The letters, which began landing in dozens of companies’ email inboxes in the spring, reflect the broadly held view among U.S. officials and lawmakers that the United States failed in recent years to adequately screen investments pouring in from China and other countries — particularly low-profile venture-capital investments that didn’t make the headlines. The 2018 Foreign Investment Risk Review Modernization Act, or FIRRMA, aimed to address that by boosting CFIUS’s funding and powers.
Tech executives say the inquiries are part of a growing chill in U.S.-China relations that has made Silicon Valley companies more cautious about accepting foreign investments and caused some China-backed venture-capital funds to curb their activity.
The decoupling can be seen in data showing that Chinese venture-capital investment in the United States dropped to a six-year low in the first half of 2020, to $800 million, according to research provider Rhodium Group. VC investment by U.S. firms in China hit its lowest level in four years, at $1.3 billion.
Michael Borrus, the founding general partner of XSeed Capital, said CFIUS scrutiny is causing investors and companies to think twice about deals.
“We’ve had Chinese VCs or Chinese families who have been interested in putting money in” to some companies where XSeed Capital is a shareholder, Borrus said. “In the current environment, we’ve decided it’s too complicated.”
Start-ups decide which investments to accept, but existing shareholders often have a say in the matter, Borrus said. “You have discussions with companies, ‘You need to think about this very seriously, it could open you up to CFIUS investigations … if you have alternatives, you should consider them,’ ” he said. “They usually see the wisdom.”
In addition to boosting CFIUS’s work, the government is also sending national-security officials to visit venture capitalists and other tech leaders in Silicon Valley to advise them to exercise caution about accepting Chinese investments, industry executives say.
Some tech companies have overlooked the CFIUS emails because they are brief and cryptic, requesting a phone call to discuss a confidential matter, tech-industry lawyers said.
CFIUS is particularly focused on companies and apps that collect sensitive personal information on users, such as location or financial data, and on companies involved in technology seen as critical for national security, such as certain types of battery technology and biotechnology, lawyers said, requesting anonymity to discuss sensitive matters. The committee is mostly inquiring about Chinese investment, but on a few occasions has asked about Russian investors.
CFIUS, an interagency committee chaired by the Treasury Department, has several powers to influence foreign investments it sees as risky. The committee can impose conditions, such as limiting a foreign investor’s access to information on the company’s research and development, or mandating that the company’s board members be government-approved. In extreme cases, CFIUS can advise the parties to abandon or unwind a deal, or kick the matter up to the president for a formal ban or divestment order.
The Treasury Department declined to comment for this story.
CFIUS’s more aggressive role stems from the authority FIRRMA gave the committee to scrutinize more types of foreign investment, including minority shareholdings and real estate transactions. The legislation also gave CFIUS funds to set up a new enforcement arm.
The 2018 FIRMMA law made it mandatory for companies to report to CFIUS some investments involving foreign governments or certain technologies. Previously, it had been optional for companies to notify CFIUS of planned transactions. If they did and CFIUS cleared them, it protected the parties from further CFIUS interference. If they didn’t, they ran the risk CFIUS could take an interest in their deal after it closed and demand changes.
“CFIUS is increasingly contacting parties that didn’t make filings,” said Stephen Heifetz, a lawyer at Wilson Sonsini. “We’ve heard about matters going back almost 10 years. Historically, it was unusual for [CFIUS] to reach back more than three years. But there is in theory no time limitation, and we are increasingly hearing about long reach-back periods.”
CFIUS’s scrutiny of TikTok shows how a foreign investment can raise alarms years after the fact.
TikTok’s quick rise in the U.S. was shadowed by signs that Beijing was influencing the videos that could appear on the app. In September 2019, The Washington Post reported that a search for “#hongkong” on TikTok yielded few images of the city’s pro-democracy protests, while such images were common on Twitter.
The Post also reported that ByteDance imposed strict rules on what could appear on the app, in keeping with China’s restrictive view of acceptable speech, a policy that sparked a backlash from the company’s U.S. employees.
In October 2019, Sen. Marco Rubio (R-Fla.) asked CFIUS to review the 2017 Musical.ly acquisition out of concern that TikTok was “censoring content” around the world to satisfy Beijing’s leaders.
CFIUS opened a review the following month. In keeping with protocol, it did not publicly disclose the probe or the reasons behind it, but when it concluded its review nine months later, it suggested TikTok’s access to user data was a primary concern.
In August, the Treasury Department said CFIUS had advised President Trump to order ByteDance to divest its U.S. business.
“CFIUS conducted an exhaustive review of the case and unanimously recommended this action to the President in order to protect U.S. users from exploitation of their personal data,” Treasury Secretary Steven Mnuchin said in a statement.
A Trump executive order that same day ordered ByteDance to sell within 90 days, a deadline that expires Nov. 12.