An­other Trump pres­sure point: startup in­vest­ments

National Post (Latest Edition) - - FP COMMENT - Whit­ney Har­ing- Smith

Un­til re­cently, a Cana­dian who wanted to back a startup in the U. S. could write a cheque, take a board seat, and help build the com­pany. For an­gel in­vestors in Van­cou­ver, cor­po­rates in Toronto, and ven­ture funds in Mon­treal, ac­cess­ing the U. S. ven­ture ecosys­tem has been al­most as easy as do­ing deals north of the bor­der. But that may be about to change.

Last week, the U. S. Trea­sury De­part­ment an­nounced draft reg­u­la­tions that could cre­ate new re­views and re­quired ap­provals for hun­dreds of Cana­dian in­vest­ments into U. S. busi­nesses. The key change is an in­crease in the author­ity of the Com­mit­tee on For­eign In­vest­ments in the United States ( CFIUS) to re­view non- con­trol trans­ac­tions or mi­nor­ity in­vest­ments, in­clud­ing hun­dreds of startup and ven­ture in­vest­ments.

Un­til now the only CFIUS- re­viewed trans­ac­tions were for con­trol or ma­jor­ity ac­qui­si­tions, such as when Sin­ga­pore’s Broad­com pro­posed a hos­tile takeover of Qual­comm in Cal­i­for­nia in a Us$142-bil­lion deal. The 300+ pages of pro­posed new reg­u­la­tions spell out a wide va­ri­ety of con­sid­er­a­tions and def­i­ni­tions for in­vest­ments by for­eign­ers into U. S. com­pa­nies and real es­tate. The fo­cus of these new U. S. reg­u­la­tions is — jus­ti­fi­ably — on China, Rus­sia, and other coun­tries where

state- spon­sored com­pa­nies and oth­ers have a his­tory of en­gag­ing in in­tel­lec­tual prop­erty theft and eco­nomic es­pi­onage through their in­vest­ing arms. Un­for­tu­nately, as in trade, Cana­dian in­vest­ments risk be­ing caught in the cross­fire.

The new reg­u­la­tions pro­vide for a small num­ber of “ex­cepted for­eign states” to be ex­empted from these ad­di­tional re­views. The list of coun­tries has not yet been fi­nal­ized, how­ever, and it is ex­pected to be quite small. Pro­pos­als have been made to ex­clude NATO al­lies, but the re­cently re­leased U. S. Trea­sury De­part­ment rules pro­vide no sim­ple de­lin­eation. For the fu­ture of North Amer­i­can eco­nomic de­vel­op­ment, it is crit­i­cal that Canada be an “ex­cepted for­eign state” un­der these new rules.

Given decades of Cana­dian- Amer­i­can eco­nomic part­ner­ship, you might think Canada’s ex­emp­tion would be all but au­to­matic. But we are in an era in which Don­ald Trump makes re­marks like “We lose with Canada — big league” and de­scribes the cur­rent Cana­dian prime min­is­ter as “very dis­hon­est & weak.” Be­yond cam­paign speeches and an­gry tweets, tar­iffs on Cana­dian steel and alu­minum have been jus­ti­fied as part of a “na­tional se­cu­rity threat” to the United States. In this en­vi­ron­ment, noth­ing can be taken for granted.

In 2018, based on trans­ac­tion- track­ing data from Pitchbook, Cana­di­ans made more than 250 non- con­trol in­vest­ments into U. S. com­pa­nies in deals worth sev­eral bil­lion U. S. dol­lars. Given how pri­vate mar­kets work, many more in­vest­ments likely oc­curred unan­nounced. In the­ory, un­less Canada gets an ex­emp­tion un­der the new regs al­most all these deals, whether pub­lic or pri­vate, could now come un­der CFIUS re­view.

If Canada doesn’t get an ex­emp­tion, there may be a tit- for- tat re­ply. A decade ago, fewer than 50 ven­ture and pri­vate eq­uity mi­nor­ity in­vest­ments in Canada in­cluded a U. S. in­vestor, ac­count­ing for less than US$ 1 bil­lion of in­bound in­vest­ment. Each of the past two years, how­ever, has seen more than 400 such deals, while more than US$ 2 bil­lion has been in­vested every year since 2013, again ac­cord­ing to data from PitchBook. Though Canada re­views for­eign ac­qui­si­tion in­vest­ments us­ing the In­vest­ment Canada Act, non- con­trol trans­ac­tions are not re­viewed. But if the U. S. starts to re­view non- con­trol Cana­dian in­vest­ments, Canada could do the same. And Cana­dian re­views would likely be more oner­ous. Un­like the U. S. re­view process, which fo­cuses pri­mar­ily on na­tional se­cu­rity, the Cana­dian re­view process also in­cludes con­sid­er­a­tions of Cana­dian cul­ture, eco­nomic growth, em­ploy­ment and com­pet­i­tive­ness. Ad­di­tional re­views, risks and de­lays to cross-bor­der in­vest­ment serve nei­ther U.S. nor Cana­dian in­ter­ests.

A mod­est in­crease in re­port­ing re­quire­ments would not be a prob­lem. It is rea­son­able for a coun­try to want to know what kind of cap­i­tal is flow­ing in and from where. But CFIUS re­views leave many trans­ac­tions frozen while bu­reau­cratic pro­cesses grind on. My own firm ( Anzu Part­ners) has wit­nessed first­hand how mil­lions of dol­lars of prospec­tive in­vest­ment from long­time U. S. al­lies in our port­fo­lio com­pa­nies has been de­layed while lawyers — billing by the hour — de­bated ex­actly how much CFIUS pa­per­work is re­quired. The new CFIUS reg­u­la­tions add a new ap­proval stamp re­quire­ment that will cer­tainly re­duce cross- bor­der in­vest­ment un­less Canada is an “ex­cepted for­eign state.”

Last year, there were thou­sands of non- con­trol in­vest­ments into the U. S. by over­seas in­vestors. Rather than in­tro­duce CFIUS re­view for all of these and po­ten­tially over­whelm­ing the agency’s re­sources, U. S. reg­u­la­tors should fo­cus their ef­forts on re­view­ing high- risk in­vest­ments, not po­si­tions taken by Cana­dian com­pa­nies or other al­lies.

The win­dow for Canada to be listed as an “ex­cepted for­eign state” is quite nar­row. The rules are open for pub­lic com­ment un­til Oct. 17, and fi­nal im­ple­men­ta­tion will oc­cur no later than Fe­bru­ary 2020. Now is the time for Cana­dian busi­nesses and diplo­mats to take ac­tion to en­sure they do not face new reg­u­la­tory bar­ri­ers in the United States. Dr. Whit­ney Har­ing- Smith is a man­ag­ing part­ner at Anzu Part­ners, a U. S. ven­ture cap­i­tal and pri­vate eq­uity firm,

and a Coun­cil on For­eign Re­la­tions In­ter­na­tional Af­fairs Fel­low in Canada based at the In­no­va­tion Pol­icy Lab at the Munk School of Global Af­fairs in the Uni­ver­sity of Toronto.

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