National Post

Another Trump pressure point: startup investment­s

- 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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