Government ‘SWAT Team’ Is Reviewing Past Startup Deals Tied to Chinese Investors

A national-security panel on the hunt for Chinese involvement in U.S. technology companies is scrutinizing startup investments that are months or even years old.

The Committee on Foreign Investment in the U.S., or Cfius, has over the past two years built out a new enforcement arm of roughly two dozen people tasked with rooting out old investment deals that involve sensitive technologies and could pose a threat to national security, according to current and former government officials and national-security lawyers.


The team has its sights on venture-capital investments, even small-dollar deals, where the money can be traced back to China, these people say.

Cfius, which reviews foreign investment in U.S. companies and real estate for potential national-security risks, is positioned to become a linchpin in President Biden’s strategy to curb China’s technology ambitions.

Recent hires to its enforcement team include professionals from venture-capital firms, investment banks and technology backgrounds, according to people involved in the effort. This Cfius group has sent letters to several dozen companies and made calls requesting information about transactions with foreign investors, said lawyers, investors and national-security officials.


Some of the initial inquiries have run for months, said people familiar with the matter, because examining venture-capital deals can be complicated and time-intensive. While some inquiries have led to formal government probes, much of the enforcement work is in the early phases.

Penalties—ranging from fines to changing the company’s governance or even divestment—are expected to start appearing in a larger number later this year, these people said.

Over the past year, Cfius leaders have sought to clarify these results to the startup industry. “We really bring back that part of the market that is at risk and can receive money from certain investors and the following things you potentially know. Order divestment,” said a senior Treasury diplomatic official. Said this month.

The Treasury’s staff, who lead the inter-ministerial committee, has increased from about 12 since 2018 to about 70, a senior Treasury official said. An additional $ 40 million was added to the division’s 2020 and 2021 budgets, fueling team growth.

Startup investments are exempt from many of the disclosures required by public companies. Last year, Cfius launched a new secret hint line to help surface transactions. Companies may have warned Cfius about the relationship between rivals and foreign investors, according to startup executives and lawyers.


According to a survey by Horizon Advisory, a U.S. consulting firm focused on China, the number of Chinese venture capital transactions by U.S. companies increased to about 308 last year, a record high in 2016. .. Nathan Picardic, co-founder of Horizon Advisory, said the deal has shrunk, but the deal is mostly a small investment, showing no control over Chinese investors.

Picarsic said these investments could still be a problem as they can be traced back to Chinese government-led funds. Such funds have been set up to advance China’s priorities in science and technology know-how and may invest using US seed and angel investors.

Cfius’ willingness to unravel venture capital has changed the calculations of some start-ups. According to lawyers and start-up investors, more companies are seeking Cfius approval before closing a deal and agreeing to a concession for government approval. This ensures that it will not be the subject of future investigations.


Other companies have stated that they have made foreign investments only after improving cybersecurity and data protection, and can show Cfius that they will not be victims of technology theft.

“Venture capital is under the microscope,” said Mario Manxo, who heads international trade and national security practices at Kirkland & Ellis LLP. “There is no safe de minimis threshold below that.”

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