Who’s the Boss? The CFIUS “Control” Definition for Global Venture Capital Funds
My VC Fund has U.S. and non-U.S. General Partners, will I need to file CFIUS declarations for every investment I want to make in tech, in infrastructure, or in a company with customers’ personal data?
This is a critical question at the fore of concerns for diversified investment funds with foreign-person directors. There are more than a few funds that have non-U.S. General Partners – perhaps posted overseas to scout potential investments abroad, or U.S. residents but not yet citizens who bring global experience to a U.S. table. In an increasingly global marketplace, there is a clear potential advantage for a U.S. investment fund to look for the most talented investors with the broadest perspectives from around the world.
So why should this be a problem?
Because, under proposed CFIUS regulations, the presence of one or a few non-U.S. General Partners could be considered foreign “control” in a target investment, such that the investment is subject to CFIUS jurisdiction and, potentially, a mandatory CFIUS filing.
On September 17, 2019, the Committee on Foreign Investment in the United States (CFIUS) published proposed regulations implementing the Foreign Investment Risk Review Modernization Act. Under those regulations, a “foreign person” includes any “foreign national” as well as “any entity over which control is exercised or exercisable by a foreign national.” The definition of foreign national would also include U.S. legal permanent residents (Green Card holders), that had not yet obtained U.S. citizenship. Further, “control” would mean “the power, direct or indirect, whether or not exercised . . . to determine, direct, or decide important matters affecting the entity.”
In our experience, CFIUS has interpreted foreign “control” to include situations where one or two members of a board of directors are appointed by persons from a foreign country. CFIUS takes that position even where those one or two directors represent a small minority of the board in question. As the National Venture Capital Association (NVCA) points out in its comments on the proposed CFIUS regulations, “if that same logic were to hold true in the fund context, many funds with a U.S. place of business and a majority of U.S. based investment partners, but a few foreign general partners, would be considered ‘foreign persons’ subject to CFIUS review.”
The proposed rule, as written, does not account for the fact that, generally, fund decisions are made collectively among the General Partners and that, therefore, the minority of GPs would not typically drive the decisions of that partnership.
Notwithstanding the commentary, voiced by the NVCA and other interested stakeholders, CFIUS appears to be proceeding cautiously. In its past rulemaking and interpretations, CFIUS has erred on the side of over-inclusion in asserting its jurisdiction – willing to risk an increase of potentially-non-critical filings in order to ensure that the Committee has authority to review investments in which it may find a national security threat or vulnerability.
 National Venture Capital Association; Re: National Venture Capital Association Comments on Proposed Rule RIN 1505-AC64, Provisions Pertaining to Certain Investments in the United States by Foreign Persons (84 FR 50174) (“Part 800 Rules”) and Proposed Rule RIN 1505-AC63, Provisions Pertaining to Certain Transactions by Foreign Persons Involving Real Estate in the United States (84 FR 50214) (“Part 802 Rules”). Available at: https://nvca.org/wp-content/uploads/2019/10/NVCA-Comments-on-Proposed-CFIUS-Rules-AS-SUBMITTED.pdf