Another Trump pressure point: startup investments
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.