the end of that 45 days, they can say, you’re good.
0:21:09 Or they can say, actually, we need
0:21:11 45 more days of investigation.
0:21:14 You go into a second 45 days.
0:21:18 At the end of that, then they can say, things, you’re good.
0:21:19 We’re going to send it to the president.
0:21:22 Or what they often do, if it’s a really hard case,
0:21:23 is we’re not quite there.
0:21:26 We think we’d like you to restart the clock.
0:21:28 And you go through another 45 day period.
0:21:31 So that’s the traditional construct, four to six months.
0:21:32 It’s post-signing.
0:21:34 Some of it can be done pre-signing.
0:21:36 The problem is inevitably pre-signing.
0:21:37 You can get some of your ducks in a row.
0:21:40 But there’s certain information that the parties just
0:21:41 aren’t willing to exchange yet.
0:21:42 Not to mention pre-signing.
0:21:44 People are actually still trying to get the signing.
0:21:48 So getting anyone’s attention to do some of this is a challenge.
0:21:50 But I do want to come back to what
0:21:52 should absolutely be done pre-signing.
0:21:54 Because even if you’re not filing,
0:21:55 there’s an enormous amount of thought
0:21:58 that should go into that so you don’t end up
0:22:00 in a siphious ditch.
0:22:02 The four to six months is not exactly nimble.
0:22:05 So they created– that traditional process
0:22:06 is called a notice.
0:22:10 They created what is known as a short form declaration.
0:22:12 And a declaration is no more than about five pages.
0:22:13 It’s a web form.
0:22:15 It’s pretty easy.
0:22:18 There’s a 30 day timeline for review.
0:22:21 So in the valley, that’s actually relevant.
0:22:23 We just got to a place where we hope
0:22:25 they will have voluntary filings like that–
0:22:27 voluntary declarations.
0:22:28 We don’t have that yet.
0:22:32 But that means that if you start a little bit before signing
0:22:37 getting stuff done, you spend a couple of weeks post-signing.
0:22:41 Realistically, you have probably a 45 day process.
0:22:43 Again, it’s a 30 day review process
0:22:46 itself where the government has to give you an answer.
0:22:48 But realistically, you obviously need some time
0:22:52 before that to get your information together and file it.
0:22:53 So that’s good.
0:22:55 You can do it in a shorter time frame.
0:22:58 The bad news is, siphious doesn’t have
0:23:00 to give you an answer at the end of that.
0:23:02 And so then aren’t you stuck in some kind of limbo?
0:23:05 Then, well, you are stuck in a limbo.
0:23:07 But in reality, what we tell most of our clients,
0:23:11 if siphious can do what we affectionately call the shrug,
0:23:13 up to you what you want to do next.
0:23:15 They don’t clear you.
0:23:17 They don’t tell you how to file a notice.
0:23:20 And it’s totally up to you on what you want to do.
0:23:25 But the good news is, in most cases, that shrug means, go away.
0:23:27 We have more important things to do.
0:23:30 So you no longer get that safe harbor.
0:23:32 They can always come back to you later.
0:23:34 But what’s the likelihood of that occurring?
0:23:36 Really, really small.
0:23:40 So the shrug, in most cases, is good enough for government work.
0:23:41 I want to ask you one thing.
0:23:44 What if someone wants to challenge siphious and say no?
0:23:46 Can people do that?
0:23:48 Because in most contexts with government agencies,
0:23:50 you have a right of judicial review.
0:23:51 But siphious is different.
0:23:53 Siphious is different.
0:23:55 If you’ve been a litigator before and you never
0:23:57 want to litigate anything again, you’re pretty much
0:23:59 safe in siphious land.
0:24:04 Siphious provides a very, very, very narrow judicial review
0:24:06 provision.
0:24:09 You can’t challenge the national security determinations.
0:24:12 You can challenge on sort of due process grounds.
0:24:14 There has been one.
0:24:18 Yes, count it one challenge in federal court in siphious’s
0:24:22 history, which did, in fact, involve
0:24:25 the acquisition of some wind turbines in southern Washington
0:24:27 state.
0:24:30 And that established the requirements for due process.
0:24:32 That siphious has to tell the parties
0:24:35 what its concerns are to the extent it can.
0:24:39 But unlike every other regulatory environment,
0:24:41 the ability to challenge siphious in court
0:24:43 is extremely narrow.
0:24:46 So the bottom line is, you have to get
0:24:48 what you can out of the regulatory process.
0:24:51 And it does make for, honestly, a very different sort
0:24:54 of negotiation than you see in most contexts.
0:24:58 Because the US government may not hold all the cards,
0:25:01 but it holds 51 of them.
0:25:05 And how does the siphious body, do they vote?
0:25:07 I mean, what if some of the entities of the 13
0:25:10 don’t care about a transaction or an investment,
0:25:11 and then others do?
0:25:13 How does that work?
0:25:16 Now, so it’s a little bit like a jury.
0:25:18 You’ve got to be unanimous.
0:25:22 But if you have one holdout, you just keep going.
0:25:25 So it’s all on consensus.
0:25:28 If one person keeps saying, I want mitigation,
0:25:30 you’re still stuck in this loop of trying
0:25:32 to work through mitigation.
0:25:34 So you can’t get cleared unless everyone agrees.
0:25:36 You probably won’t get rejected unless everyone
0:25:37 agrees, too.
0:25:41 But it can be a very challenging fight about consensus.
0:25:43 And part of what we do with clients all the time
0:25:46 is think about the technology, think about the acquirer,
0:25:49 because siphious comprises 13 different agencies.
0:25:52 And those different agencies have very, very different concerns.
0:25:56 And sometimes, we, as siphious lawyers with our clients,
0:25:59 want to spend a lot of time with the Department of Defense,
0:26:01 because it’s something they care about.
0:26:03 Sometimes, we know the Department of Defense
0:26:03 doesn’t care at all.
0:26:07 We want to spend all our time with DOJ or NSA
0:26:08 on different pieces.
0:26:10 And part of the art is identifying
0:26:12 which agencies care about it and trying
0:26:15 to make sure that as you’re going through the process,
0:26:17 not only are they not an impediment,
0:26:19 but the ones who have the biggest interest in the US
0:26:22 government are actually advocates for the deal getting
0:26:23 done.
0:26:24 We’ve been talking about acquisitions.
0:26:26 I want to talk a little bit about investments.
0:26:29 I talked about those mandatory categories
0:26:31 on that critical technology piece.
0:26:33 If you have export control technology,
0:26:36 the draft regulations add one more thing that’s mandatory,
0:26:41 that if there’s a foreign government control transaction
0:26:44 in those technology infrastructure or data spaces,
0:26:47 and a foreign government control transaction
0:26:52 is a foreign investment of 25% or more in the US business
0:26:55 by an entity that is 49% or more controlled
0:26:56 by a foreign state.
0:27:00 GIC, sovereign wealth fund for Singapore,
0:27:04 the issue may or may not be if they make a 25% investment
0:27:07 in any of those types of companies,
0:27:11 that also drives a mandatory declaration.
0:27:14 So that’s going to change the environment a little bit
0:27:17 for some of the ever-present sovereign wealth funds
0:27:20 and related entities and their investments in the valley
0:27:21 as well.
0:27:23 What if those sovereign wealth funds are LPs
0:27:25 in venture capital funds?
0:27:28 So the way it’s written now in terms of a JV,
0:27:31 sovereign wealth funds in a joint venture,
0:27:34 and they have 49% of the joint venture,
0:27:35 in most cases, a sovereign wealth fund probably
0:27:39 wouldn’t be 49% LP.
0:27:43 The LP piece, this gets pretty complicated
0:27:44 because you’re combining two things.
0:27:47 They analysis on whether it’s foreign government control
0:27:50 and also the analysis on whether or not
0:27:54 the LP should even be considered as an investor of just the GP.
0:27:57 Because if it’s just an LP and that LP doesn’t
0:27:59 have certain decision-making rights,
0:28:01 then you don’t consider that LP at all.
0:28:04 So this is another way in which, for funds,
0:28:08 it becomes very, very important to look at LP agreements
0:28:10 and determine what rights you want to provide
0:28:12 and what rights you don’t want to provide.
0:28:16 So we’re seeing more and more excerpts of LP agreements,
0:28:19 which say under no circumstances will the limited partners have
0:28:22 access to material, non-public, technical information.
0:28:27 Because if they did, they no longer get the LP protection.
0:28:29 So it’s taking some of the language and some
0:28:31 of the art of what goes on at CFIUS,
0:28:33 inserting that into the LP agreement
0:28:37 and looking very carefully at the provisions around the advisory
0:28:39 committees, the investment committees for the LPs.
0:28:41 And in general, LPs want this.
0:28:45 Because LPs are joining a fund so they’re not the investor.
0:28:47 So this is basically just verifying their passive.
0:28:50 Now, the one complication you get in larger investments,
0:28:54 of course, is direct investment by that same LP.
0:28:55 That’s covered in CFIUS.
0:28:57 They don’t get to skate free of that because they
0:28:59 are an LP and another fund.
0:29:02 Well, a lot of founders, they’re not
0:29:06 yet kind of at the stage or later stage or growth investments.
0:29:09 How should they be thinking about CFIUS reforms?
0:29:12 I mean, they might have not yet a million users
0:29:15 for their product or service, but aspire to it.
0:29:19 And maybe they want to go raise money for a variety of reasons,
0:29:23 not just here in Silicon Valley, but outside of the US.
0:29:26 How should they be thinking about something like CFIUS?
0:29:28 They might be– it’s series A, they
0:29:31 might not have a general counsel or a huge legal budget
0:29:33 for outside counsel, such as yourself.
0:29:34 What should those founders–
0:29:36 So even if you don’t have a general counsel,
0:29:39 talk to the Katie Hans of the world to say, all right,
0:29:42 if I take this money from this foreign investor,
0:29:44 how is that going to affect my round?
0:29:46 What rights do I have to make sure are not involved?
0:29:49 How is that going to affect future business opportunities?
0:29:51 That’s really important.
0:29:53 So think strategically.
0:29:56 Of course, it can be very attractive
0:30:02 to take $5,000,000,000, $10,000,000, $15,000,000,
0:30:04 whatever it is from a foreign investor who
0:30:07 can write a big check and isn’t asking for much.
0:30:09 Or her provide some strategic–
0:30:10 That’s right.
0:30:12 Or strategic benefit for geographic diversity.
0:30:14 I mean, all sorts of reasons.
0:30:15 Think it through.
0:30:18 I’m not saying don’t do it, but potentially limit
0:30:19 certain information rights.
0:30:22 So you’re a specialist in coming up
0:30:24 with innovative deal structures.
0:30:27 Maybe you trip into SIFIUS, maybe you don’t.
0:30:30 If someone didn’t want to, what kind of things
0:30:34 would you tell a Series A or Series B founder if they said,
0:30:35 I want to take foreign investment,
0:30:38 but I really don’t want to go through this what sounds like a
0:30:42 not nimble and a fairly paper-intensive SIFIUS process?
0:30:44 What kinds of things could they be doing strategically?
0:30:46 You’ve got to think about the rights that you’re
0:30:47 including for that investor.
0:30:50 Those rights on board, information rights,
0:30:52 absolutely decision rights, may trip you into SIFIUS
0:30:53 one way or another.
0:30:54 So that’s critical.
0:30:57 And that investor might not care about those things.
0:30:57 That’s right.
0:30:59 And you might tell that investor, if you get this,
0:31:02 it’s going to delay things, and we have a long process.
0:31:05 They may say, oh, god, yeah, it’s not worth it to me, either.
0:31:07 So think about those rights up front.
0:31:11 Second, think about how, in terms of timing,
0:31:12 phase your investment in different ways.
0:31:15 So maybe they say 9% equity, but damn it,
0:31:18 I want a board seat if I’m giving you 9%.
0:31:19 And the answer may be, OK, great.
0:31:21 But let’s phase the investment.
0:31:22 I need the 9% now.
0:31:24 I need the equity now.
0:31:26 But you’ll only get your board seat
0:31:28 after we get through this SIFIUS process.
0:31:30 Three years ago, this is hard, because you
0:31:33 had lots of foreign investors who weren’t thinking about this.
0:31:36 Today, you’ve got a global environment
0:31:39 of very, very well-educated foreign investors who
0:31:42 don’t want to run afoul of the rules
0:31:44 and are more thoughtful.
0:31:46 If you said to certain investors three years ago,
0:31:47 sorry, if I give you a board seat,
0:31:49 we’re going to have a SIFIUS issue.
0:31:50 They’d say, well, who cares?
0:31:51 Let’s go through SIFIUS.
0:31:53 Today, I think it’s actually a very different environment,
0:31:56 and they might well say, totally understand.
0:31:57 I don’t need a board seat.
0:31:59 So that’s good news.
0:32:00 They’re taking the equity position,
0:32:02 but you’re delaying some other rights,
0:32:04 whether it’s a board seat, board observer, and the like.
0:32:07 So phase it so it doesn’t totally follow up your timeline.
0:32:09 Third, you really do have to think strategically
0:32:12 about where you’re trying to go with the business.
0:32:14 Do you want to do work with the US government?
0:32:17 Is your priority in Asia or Europe or anywhere else,
0:32:18 in which case?
0:32:20 You may have to walk through some of this,
0:32:23 and you’re perfectly fine closing one door to open another.
0:32:25 So don’t just think about this.
0:32:28 I know that’s hard when you need equity right away,
0:32:31 but you still have to be a little bit strategic looking
0:32:34 forward about how this will affect you in the future.
0:32:36 Think about if there are ways to structure it.
0:32:39 So they are LPs and another fund.
0:32:42 Now, funds of one aren’t good, but to the extent
0:32:44 you can work with someone and say, listen,
0:32:46 we’d love to take your money, but it’s problematic
0:32:49 if we do it that way, let’s move it over to here.
0:32:50 That’s really good.
0:32:54 Another possibility is, again, early stage this gets hard,
0:32:57 but later stage, you might start looking at not actually
0:33:01 selling in the US business.
0:33:03 If you’ve already gone international, carving it up,
0:33:06 so they’re actually making an investment outside the United
0:33:09 States and some of your growth in other geographic regions.
0:33:10 Now, that gets tricky because then you
0:33:13 have to really be careful that you’re not contributing
0:33:16 a US business, that your R&D isn’t supporting it,
0:33:17 your people, all those things.
0:33:20 But at some point, that becomes quite valuable
0:33:23 to create potentially a joint venture overseas
0:33:26 with the foreign investor rather than investing
0:33:28 in the domestic US company.
0:33:32 And if you finally decide, well, we’ve got to do this,
0:33:34 but I’m worried about what Siphius might say,
0:33:37 then you’re in the world of how are you allocating that risk
0:33:41 that Siphius is going to show up and stop us
0:33:43 from doing something or sharing something.
0:33:44 So you really have to understand why you’re
0:33:45 doing the investment.
0:33:47 If you’re just doing the investment to get the money,
0:33:50 the risk isn’t that bad for you.
0:33:51 Because what would the mitigation be?
0:33:53 The mitigation might not be the money,
0:33:55 the mitigation might be a lack of information access
0:33:57 for the acquirer or the investor.
0:33:59 But what you’re trying to do is I
0:34:01 want to share information and technology
0:34:04 with this foreign investor because they have technology
0:34:06 or access to markets that I need.
0:34:08 Well, then you have to be really careful
0:34:11 because that might be exactly what Siphius cuts off.
0:34:13 So you have to understand what the investment thesis is not
0:34:15 just for them, but what it is for you
0:34:17 and how Siphius may affect that.
0:34:19 And then you fold into the deal documents
0:34:22 the allocation of risk like you would in any other deal,
0:34:25 what the efforts they might have to do for the regulatory
0:34:29 regime, when you have a right to walk, things like that.
0:34:32 What about– we talked about US business doesn’t necessarily
0:34:33 just mean US business.
0:34:35 It could mean just you have a presence in the US.
0:34:37 What about where there’s no company at all?
0:34:38 And here I’m thinking about crypto.
0:34:42 We have these things called DAOS, decentralized autonomous
0:34:45 organizations or distributed autonomous organizations.
0:34:47 In many times they’re set up as a nonprofit.
0:34:50 Do these rules, the new reforms speak to that kind
0:34:52 of circumstance or not really?
0:34:54 I think they really don’t.
0:34:56 I think that is over the horizon for Siphius.
0:34:58 One thing though, going back to the point
0:35:01 about judicial review, a lack of judicial review
0:35:04 means one really important thing on something like this.
0:35:08 Siphius has enormous discretion to interpret its rules
0:35:10 the way it wants to interpret its rules.
0:35:14 So it wants to say it’s a US business.
0:35:17 It wants to find enough indicia of it being a US business.
0:35:18 It can say it’s a US business.
0:35:20 And there’s not going to be a court which says,
0:35:22 how dare you say that?
0:35:25 And there aren’t that many investors or companies
0:35:27 that want to go fight the US government in court,
0:35:30 even if they could, on that sort of thing.
0:35:32 Well, before we take time for questions,
0:35:33 I just wanted to ask you, what do you
0:35:37 think are the biggest surprises for which industries
0:35:39 or which types of business do you
0:35:41 think this is going to– these reforms are really
0:35:44 going to affect most in our world?
0:35:48 I think I am nervous about anyone
0:35:52 who mentions artificial intelligence on their website,
0:35:53 which is everyone.
0:35:55 Artificial intelligence machine learning
0:35:56 are inherently challenging places
0:36:00 because ultimately we’re talking about algorithms
0:36:03 and where do you actually draw the line between basic mathematical
0:36:06 science and research into the application of that.
0:36:08 So I think it’s going to have a potentially significant
0:36:09 impact there.
0:36:13 Biotech, anything health care related,
0:36:16 is increasingly becoming an area of focus.
0:36:18 Certainly, as I’ve already mentioned,
0:36:20 anyone who deals with identifiable information
0:36:24 in any way, this is a very hot topic.
0:36:28 The last two, as I said, if you don’t file with CIFIUS,
0:36:30 CIFIUS can always knock on your door
0:36:36 and you can have a really, really uncomfortable period
0:36:39 and they can impose penalties or impose divestiture.
0:36:40 There are two cases like that right now,
0:36:44 both involving Chinese investors and acquirers,
0:36:45 both pretty well known.
0:36:49 So I think– I hate to say it, but it’s
0:36:52 hard to find areas that aren’t of concern to CIFIUS right now.
0:36:56 Again, that doesn’t mean that everybody is going to be blocked.
0:36:58 It doesn’t mean that everyone has mitigation.
0:37:02 It does mean, in most cases, thoughtful planning early
0:37:04 in the process, structuring in a way
0:37:07 where CIFIUS is a lesser concern becomes more and more important.
0:37:09 And where can people learn more?
0:37:11 If they want to thoughtfully think about this,
0:37:12 I don’t want to go file anything,
0:37:15 but I want to keep my finger on the pulse of this work.
0:37:18 What are some resources that people could go look for?
0:37:23 So CIFIUS is also a funny regime in that CIFIUS never
0:37:25 publishes anything publicly.
0:37:27 Any other court case, you have a court case.
0:37:28 And what do lawyers do?
0:37:30 They go read the court case.
0:37:32 CIFIUS doesn’t release any of its decision.
0:37:34 It’s all confidential, which actually
0:37:35 is a good thing for the businesses,
0:37:38 because you’d rather not have the whole world know
0:37:40 what you’re doing, how your investors are.
0:37:41 So that’s a good thing, and things
0:37:43 tend not to leak out of CIFIUS.
0:37:47 There’s obviously an industry of lawyers who write on this.
0:37:49 There are one or two sites.
0:37:52 One slight warning, because CIFIUS has become a bigger deal,
0:37:56 it’s sort of like mushrooms after a rainstorm.
0:37:58 Experts are popping up everywhere.
0:38:00 They’re national security experts or CIFIUS experts.
0:38:03 If you call someone, if you call firms,
0:38:05 say, hey, how many CIFIUS filings have you
0:38:07 done over the past five years?
0:38:10 And if the answer is less than about 100,
0:38:11 you ought to be scared.
0:38:13 So find the reputable firms that do this.
0:38:16 Talk to the reputable investors who understand this.
0:38:19 And it is something where keeping your finger on the pulse,
0:38:21 I just think it’s going to be too overwhelming.
0:38:23 There’s too much change in this environment right now.
0:38:26 So find a lawyer that you trust so you can get on the phone
0:38:26 with.
0:38:29 It’s not always hundreds of thousands of dollars.
0:38:31 Any reputable lawyer should say, hey,
0:38:32 let’s talk through this for half an hour,
0:38:33 see if you have a problem.
0:38:36 The lawyer understands your technology, who the investor is,
0:38:38 what the timeline is, what your business goals are.
0:38:41 Say yes, no, or maybe.
0:38:43 And then you make a decision about how you want to proceed.
0:38:45 And you’re not going to get that from just reading something.
0:38:47 Reading is good background.
0:38:49 But again, you’re trying to build a business or run a business.
0:38:52 You’re only going to read so many articles from my guests.
0:38:52 Great.
0:38:54 Mike, thanks so much for being here.
0:38:56 I know people might have questions for you.
0:38:59 Is there ways you can accidentally back yourself
0:39:01 into a SIFI situation?
0:39:04 So for example, you have a downward protection
0:39:05 or a secondary market.
0:39:07 Someone buys your store.
0:39:09 You go public and someone buys your stock.
0:39:13 Yeah, so there absolutely are what you describe.
0:39:17 Everything from convertible debt, which when it converts,
0:39:19 and there are rules about how SIFI is
0:39:23 treats convertible debt instruments and the like.
0:39:24 And SIFI is doesn’t matter.
0:39:25 It doesn’t matter if it’s a direct investment
0:39:29 in private company or ownership on the public market.
0:39:33 So you get over 10% public ownership on the public market.
0:39:38 And that, too, implicates SIFI as it doesn’t matter
0:39:39 what form of ownership it is.
0:39:41 It’s just about equity.
0:39:45 By the way, debt does not count.
0:39:47 Convertible debt gets more complicated, but debt doesn’t.
0:39:49 So that’s another way to structure
0:39:52 potentially, which can be helpful.
0:39:54 Now, if you have debt and you have some other rights
0:39:57 on top of that debt, it gets a little bit more complicated.
0:40:01 But yes, you have to be aware of your shareholder base,
0:40:05 public, private, regardless of how it comes in.
0:40:09 Now, it does matter to SIFIUS in terms
0:40:11 of how they look at it, because if you’ve
0:40:14 been passive about this, you didn’t reach an agreement.
0:40:16 Somebody just comes in and acquires
0:40:18 your debt on a secondary market.
0:40:21 They may be concerned about what the effects of that are,
0:40:24 but they absolutely look at the US business
0:40:27 and the target a little bit differently,
0:40:29 since you have obviously not signed up
0:40:32 to do something collaboratively with that foreign investor.
0:40:34 So it changes the color, but it doesn’t change
0:40:36 the jurisdictional analysis.
0:40:39 The owner’s the responsibility for filing on the company
0:40:42 or the investor or acquirer for filing.
0:40:46 Yeah, so the way the fines work, it’s joint and several.
0:40:49 So they’ve only imposed one fine in that so far.
0:40:52 So we really don’t have a lot of data to know–
0:40:53 Can you just explain?
0:40:54 I mean, joint and several.
0:40:55 Oh, sure, sure.
0:40:58 Meets both of you are in trouble.
0:40:59 Yeah, so you both have a responsibility.
0:41:01 The filing is joint.
0:41:04 So any SIFIUS filing is joint.
0:41:07 It isn’t joint if there’s been an outright acquisition
0:41:10 and after the fact, because then there’s only one party.
0:41:13 So if you get acquired and you get your equity
0:41:17 and you get your cash and you walk away, listen, you’re good,
0:41:19 depending on what the contract said.
0:41:22 But generally, if you’re talking about an investment
0:41:25 in a US business, both parties go to SIFIUS.
0:41:28 Both parties can be fined by SIFIUS,
0:41:33 although each party generally only states–
0:41:36 it can only be responsible for its own information.
0:41:41 So you can’t be fined for the foreign investor lying
0:41:42 about something.
0:41:46 But if you then have a mediation agreement,
0:41:49 the foreign investor isn’t going to get access to my technology
0:41:51 and you provide them access or you
0:41:54 do something that violates that national security
0:41:55 agreement with the US government,
0:41:59 then the fine, you are jointly responsible for that fine.
0:42:02 Is the application viewed differently based off
0:42:02 of the timing?
0:42:06 For example, let’s say you do it post wire money
0:42:08 versus three months after the wiring money.
0:42:10 And is there penalties associated with the timing?
0:42:11 Great question.
0:42:13 If it’s a mandatory filing, then you
0:42:17 have to file 45 days before signing, for closing.
0:42:21 In closing, is that defined as when the money is transferred?
0:42:23 Well, probably, but it also depends
0:42:26 on how it’s defined in the term sheet.
0:42:28 Most term sheets, it’s going to be signed and closed.
0:42:33 But again, that means 45 days before the term sheet is completed,
0:42:34 you’ve got to file.
0:42:38 Now, if it’s voluntary, there’s no requirement
0:42:41 to file before or after.
0:42:43 So you can file it any time.
0:42:47 But here’s the important but.
0:42:50 Unsurprisingly, SIFIUS wants you to file before.
0:42:53 It’s always a harder conversation if they already
0:42:55 have the investment, they already have the rights,
0:42:57 and you’re going and explaining it.
0:43:01 So there are situations where we sort of work with SIFIUS
0:43:03 and the parties close before they’ve
0:43:06 gotten approval from SIFIUS.
0:43:08 But it has to be done very, very carefully
0:43:11 in a knowing, open, transparent way.
0:43:15 Or otherwise, SIFIUS has the ability to take it out on you.
0:43:18 Well, we have time for one more question.
0:43:19 Where do you think this is all going?
0:43:24 The footprint of SIFIUS has been expanding, arguably
0:43:27 beyond national interest and just broader economic interests
0:43:29 of companies.
0:43:32 And you mentioned the dialogue with the export control
0:43:35 regulations where it’s not just at the time of an M&A
0:43:37 event or an investment, but ongoingly,
0:43:39 may need a license from the government
0:43:43 just to do business with entities located
0:43:46 in foreign jurisdictions.
0:43:50 1% of the transaction is pretty onerous for mandatory filing.
0:43:54 And then who knows what the export licenses would be.
0:43:57 Where is this all going in DC, a stopping point?
0:43:59 So a couple of pieces on that.
0:44:02 First, this is about the only bipartisan thing
0:44:05 that has happened in Washington in the last three years.
0:44:06 So that tells you something.
0:44:11 That regards to what happens in 2020, this isn’t going away.
0:44:13 And a lot of this started at the end of the Obama
0:44:14 administration.
0:44:18 Now, you put on top of that, obviously, the US-China trade
0:44:18 tensions.
0:44:20 That’s clearly exacerbated this.
0:44:23 And we’ve seen instances where these issues are all
0:44:28 getting thrown into a pretty messy stew.
0:44:30 I think Huawei is ZTE.
0:44:31 Is that national security?
0:44:34 Is it a negotiating tactic on trade deals?
0:44:38 So I think some of that, let’s assume, going forward,
0:44:42 comes down a little bit on the broader US-China trade front.
0:44:44 I think we’ll have a little bit more predictability.
0:44:47 But I think the basic trajectory of CIFIUS,
0:44:49 looking broadly at technology, data,
0:44:52 critical infrastructure, expanding
0:44:55 that definition of critical technology,
0:44:56 that’s not going away.
0:44:58 And there are still a lot of things
0:44:59 you can do outside of CIFIUS.
0:45:03 As I said, licensing of technology
0:45:04 does go through export control.
0:45:06 That will change, but it doesn’t go through CIFIUS.
0:45:09 So we can’t do anything to evade CIFIUS,
0:45:13 but there are still good ways to do business
0:45:17 with overseas investors, in overseas environment, that
0:45:19 doesn’t put you squarely in the crosshairs.
0:45:21 I don’t think, going forward, this
0:45:22 is going to radically change.
0:45:24 What is the stopping point?
0:45:26 I hope we don’t have a global downturn.
0:45:29 But right now, we’re in a world where
0:45:33 it’s not that hard to find capital.
0:45:35 There’s a lot of capital out there.
0:45:37 Those capital markets start to shrink a lot.
0:45:40 I think they’ll clearly be an incentive on the US front
0:45:43 to open those doors a little bit more widely.
0:45:45 So I think there are some macro trends
0:45:48 that could start to have this ebb.
0:45:50 But I think short of that, the trajectory
0:45:53 is going to remain relatively constant at this point.
0:45:55 Well, on that note, thank you so much, Mike.
0:45:56 Thanks for coming in.
0:45:59 [APPLAUSE]
0:46:07 [BLANK_AUDIO]
0:00:05 should not be taken as legal business tax
0:00:06 or investment advice,
0:00:09 or be used to evaluate any investment or security
0:00:11 and is not directed at any investors
0:00:14 or potential investors in any A16Z fund.
0:00:19 For more details, please see a16z.com/disclosures.
0:00:21 – Hi everyone, welcome to the A6NC podcast.
0:00:23 Today’s episode is all about SIFIUS,
0:00:25 the Committee on Foreign Investment in the United States
0:00:27 and their proposed updates to FERMA
0:00:30 or the Foreign Investment Risk Review Modernization Act
0:00:34 of 2018, which took place in September 2019.
0:00:36 The conversation was hosted by Andreessen Horowitz
0:00:38 as part of an event for founders and others
0:00:41 with general partner Katie Hahn interviewing Michael Leiter,
0:00:44 a partner at law firm Scad and Arps et al.
0:00:47 who covers national security, cybersecurity and privacy,
0:00:50 SIFIUS and more, which is what this Q&A is all about,
0:00:52 covering what it involves and doesn’t
0:00:54 to how to think about and structure your business
0:00:56 and partnerships strategically as a result.
0:01:00 But the conversation begins with what SIFIUS is.
0:01:02 – So SIFIUS stands for the Committee on Foreign Investment
0:01:04 in the United States.
0:01:08 And the basic function of SIFIUS is to review
0:01:11 any foreign investment in a U.S. business
0:01:13 that produces national security concerns.
0:01:15 So that sounds relatively basic.
0:01:17 It’s this big interagency body,
0:01:19 everything in Washington is interagency,
0:01:21 but you know– – How many agencies?
0:01:22 – And how many agencies? – 13 agencies.
0:01:26 It’s run by the Department of Treasury unsurprising
0:01:28 because it’s about foreign investment in the United States.
0:01:31 And it has traditionally sort of split
0:01:33 between two different camps.
0:01:35 Historically, it was those parts of the U.S. government
0:01:38 that wanted foreign investment in the United States,
0:01:40 Treasury, the U.S. Trade Representative,
0:01:43 State Department, like their job is to do this.
0:01:47 And those agencies that didn’t necessarily want investment
0:01:51 were at least more concerned about security.
0:01:53 So thank Department of Defense, Department of Justice,
0:01:55 now Homeland Security and elements
0:01:57 of the intelligence community.
0:02:00 Central Intelligence Agency, NSA,
0:02:02 organizations like that, FBI.
0:02:04 So once upon a time, we were really, really worried
0:02:06 about the semiconductor industry moving
0:02:08 from the United States to Japan.
0:02:10 So SIFIUS was fundamentally created
0:02:13 to start to limit that movement of technology
0:02:16 from the U.S. to Japan, and that was generally being done
0:02:18 through limiting Japanese acquisition
0:02:21 of certain businesses here in the United States.
0:02:23 So that’s now pretty ancient history.
0:02:29 Fast forward to when Katie and I were in government, 2006,
0:02:31 what is SIFIUS concerned with then?
0:02:34 It’s post-9/11 to buy Port’s World,
0:02:37 decides that they want to buy American ports.
0:02:41 Washington says, wait, that has to be bad too.
0:02:44 So in post-9/11 era, SIFIUS honestly
0:02:47 focuses on things like that, worrying
0:02:51 about critical infrastructure and the Emiratis buying that.
0:02:54 Fast forward to today, and the joke I often use
0:02:56 is, although it’s the Committee on Foreign Investment
0:02:59 in the United States, largely, it’s
0:03:01 Chinese foreign investment in the United States.
0:03:05 And what has changed is not just that political lens,
0:03:07 but what’s really changed and what
0:03:11 starts to really affect, I hate to say it, all of you,
0:03:17 is the changes in technology, the expansion of data,
0:03:21 the ability to use data in a huge variety of ways
0:03:25 that was never present 20 or 30 years ago, 10 years ago.
0:03:28 Now means that the US government is
0:03:32 focused on a huge range and fundamentally every sector
0:03:33 of society.
0:03:36 So SIFIUS is not limited to technology.
0:03:38 It’s not limited to aerospace and defense
0:03:40 and military technology.
0:03:42 It’s true, not everything is covered by SIFIUS,
0:03:46 but you have to assume it is if you’re involved in technology.
0:03:48 You touch data.
0:03:50 You own any real estate.
0:03:52 You do any work with the US government,
0:03:55 or you have anything else.
0:03:59 You can even get into the world of dog food.
0:04:03 Ooh, do the seals buy dog food from you
0:04:05 for their bomb-sniffing dogs?
0:04:09 So there’s no limitation on the sector.
0:04:11 There’s no limitation on the size of the deal.
0:04:14 You mentioned that this all came about during the Japanese
0:04:18 semiconductor era, but now it’s undergone some reforms
0:04:21 and then some new implementing proposed regulations.
0:04:23 So I want to talk about those reforms.
0:04:26 But before I do, you just mentioned data.
0:04:30 What about verticals like FinTech or crypto companies
0:04:31 who might have PII?
0:04:36 Yeah, so really, we’ve seen this for several years now
0:04:40 about a focus on personally identifiable information.
0:04:43 And SIFIUS has looked at this through a very broad lens.
0:04:44 So once upon a time, it was, again,
0:04:47 if I knew everything about Katie in one place,
0:04:49 maybe SIFIUS would care.
0:04:49 You probably do.
0:04:51 I do.
0:04:52 And I have stories for you.
0:04:54 So there are a number of things that
0:04:56 have happened which have really highlighted
0:05:00 how sensitive SIFIUS is about data that is collected.
0:05:02 First of all, there’s this thing called cybersecurity.
0:05:06 And what we’ve seen over the past, again, five to 10 years,
0:05:09 is obviously not just the ubiquity of data,
0:05:12 but the key vulnerability of data across every sector.
0:05:17 And we’ve seen countries, especially China, Russia,
0:05:21 and other others, use cyber attacks and cyber
0:05:23 penetrations for their benefit.
0:05:25 And not just their national security benefit,
0:05:27 but also their economic benefit.
0:05:30 Everyone remember the OPM hack, Office of Personnel Management?
0:05:33 So if you start to put these pieces together,
0:05:35 you understand how foreign adversaries
0:05:38 can take advantage of lots and lots of data
0:05:41 in different places and piece that together.
0:05:44 So in terms of FinTech, all financial information,
0:05:47 that’s been a clear area of focus for SIFIUS.
0:05:49 And the good news is these new regulations
0:05:55 do sort of carve out standard consumer credit card information
0:05:57 as an area of specific concern.
0:05:59 But beyond that, they specifically
0:06:04 cite things like credit reports, broader financial data.
0:06:08 So I think anyone in this sector working in FinTech
0:06:12 is inevitably going to have more than just your 16-digit credit
0:06:13 card number.
0:06:16 And that will absolutely be considered sensitive data
0:06:18 to SIFIUS.
0:06:20 SIFIUS also, in its newest regulations,
0:06:23 try to say, OK, well, it’s not really everything.
0:06:25 It’s only if you have a lot of it.
0:06:28 Everyone remember Austin Powers, how much money he asks for?
0:06:30 $1 million.
0:06:35 And they’re like, guys, $1 million isn’t a lot.
0:06:37 So what does SIFIUS come up with for the number
0:06:39 of people’s personal data?
0:06:42 1 million people.
0:06:43 That’s not a joke.
0:06:44 It really is.
0:06:47 And it’s not even if you have a million people’s data.
0:06:49 It’s if you have a stated business purpose
0:06:51 to get to a million people.
0:06:53 Who here doesn’t?
0:06:55 So again, these are draft regulations.
0:06:58 But it gives you a sense of, to some extent,
0:07:00 the dichotomy between how you’re seeing business,
0:07:02 how you’re trying to grow a business,
0:07:06 and how, from a Washington National security perspective,
0:07:08 everything starts to get encompassed.
0:07:11 And also financial technologies, as you know,
0:07:13 I have a real interest in crypto.
0:07:15 Obviously, I want to talk a little bit about how
0:07:18 SIFIUS reforms could affect the crypto industry.
0:07:22 I’ll save that for later in our discussion of what
0:07:23 is the US business?
0:07:25 And indeed, in the context of crypto,
0:07:27 what is even a business at all?
0:07:29 But tell us about the reforms.
0:07:32 Like, what’s new?
0:07:35 And why are we hearing about SIFIUS so much more?
0:07:38 I think we’ve seen two major factors which
0:07:42 have driven everyone listening about SIFIUS.
0:07:44 Chinese are a global competitor for the United States.
0:07:46 They’re also a global partner in some ways,
0:07:48 certainly in investment and technology.
0:07:52 But stated Chinese policy is about being
0:07:54 a global competitor on a bunch of technological fronts.
0:07:57 And that really motivated the Congress
0:08:01 to be fearful of China and start to limit Chinese influence
0:08:04 in US business, which brought about one
0:08:06 of the only bipartisan things that
0:08:07 just happened over the past three years, which
0:08:09 was reform of SIFIUS.
0:08:11 So that was kind of the driving impetus for it.
0:08:13 What did it actually change?
0:08:14 A couple of things.
0:08:16 First, SIFIUS has always been purely voluntary.
0:08:18 Can you unpack that a little bit?
0:08:19 What do you mean purely voluntary?
0:08:23 Yeah, so if Alibaba shows up and buys one of you
0:08:26 tomorrow prior to SIFIUS reform, it
0:08:30 was up to you and Alibaba to go and actually submit
0:08:32 something to SIFIUS or not.
0:08:36 And that did mean that the vast majority of transactions
0:08:38 were never seen by SIFIUS.
0:08:39 And every once in a while, SIFIUS
0:08:42 would go out and grab and pull a company in.
0:08:43 But again, there was no requirement
0:08:45 to ever present your matter.
0:08:47 And when you present a matter to SIFIUS,
0:08:49 it’s fundamentally the two parties coming together.
0:08:51 You describe the US business.
0:08:53 You describe the foreign acquirer.
0:08:56 You describe the transaction, the motivation for the transaction.
0:08:59 And there’s a process whereby SIFIUS reviews that
0:09:00 for national security concerns.
0:09:04 And SIFIUS can then either say, you’re good.
0:09:06 SIFIUS can say, you’re very, very bad.
0:09:09 And we’re going to ask the president to block it.
0:09:12 And the president can, under his Article 2 authority,
0:09:14 block the transaction from occurring.
0:09:17 Or what happens most often in a sense of transactions
0:09:21 is that SIFIUS says, well, you can do the transaction,
0:09:24 but we’re going to impose some mitigation
0:09:26 to reduce the national security risk.
0:09:27 And that can mean a lot of things.
0:09:30 That can be a separate board of US citizens overseeing
0:09:31 the company.
0:09:33 It could be limitations on access to technology,
0:09:36 controls over the data, all sorts of things.
0:09:38 So that’s how SIFIUS always operated.
0:09:41 People came to SIFIUS, presented their transaction,
0:09:44 and one of those three things generally happened.
0:09:46 If, since it was voluntary, did you
0:09:49 see companies that would have otherwise fallen
0:09:51 under the jurisdiction of SIFIUS saying,
0:09:53 I want to fly under the radar?
0:09:53 Absolutely.
0:09:58 So it happened all the time that people wouldn’t actually
0:09:59 go to SIFIUS.
0:10:02 So especially smaller transactions.
0:10:04 I mean, you have a big market transaction,
0:10:06 and it’s all over the front page of the finance times
0:10:08 in the Wall Street Journal, a little harder
0:10:09 to fly under the radar.
0:10:11 But for a long time, especially on smaller transactions,
0:10:12 it wasn’t occurring.
0:10:16 Now, why even go then if it’s voluntary?
0:10:20 Because there’s no statute of limitations on SIFIUS.
0:10:24 So if you don’t go to SIFIUS at any time the US government
0:10:27 can knock on your door and say, hey, Katie,
0:10:29 that deal you did three years ago?
0:10:31 We want to investigate that deal.
0:10:34 And ultimately, SIFIUS has the authority
0:10:37 to force divestiture, unwind the transaction,
0:10:39 or impose mitigation.
0:10:42 And if you’re a company and you’re taking money
0:10:44 or you’re buying something, that’s
0:10:48 a pretty uncomfortable place to be for the rest of time.
0:10:49 And especially if you’re a company that
0:10:53 is doing other transactions in the United States,
0:10:56 it gets harder and harder to say, ah, let’s not worry about it.
0:11:00 But the reforms, again, did several things here
0:11:02 that have changed this.
0:11:05 First, there are pieces of SIFIUS that are now mandatory.
0:11:06 So not voluntary.
0:11:07 Not voluntary.
0:11:09 And if you don’t show up, you can
0:11:14 be fined up to $250,000 or the value of the transaction.
0:11:16 And so it’s just like any other compliance scheme
0:11:18 at that point, export control or something else.
0:11:20 And that’s not every transaction,
0:11:25 but it does involve a lot of what people in the valley do.
0:11:29 In particular, it’s mandatory if the company operates
0:11:32 in a certain sensitive sector that’s listed by SIFIUS.
0:11:37 And if you produce or design, export control technology.
0:11:40 That sounds like military stuff, but it’s not just that, right?
0:11:40 Exactly.
0:11:41 It’s not just military stuff.
0:11:44 It’s also a huge range of other things
0:11:46 that are controlled by the Commerce Department
0:11:47 as dual-use technology.
0:11:49 So what does that include?
0:11:52 Things like encryption.
0:11:54 Your software has a certain level of encryption.
0:11:57 Your software is export-controlled.
0:11:59 That means if there’s an investment in that company
0:12:01 over a certain size or giving that
0:12:03 for an investor certain rights, it’s
0:12:06 a mandatory filing with SIFIUS.
0:12:08 What other kinds of things for companies
0:12:11 that you see out in the valley would be relevant that now,
0:12:13 under these new reforms, would be covered?
0:12:13 Yeah.
0:12:18 So today, it’s certain sensors, LIDAR, for example.
0:12:20 The high-end types of LIDAR defined
0:12:24 by certain wavelength for distance, those are controlled.
0:12:29 LIDAR that you use for your standard autonomous vehicle
0:12:32 test projects now, not controlled.
0:12:36 So it turns out that the export control regime actually
0:12:40 covers fundamentally everything that anyone makes.
0:12:42 And you either get classified under what’s
0:12:46 known as EAR-99, non-export-controlled,
0:12:48 or if there’s something more sensitive about technology,
0:12:51 it can be export-controlled to certain countries
0:12:52 for national security.
0:12:58 So it ranges from computing power, battery storage, sensors.
0:12:59 It’s everything.
0:13:02 Now, if you’re doing straight software,
0:13:07 it tends not to unless you get into the world of encryption.
0:13:09 Can you talk a little bit more about that
0:13:11 and about what now I know as part of the reforms
0:13:13 are if it’s a sensitive technology?
0:13:14 Yeah, so–
0:13:15 How is that defined?
0:13:17 Yeah, I assume there are kind of three stages.
0:13:18 I’ve talked a lot about the historical,
0:13:20 all the just voluntary stuff.
0:13:22 Then we had the reform in 2018, which
0:13:25 starts to really edge more into this world of sensitive
0:13:28 technology, which is, if it’s export-controlled
0:13:31 and you work in a certain sector, mandatory.
0:13:34 The reform continues because this is Washington.
0:13:36 So the law was passed in 2018.
0:13:38 There are still regulations being promulgated
0:13:40 to implement that law.
0:13:42 And those are the draft regulations you mentioned
0:13:43 that came out.
0:13:45 On going throughout that, there is also
0:13:48 reform of all US export control.
0:13:50 And this is where I think a lot of people
0:13:54 are going to be affected in the valley more than ever before.
0:13:56 The Commerce Department is now defining
0:14:01 what it means to be foundational and emerging technology.
0:14:02 Exactly what foundational emerging
0:14:04 is still to be defined.
0:14:08 But if your technology falls into that TBD category,
0:14:10 and that should be out in the next four to six months,
0:14:14 then any transaction there puts you back
0:14:15 into that mandatory bucket.
0:14:18 So what are the areas of foundational emerging
0:14:22 technology that we know the US government is most focused on?
0:14:27 Artificial intelligence, machine learning, autonomy, right.
0:14:28 What about sensors?
0:14:30 So very, very high-end battery technology
0:14:32 has always been sensitive.
0:14:34 And the export control rules literally
0:14:37 get down to how much battery storage do you have for the weight?
0:14:41 What’s the weight to storage capacity?
0:14:43 So this is all quite purposeful.
0:14:44 What is going on?
0:14:46 This is not an accident, because the view
0:14:49 is in Washington and from Syphius
0:14:53 that our global competitors, in particular China,
0:14:57 have focused on early-stage startups
0:14:59 who are developing technology, or the engine of innovation
0:15:02 in our society, coming in early investors,
0:15:04 getting access to that technology.
0:15:07 It’s not being reviewed for national security purposes.
0:15:09 And eventually, that technology is
0:15:13 moving across to foreign companies and, in some cases,
0:15:15 foreign militaries.
0:15:18 It’s actually a very strongly worded, pretty powerful article
0:15:22 in the Wall Street Journal about Chinese civil military
0:15:26 cooperation and investments in US companies.
0:15:30 But we are now in a place where, in terms of reforms,
0:15:32 some more stuff is mandatory.
0:15:35 More stuff is going to become mandatory.
0:15:37 And one thing we didn’t talk about is,
0:15:40 Syphius is not any investment.
0:15:41 It’s not any investment.
0:15:42 What’s covered?
0:15:46 So first of all, you have– think about it as kind of at least
0:15:47 two things, and then there’s a plus.
0:15:49 One is there’s got to be a US business.
0:15:51 A US business is somebody in the US
0:15:53 who’s engaged in interstate commerce.
0:15:55 There’s not a whole lot more definition than that.
0:16:01 It doesn’t matter if it’s, say, a French company that
0:16:04 has a US office and they’re doing business in the US.
0:16:07 If someone goes to buy that French company,
0:16:10 Syphius has nothing to do with that French acquisition,
0:16:13 but it still gets to look at, if it wants to,
0:16:16 the US element of that transaction.
0:16:18 So effectively, what you’re saying
0:16:20 is you don’t need to be a Delaware corporation.
0:16:21 Exactly.
0:16:23 You just have to be doing business in the US.
0:16:24 You have to be doing business here.
0:16:26 Now, that does mean if you’re just selling assets,
0:16:28 you’re not selling a business, it’s a general matter
0:16:29 that’s not covered.
0:16:32 By the way, it also doesn’t affect green field investments.
0:16:34 So foreign company can come here,
0:16:38 start– flatten a lot in Palo Alto,
0:16:41 build everything, start everything on their own.
0:16:43 No Syphius, except maybe the real estate.
0:16:45 We’re not going to worry about that for now.
0:16:48 Second, it’s got to be a foreign business.
0:16:50 You’ve got to have a foreign person making the acquisition
0:16:51 or the investment.
0:16:53 And what does it mean to be foreign?
0:16:57 So US business bought by another US business,
0:16:59 but the US business has a foreign parent?
0:17:00 That’s foreign.
0:17:03 So Syphius looks to the ultimate parent
0:17:09 and the ultimate ownership of the acquirer or the investor.
0:17:13 So foreign, private equity, foreign venture capital,
0:17:14 that’s all foreign.
0:17:15 And you said acquisition, but this
0:17:18 does importantly come up with investments, too, right?
0:17:21 So it doesn’t need to just be an acquisition.
0:17:22 Straight acquisition is easy.
0:17:25 That’s definitely Syphius.
0:17:28 Traditionally, Syphius was only about controlling transactions.
0:17:32 What does controlling mean to you, Katie, as someone in venture?
0:17:33 That you have a vote on a board.
0:17:35 You have more than 51%.
0:17:37 There’s the case.
0:17:39 You have more than 51%.
0:17:42 For Syphius, controlling for Syphius purposes.
0:17:44 So again, you have to have a controlling investment
0:17:47 by a foreign person in a US company.
0:17:52 Controlling for Syphius, more than 9.9% equity.
0:17:59 Or less than 9.9% equity with some other initiative of control.
0:18:02 So 8% in a board seat, controlling investment.
0:18:03 So it can be–
0:18:05 What, in addition to board seats,
0:18:07 are in-dish of controlling investment?
0:18:11 So anything in commitment letter, side-letter MOU,
0:18:13 which suggests some ability, decision-making authority
0:18:16 beyond standard minority protections.
0:18:19 That’s kind of the general rule.
0:18:21 But it gets even better, guys.
0:18:25 One of the big changes in Syphius, in the reform,
0:18:27 it was always about controlling.
0:18:30 So again, it was a pretty low bar, 9.9%.
0:18:32 That’s not what anyone normally thinks about control.
0:18:34 But in this case, it is.
0:18:37 The reform adds an entire category
0:18:39 of non-controlling investments.
0:18:41 If you’re involved, if your business does technology,
0:18:43 we’ve already talked about what that means
0:18:46 to be involved in critical technology.
0:18:48 If you’re involved in critical infrastructure–
0:18:50 and that’s a really detailed list we won’t go through–
0:18:55 or if you are a data company–
0:18:57 remember our data discussion, all those different categories,
0:18:59 one million, that sort of thing.
0:19:05 If you’re any of those, even a less than 10% investment
0:19:09 in you, if the foreign investor has board-seat,
0:19:15 board observer, ability to influence decision-making
0:19:19 or control decision-making, or if they
0:19:24 have access to material, non-public technical information,
0:19:27 any of those things, they can be at 2%.
0:19:31 If you’re a data company, they get some technology information,
0:19:33 that’s a covered investment.
0:19:36 So what you’ve seen, again, I think
0:19:38 you’ve now seen most of the movie,
0:19:42 is it starts with this relatively narrow swath
0:19:44 of defense technology information,
0:19:48 and is now moved into even small investments
0:19:51 if there are certain rights in almost everything
0:19:53 that occurs here.
0:19:55 There’s at least a voluntary filing,
0:19:59 and more and more, there are also some mandatory filings.
0:20:03 So mandatory filings, I’m sure Sifias and the government
0:20:06 have a nimble process for reviewing
0:20:09 all of these mandatory filings they’re not going to have?
0:20:11 When I think US government, I think nimble.
0:20:13 Nimble, agile.
0:20:16 OK, so we know about what historically the process has
0:20:16 been.
0:20:18 I guess you don’t know what it’s been, the review process,
0:20:22 with these new reforms, and presumably a lot more transactions
0:20:23 being submitted.
0:20:24 What was the historical process?
0:20:26 Yeah, so historically, the process
0:20:29 has been, we estimate, in most cases,
0:20:31 about four to six months start to finish.
0:20:34 Now, if you’re in the valley, four to six months
0:20:36 is like life or death.
0:20:38 Obviously, larger deals, it actually
0:20:41 tends to align relatively well with things like Hart-Scout
0:20:42 or Dino antitrust.
0:20:44 So it isn’t always a huge problem in larger deals,
0:20:46 but for smaller deals, it is.
0:20:49 And that four to six months constitutes kind of from sign
0:20:50 to close.
0:20:51 You’re prepping the documents.
0:20:53 You’re sending the documents to Sifias.
0:20:54 They review it.
0:20:55 There’s a back and forth.
0:20:57 They finally accept it formally.
0:21:00 So that whole thing takes sort of a month.
0:21:04 The acceptance, they then review it for 45 days.
0:21:08 At the end of that 45 days, they can say, you’re good.
0:21:09 Or they can say, actually, we need
0:21:11 45 more days of investigation.
0:21:14 You go into a second 45 days.
0:21:18 At the end of that, then they can say, things, you’re good.
0:21:19 We’re going to send it to the president.
0:21:22 Or what they often do, if it’s a really hard case,
0:21:23 is we’re not quite there.
0:21:26 We think we’d like you to restart the clock.
0:21:28 And you go through another 45 day period.
0:21:31 So that’s the traditional construct, four to six months.
0:21:32 It’s post-signing.
0:21:34 Some of it can be done pre-signing.
0:21:36 The problem is inevitably pre-signing.
0:21:37 You can get some of your ducks in a row.
0:21:40 But there’s certain information that the parties just
0:21:41 aren’t willing to exchange yet.
0:21:42 Not to mention pre-signing.
0:21:44 People are actually still trying to get the signing.
0:21:48 So getting anyone’s attention to do some of this is a challenge.
0:21:50 But I do want to come back to what
0:21:52 should absolutely be done pre-signing.
0:21:54 Because even if you’re not filing,
0:21:55 there’s an enormous amount of thought
0:21:58 that should go into that so you don’t end up
0:22:00 in a siphious ditch.
0:22:02 The four to six months is not exactly nimble.
0:22:05 So they created– that traditional process
0:22:06 is called a notice.
0:22:10 They created what is known as a short form declaration.
0:22:12 And a declaration is no more than about five pages.
0:22:13 It’s a web form.
0:22:15 It’s pretty easy.
0:22:18 There’s a 30 day timeline for review.
0:22:21 So in the valley, that’s actually relevant.
0:22:23 We just got to a place where we hope
0:22:25 they will have voluntary filings like that–
0:22:27 voluntary declarations.
0:22:28 We don’t have that yet.
0:22:32 But that means that if you start a little bit before signing
0:22:37 getting stuff done, you spend a couple of weeks post-signing.
0:22:41 Realistically, you have probably a 45 day process.
0:22:43 Again, it’s a 30 day review process
0:22:46 itself where the government has to give you an answer.
0:22:48 But realistically, you obviously need some time
0:22:52 before that to get your information together and file it.
0:22:53 So that’s good.
0:22:55 You can do it in a shorter time frame.
0:22:58 The bad news is, siphious doesn’t have
0:23:00 to give you an answer at the end of that.
0:23:02 And so then aren’t you stuck in some kind of limbo?
0:23:05 Then, well, you are stuck in a limbo.
0:23:07 But in reality, what we tell most of our clients,
0:23:11 if siphious can do what we affectionately call the shrug,
0:23:13 up to you what you want to do next.
0:23:15 They don’t clear you.
0:23:17 They don’t tell you how to file a notice.
0:23:20 And it’s totally up to you on what you want to do.
0:23:25 But the good news is, in most cases, that shrug means, go away.
0:23:27 We have more important things to do.
0:23:30 So you no longer get that safe harbor.
0:23:32 They can always come back to you later.
0:23:34 But what’s the likelihood of that occurring?
0:23:36 Really, really small.
0:23:40 So the shrug, in most cases, is good enough for government work.
0:23:41 I want to ask you one thing.
0:23:44 What if someone wants to challenge siphious and say no?
0:23:46 Can people do that?
0:23:48 Because in most contexts with government agencies,
0:23:50 you have a right of judicial review.
0:23:51 But siphious is different.
0:23:53 Siphious is different.
0:23:55 If you’ve been a litigator before and you never
0:23:57 want to litigate anything again, you’re pretty much
0:23:59 safe in siphious land.
0:24:04 Siphious provides a very, very, very narrow judicial review
0:24:06 provision.
0:24:09 You can’t challenge the national security determinations.
0:24:12 You can challenge on sort of due process grounds.
0:24:14 There has been one.
0:24:18 Yes, count it one challenge in federal court in siphious’s
0:24:22 history, which did, in fact, involve
0:24:25 the acquisition of some wind turbines in southern Washington
0:24:27 state.
0:24:30 And that established the requirements for due process.
0:24:32 That siphious has to tell the parties
0:24:35 what its concerns are to the extent it can.
0:24:39 But unlike every other regulatory environment,
0:24:41 the ability to challenge siphious in court
0:24:43 is extremely narrow.
0:24:46 So the bottom line is, you have to get
0:24:48 what you can out of the regulatory process.
0:24:51 And it does make for, honestly, a very different sort
0:24:54 of negotiation than you see in most contexts.
0:24:58 Because the US government may not hold all the cards,
0:25:01 but it holds 51 of them.
0:25:05 And how does the siphious body, do they vote?
0:25:07 I mean, what if some of the entities of the 13
0:25:10 don’t care about a transaction or an investment,
0:25:11 and then others do?
0:25:13 How does that work?
0:25:16 Now, so it’s a little bit like a jury.
0:25:18 You’ve got to be unanimous.
0:25:22 But if you have one holdout, you just keep going.
0:25:25 So it’s all on consensus.
0:25:28 If one person keeps saying, I want mitigation,
0:25:30 you’re still stuck in this loop of trying
0:25:32 to work through mitigation.
0:25:34 So you can’t get cleared unless everyone agrees.
0:25:36 You probably won’t get rejected unless everyone
0:25:37 agrees, too.
0:25:41 But it can be a very challenging fight about consensus.
0:25:43 And part of what we do with clients all the time
0:25:46 is think about the technology, think about the acquirer,
0:25:49 because siphious comprises 13 different agencies.
0:25:52 And those different agencies have very, very different concerns.
0:25:56 And sometimes, we, as siphious lawyers with our clients,
0:25:59 want to spend a lot of time with the Department of Defense,
0:26:01 because it’s something they care about.
0:26:03 Sometimes, we know the Department of Defense
0:26:03 doesn’t care at all.
0:26:07 We want to spend all our time with DOJ or NSA
0:26:08 on different pieces.
0:26:10 And part of the art is identifying
0:26:12 which agencies care about it and trying
0:26:15 to make sure that as you’re going through the process,
0:26:17 not only are they not an impediment,
0:26:19 but the ones who have the biggest interest in the US
0:26:22 government are actually advocates for the deal getting
0:26:23 done.
0:26:24 We’ve been talking about acquisitions.
0:26:26 I want to talk a little bit about investments.
0:26:29 I talked about those mandatory categories
0:26:31 on that critical technology piece.
0:26:33 If you have export control technology,
0:26:36 the draft regulations add one more thing that’s mandatory,
0:26:41 that if there’s a foreign government control transaction
0:26:44 in those technology infrastructure or data spaces,
0:26:47 and a foreign government control transaction
0:26:52 is a foreign investment of 25% or more in the US business
0:26:55 by an entity that is 49% or more controlled
0:26:56 by a foreign state.
0:27:00 GIC, sovereign wealth fund for Singapore,
0:27:04 the issue may or may not be if they make a 25% investment
0:27:07 in any of those types of companies,
0:27:11 that also drives a mandatory declaration.
0:27:14 So that’s going to change the environment a little bit
0:27:17 for some of the ever-present sovereign wealth funds
0:27:20 and related entities and their investments in the valley
0:27:21 as well.
0:27:23 What if those sovereign wealth funds are LPs
0:27:25 in venture capital funds?
0:27:28 So the way it’s written now in terms of a JV,
0:27:31 sovereign wealth funds in a joint venture,
0:27:34 and they have 49% of the joint venture,
0:27:35 in most cases, a sovereign wealth fund probably
0:27:39 wouldn’t be 49% LP.
0:27:43 The LP piece, this gets pretty complicated
0:27:44 because you’re combining two things.
0:27:47 They analysis on whether it’s foreign government control
0:27:50 and also the analysis on whether or not
0:27:54 the LP should even be considered as an investor of just the GP.
0:27:57 Because if it’s just an LP and that LP doesn’t
0:27:59 have certain decision-making rights,
0:28:01 then you don’t consider that LP at all.
0:28:04 So this is another way in which, for funds,
0:28:08 it becomes very, very important to look at LP agreements
0:28:10 and determine what rights you want to provide
0:28:12 and what rights you don’t want to provide.
0:28:16 So we’re seeing more and more excerpts of LP agreements,
0:28:19 which say under no circumstances will the limited partners have
0:28:22 access to material, non-public, technical information.
0:28:27 Because if they did, they no longer get the LP protection.
0:28:29 So it’s taking some of the language and some
0:28:31 of the art of what goes on at CFIUS,
0:28:33 inserting that into the LP agreement
0:28:37 and looking very carefully at the provisions around the advisory
0:28:39 committees, the investment committees for the LPs.
0:28:41 And in general, LPs want this.
0:28:45 Because LPs are joining a fund so they’re not the investor.
0:28:47 So this is basically just verifying their passive.
0:28:50 Now, the one complication you get in larger investments,
0:28:54 of course, is direct investment by that same LP.
0:28:55 That’s covered in CFIUS.
0:28:57 They don’t get to skate free of that because they
0:28:59 are an LP and another fund.
0:29:02 Well, a lot of founders, they’re not
0:29:06 yet kind of at the stage or later stage or growth investments.
0:29:09 How should they be thinking about CFIUS reforms?
0:29:12 I mean, they might have not yet a million users
0:29:15 for their product or service, but aspire to it.
0:29:19 And maybe they want to go raise money for a variety of reasons,
0:29:23 not just here in Silicon Valley, but outside of the US.
0:29:26 How should they be thinking about something like CFIUS?
0:29:28 They might be– it’s series A, they
0:29:31 might not have a general counsel or a huge legal budget
0:29:33 for outside counsel, such as yourself.
0:29:34 What should those founders–
0:29:36 So even if you don’t have a general counsel,
0:29:39 talk to the Katie Hans of the world to say, all right,
0:29:42 if I take this money from this foreign investor,
0:29:44 how is that going to affect my round?
0:29:46 What rights do I have to make sure are not involved?
0:29:49 How is that going to affect future business opportunities?
0:29:51 That’s really important.
0:29:53 So think strategically.
0:29:56 Of course, it can be very attractive
0:30:02 to take $5,000,000,000, $10,000,000, $15,000,000,
0:30:04 whatever it is from a foreign investor who
0:30:07 can write a big check and isn’t asking for much.
0:30:09 Or her provide some strategic–
0:30:10 That’s right.
0:30:12 Or strategic benefit for geographic diversity.
0:30:14 I mean, all sorts of reasons.
0:30:15 Think it through.
0:30:18 I’m not saying don’t do it, but potentially limit
0:30:19 certain information rights.
0:30:22 So you’re a specialist in coming up
0:30:24 with innovative deal structures.
0:30:27 Maybe you trip into SIFIUS, maybe you don’t.
0:30:30 If someone didn’t want to, what kind of things
0:30:34 would you tell a Series A or Series B founder if they said,
0:30:35 I want to take foreign investment,
0:30:38 but I really don’t want to go through this what sounds like a
0:30:42 not nimble and a fairly paper-intensive SIFIUS process?
0:30:44 What kinds of things could they be doing strategically?
0:30:46 You’ve got to think about the rights that you’re
0:30:47 including for that investor.
0:30:50 Those rights on board, information rights,
0:30:52 absolutely decision rights, may trip you into SIFIUS
0:30:53 one way or another.
0:30:54 So that’s critical.
0:30:57 And that investor might not care about those things.
0:30:57 That’s right.
0:30:59 And you might tell that investor, if you get this,
0:31:02 it’s going to delay things, and we have a long process.
0:31:05 They may say, oh, god, yeah, it’s not worth it to me, either.
0:31:07 So think about those rights up front.
0:31:11 Second, think about how, in terms of timing,
0:31:12 phase your investment in different ways.
0:31:15 So maybe they say 9% equity, but damn it,
0:31:18 I want a board seat if I’m giving you 9%.
0:31:19 And the answer may be, OK, great.
0:31:21 But let’s phase the investment.
0:31:22 I need the 9% now.
0:31:24 I need the equity now.
0:31:26 But you’ll only get your board seat
0:31:28 after we get through this SIFIUS process.
0:31:30 Three years ago, this is hard, because you
0:31:33 had lots of foreign investors who weren’t thinking about this.
0:31:36 Today, you’ve got a global environment
0:31:39 of very, very well-educated foreign investors who
0:31:42 don’t want to run afoul of the rules
0:31:44 and are more thoughtful.
0:31:46 If you said to certain investors three years ago,
0:31:47 sorry, if I give you a board seat,
0:31:49 we’re going to have a SIFIUS issue.
0:31:50 They’d say, well, who cares?
0:31:51 Let’s go through SIFIUS.
0:31:53 Today, I think it’s actually a very different environment,
0:31:56 and they might well say, totally understand.
0:31:57 I don’t need a board seat.
0:31:59 So that’s good news.
0:32:00 They’re taking the equity position,
0:32:02 but you’re delaying some other rights,
0:32:04 whether it’s a board seat, board observer, and the like.
0:32:07 So phase it so it doesn’t totally follow up your timeline.
0:32:09 Third, you really do have to think strategically
0:32:12 about where you’re trying to go with the business.
0:32:14 Do you want to do work with the US government?
0:32:17 Is your priority in Asia or Europe or anywhere else,
0:32:18 in which case?
0:32:20 You may have to walk through some of this,
0:32:23 and you’re perfectly fine closing one door to open another.
0:32:25 So don’t just think about this.
0:32:28 I know that’s hard when you need equity right away,
0:32:31 but you still have to be a little bit strategic looking
0:32:34 forward about how this will affect you in the future.
0:32:36 Think about if there are ways to structure it.
0:32:39 So they are LPs and another fund.
0:32:42 Now, funds of one aren’t good, but to the extent
0:32:44 you can work with someone and say, listen,
0:32:46 we’d love to take your money, but it’s problematic
0:32:49 if we do it that way, let’s move it over to here.
0:32:50 That’s really good.
0:32:54 Another possibility is, again, early stage this gets hard,
0:32:57 but later stage, you might start looking at not actually
0:33:01 selling in the US business.
0:33:03 If you’ve already gone international, carving it up,
0:33:06 so they’re actually making an investment outside the United
0:33:09 States and some of your growth in other geographic regions.
0:33:10 Now, that gets tricky because then you
0:33:13 have to really be careful that you’re not contributing
0:33:16 a US business, that your R&D isn’t supporting it,
0:33:17 your people, all those things.
0:33:20 But at some point, that becomes quite valuable
0:33:23 to create potentially a joint venture overseas
0:33:26 with the foreign investor rather than investing
0:33:28 in the domestic US company.
0:33:32 And if you finally decide, well, we’ve got to do this,
0:33:34 but I’m worried about what Siphius might say,
0:33:37 then you’re in the world of how are you allocating that risk
0:33:41 that Siphius is going to show up and stop us
0:33:43 from doing something or sharing something.
0:33:44 So you really have to understand why you’re
0:33:45 doing the investment.
0:33:47 If you’re just doing the investment to get the money,
0:33:50 the risk isn’t that bad for you.
0:33:51 Because what would the mitigation be?
0:33:53 The mitigation might not be the money,
0:33:55 the mitigation might be a lack of information access
0:33:57 for the acquirer or the investor.
0:33:59 But what you’re trying to do is I
0:34:01 want to share information and technology
0:34:04 with this foreign investor because they have technology
0:34:06 or access to markets that I need.
0:34:08 Well, then you have to be really careful
0:34:11 because that might be exactly what Siphius cuts off.
0:34:13 So you have to understand what the investment thesis is not
0:34:15 just for them, but what it is for you
0:34:17 and how Siphius may affect that.
0:34:19 And then you fold into the deal documents
0:34:22 the allocation of risk like you would in any other deal,
0:34:25 what the efforts they might have to do for the regulatory
0:34:29 regime, when you have a right to walk, things like that.
0:34:32 What about– we talked about US business doesn’t necessarily
0:34:33 just mean US business.
0:34:35 It could mean just you have a presence in the US.
0:34:37 What about where there’s no company at all?
0:34:38 And here I’m thinking about crypto.
0:34:42 We have these things called DAOS, decentralized autonomous
0:34:45 organizations or distributed autonomous organizations.
0:34:47 In many times they’re set up as a nonprofit.
0:34:50 Do these rules, the new reforms speak to that kind
0:34:52 of circumstance or not really?
0:34:54 I think they really don’t.
0:34:56 I think that is over the horizon for Siphius.
0:34:58 One thing though, going back to the point
0:35:01 about judicial review, a lack of judicial review
0:35:04 means one really important thing on something like this.
0:35:08 Siphius has enormous discretion to interpret its rules
0:35:10 the way it wants to interpret its rules.
0:35:14 So it wants to say it’s a US business.
0:35:17 It wants to find enough indicia of it being a US business.
0:35:18 It can say it’s a US business.
0:35:20 And there’s not going to be a court which says,
0:35:22 how dare you say that?
0:35:25 And there aren’t that many investors or companies
0:35:27 that want to go fight the US government in court,
0:35:30 even if they could, on that sort of thing.
0:35:32 Well, before we take time for questions,
0:35:33 I just wanted to ask you, what do you
0:35:37 think are the biggest surprises for which industries
0:35:39 or which types of business do you
0:35:41 think this is going to– these reforms are really
0:35:44 going to affect most in our world?
0:35:48 I think I am nervous about anyone
0:35:52 who mentions artificial intelligence on their website,
0:35:53 which is everyone.
0:35:55 Artificial intelligence machine learning
0:35:56 are inherently challenging places
0:36:00 because ultimately we’re talking about algorithms
0:36:03 and where do you actually draw the line between basic mathematical
0:36:06 science and research into the application of that.
0:36:08 So I think it’s going to have a potentially significant
0:36:09 impact there.
0:36:13 Biotech, anything health care related,
0:36:16 is increasingly becoming an area of focus.
0:36:18 Certainly, as I’ve already mentioned,
0:36:20 anyone who deals with identifiable information
0:36:24 in any way, this is a very hot topic.
0:36:28 The last two, as I said, if you don’t file with CIFIUS,
0:36:30 CIFIUS can always knock on your door
0:36:36 and you can have a really, really uncomfortable period
0:36:39 and they can impose penalties or impose divestiture.
0:36:40 There are two cases like that right now,
0:36:44 both involving Chinese investors and acquirers,
0:36:45 both pretty well known.
0:36:49 So I think– I hate to say it, but it’s
0:36:52 hard to find areas that aren’t of concern to CIFIUS right now.
0:36:56 Again, that doesn’t mean that everybody is going to be blocked.
0:36:58 It doesn’t mean that everyone has mitigation.
0:37:02 It does mean, in most cases, thoughtful planning early
0:37:04 in the process, structuring in a way
0:37:07 where CIFIUS is a lesser concern becomes more and more important.
0:37:09 And where can people learn more?
0:37:11 If they want to thoughtfully think about this,
0:37:12 I don’t want to go file anything,
0:37:15 but I want to keep my finger on the pulse of this work.
0:37:18 What are some resources that people could go look for?
0:37:23 So CIFIUS is also a funny regime in that CIFIUS never
0:37:25 publishes anything publicly.
0:37:27 Any other court case, you have a court case.
0:37:28 And what do lawyers do?
0:37:30 They go read the court case.
0:37:32 CIFIUS doesn’t release any of its decision.
0:37:34 It’s all confidential, which actually
0:37:35 is a good thing for the businesses,
0:37:38 because you’d rather not have the whole world know
0:37:40 what you’re doing, how your investors are.
0:37:41 So that’s a good thing, and things
0:37:43 tend not to leak out of CIFIUS.
0:37:47 There’s obviously an industry of lawyers who write on this.
0:37:49 There are one or two sites.
0:37:52 One slight warning, because CIFIUS has become a bigger deal,
0:37:56 it’s sort of like mushrooms after a rainstorm.
0:37:58 Experts are popping up everywhere.
0:38:00 They’re national security experts or CIFIUS experts.
0:38:03 If you call someone, if you call firms,
0:38:05 say, hey, how many CIFIUS filings have you
0:38:07 done over the past five years?
0:38:10 And if the answer is less than about 100,
0:38:11 you ought to be scared.
0:38:13 So find the reputable firms that do this.
0:38:16 Talk to the reputable investors who understand this.
0:38:19 And it is something where keeping your finger on the pulse,
0:38:21 I just think it’s going to be too overwhelming.
0:38:23 There’s too much change in this environment right now.
0:38:26 So find a lawyer that you trust so you can get on the phone
0:38:26 with.
0:38:29 It’s not always hundreds of thousands of dollars.
0:38:31 Any reputable lawyer should say, hey,
0:38:32 let’s talk through this for half an hour,
0:38:33 see if you have a problem.
0:38:36 The lawyer understands your technology, who the investor is,
0:38:38 what the timeline is, what your business goals are.
0:38:41 Say yes, no, or maybe.
0:38:43 And then you make a decision about how you want to proceed.
0:38:45 And you’re not going to get that from just reading something.
0:38:47 Reading is good background.
0:38:49 But again, you’re trying to build a business or run a business.
0:38:52 You’re only going to read so many articles from my guests.
0:38:52 Great.
0:38:54 Mike, thanks so much for being here.
0:38:56 I know people might have questions for you.
0:38:59 Is there ways you can accidentally back yourself
0:39:01 into a SIFI situation?
0:39:04 So for example, you have a downward protection
0:39:05 or a secondary market.
0:39:07 Someone buys your store.
0:39:09 You go public and someone buys your stock.
0:39:13 Yeah, so there absolutely are what you describe.
0:39:17 Everything from convertible debt, which when it converts,
0:39:19 and there are rules about how SIFI is
0:39:23 treats convertible debt instruments and the like.
0:39:24 And SIFI is doesn’t matter.
0:39:25 It doesn’t matter if it’s a direct investment
0:39:29 in private company or ownership on the public market.
0:39:33 So you get over 10% public ownership on the public market.
0:39:38 And that, too, implicates SIFI as it doesn’t matter
0:39:39 what form of ownership it is.
0:39:41 It’s just about equity.
0:39:45 By the way, debt does not count.
0:39:47 Convertible debt gets more complicated, but debt doesn’t.
0:39:49 So that’s another way to structure
0:39:52 potentially, which can be helpful.
0:39:54 Now, if you have debt and you have some other rights
0:39:57 on top of that debt, it gets a little bit more complicated.
0:40:01 But yes, you have to be aware of your shareholder base,
0:40:05 public, private, regardless of how it comes in.
0:40:09 Now, it does matter to SIFIUS in terms
0:40:11 of how they look at it, because if you’ve
0:40:14 been passive about this, you didn’t reach an agreement.
0:40:16 Somebody just comes in and acquires
0:40:18 your debt on a secondary market.
0:40:21 They may be concerned about what the effects of that are,
0:40:24 but they absolutely look at the US business
0:40:27 and the target a little bit differently,
0:40:29 since you have obviously not signed up
0:40:32 to do something collaboratively with that foreign investor.
0:40:34 So it changes the color, but it doesn’t change
0:40:36 the jurisdictional analysis.
0:40:39 The owner’s the responsibility for filing on the company
0:40:42 or the investor or acquirer for filing.
0:40:46 Yeah, so the way the fines work, it’s joint and several.
0:40:49 So they’ve only imposed one fine in that so far.
0:40:52 So we really don’t have a lot of data to know–
0:40:53 Can you just explain?
0:40:54 I mean, joint and several.
0:40:55 Oh, sure, sure.
0:40:58 Meets both of you are in trouble.
0:40:59 Yeah, so you both have a responsibility.
0:41:01 The filing is joint.
0:41:04 So any SIFIUS filing is joint.
0:41:07 It isn’t joint if there’s been an outright acquisition
0:41:10 and after the fact, because then there’s only one party.
0:41:13 So if you get acquired and you get your equity
0:41:17 and you get your cash and you walk away, listen, you’re good,
0:41:19 depending on what the contract said.
0:41:22 But generally, if you’re talking about an investment
0:41:25 in a US business, both parties go to SIFIUS.
0:41:28 Both parties can be fined by SIFIUS,
0:41:33 although each party generally only states–
0:41:36 it can only be responsible for its own information.
0:41:41 So you can’t be fined for the foreign investor lying
0:41:42 about something.
0:41:46 But if you then have a mediation agreement,
0:41:49 the foreign investor isn’t going to get access to my technology
0:41:51 and you provide them access or you
0:41:54 do something that violates that national security
0:41:55 agreement with the US government,
0:41:59 then the fine, you are jointly responsible for that fine.
0:42:02 Is the application viewed differently based off
0:42:02 of the timing?
0:42:06 For example, let’s say you do it post wire money
0:42:08 versus three months after the wiring money.
0:42:10 And is there penalties associated with the timing?
0:42:11 Great question.
0:42:13 If it’s a mandatory filing, then you
0:42:17 have to file 45 days before signing, for closing.
0:42:21 In closing, is that defined as when the money is transferred?
0:42:23 Well, probably, but it also depends
0:42:26 on how it’s defined in the term sheet.
0:42:28 Most term sheets, it’s going to be signed and closed.
0:42:33 But again, that means 45 days before the term sheet is completed,
0:42:34 you’ve got to file.
0:42:38 Now, if it’s voluntary, there’s no requirement
0:42:41 to file before or after.
0:42:43 So you can file it any time.
0:42:47 But here’s the important but.
0:42:50 Unsurprisingly, SIFIUS wants you to file before.
0:42:53 It’s always a harder conversation if they already
0:42:55 have the investment, they already have the rights,
0:42:57 and you’re going and explaining it.
0:43:01 So there are situations where we sort of work with SIFIUS
0:43:03 and the parties close before they’ve
0:43:06 gotten approval from SIFIUS.
0:43:08 But it has to be done very, very carefully
0:43:11 in a knowing, open, transparent way.
0:43:15 Or otherwise, SIFIUS has the ability to take it out on you.
0:43:18 Well, we have time for one more question.
0:43:19 Where do you think this is all going?
0:43:24 The footprint of SIFIUS has been expanding, arguably
0:43:27 beyond national interest and just broader economic interests
0:43:29 of companies.
0:43:32 And you mentioned the dialogue with the export control
0:43:35 regulations where it’s not just at the time of an M&A
0:43:37 event or an investment, but ongoingly,
0:43:39 may need a license from the government
0:43:43 just to do business with entities located
0:43:46 in foreign jurisdictions.
0:43:50 1% of the transaction is pretty onerous for mandatory filing.
0:43:54 And then who knows what the export licenses would be.
0:43:57 Where is this all going in DC, a stopping point?
0:43:59 So a couple of pieces on that.
0:44:02 First, this is about the only bipartisan thing
0:44:05 that has happened in Washington in the last three years.
0:44:06 So that tells you something.
0:44:11 That regards to what happens in 2020, this isn’t going away.
0:44:13 And a lot of this started at the end of the Obama
0:44:14 administration.
0:44:18 Now, you put on top of that, obviously, the US-China trade
0:44:18 tensions.
0:44:20 That’s clearly exacerbated this.
0:44:23 And we’ve seen instances where these issues are all
0:44:28 getting thrown into a pretty messy stew.
0:44:30 I think Huawei is ZTE.
0:44:31 Is that national security?
0:44:34 Is it a negotiating tactic on trade deals?
0:44:38 So I think some of that, let’s assume, going forward,
0:44:42 comes down a little bit on the broader US-China trade front.
0:44:44 I think we’ll have a little bit more predictability.
0:44:47 But I think the basic trajectory of CIFIUS,
0:44:49 looking broadly at technology, data,
0:44:52 critical infrastructure, expanding
0:44:55 that definition of critical technology,
0:44:56 that’s not going away.
0:44:58 And there are still a lot of things
0:44:59 you can do outside of CIFIUS.
0:45:03 As I said, licensing of technology
0:45:04 does go through export control.
0:45:06 That will change, but it doesn’t go through CIFIUS.
0:45:09 So we can’t do anything to evade CIFIUS,
0:45:13 but there are still good ways to do business
0:45:17 with overseas investors, in overseas environment, that
0:45:19 doesn’t put you squarely in the crosshairs.
0:45:21 I don’t think, going forward, this
0:45:22 is going to radically change.
0:45:24 What is the stopping point?
0:45:26 I hope we don’t have a global downturn.
0:45:29 But right now, we’re in a world where
0:45:33 it’s not that hard to find capital.
0:45:35 There’s a lot of capital out there.
0:45:37 Those capital markets start to shrink a lot.
0:45:40 I think they’ll clearly be an incentive on the US front
0:45:43 to open those doors a little bit more widely.
0:45:45 So I think there are some macro trends
0:45:48 that could start to have this ebb.
0:45:50 But I think short of that, the trajectory
0:45:53 is going to remain relatively constant at this point.
0:45:55 Well, on that note, thank you so much, Mike.
0:45:56 Thanks for coming in.
0:45:59 [APPLAUSE]
0:46:07 [BLANK_AUDIO]
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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