When investors subscribe to a venture capital fund, the fund’s closing terms or Subscription Agreement may include questions about foreign person status and/or “CFIUS” that investors are required to answer.
What is CFIUS?
The Committee on Foreign Investment in the United States (CFIUS) is a U.S. government body that reviews certain foreign investments in U.S. businesses to determine if they pose national security risks. CFIUS has the authority to block or impose conditions on transactions involving foreign investors that could impact national security.
Why Do Funds Collect CFIUS Information?
Depending on their investing strategy, some venture capital funds must ensure compliance with U.S. regulations, including CFIUS rules, when accepting investments from foreign individuals or entities. By collecting CFIUS-related representations from investors, funds can assess whether they are subject to additional regulatory scrutiny or reporting requirements.
What Do Investors Need to Disclose?
In the context of investing into a venture capital fund, an investor would need to disclose if they are a “foreign person,” i.e., a “foreign national,” a “foreign government,” a “foreign entity,” or a “foreign-controlled entity”; see below for more information on each term. These representations help funds determine if they need to proactively disclose information about their investors to CFIUS or if other precautions need to be taken to ensure they remain compliant with US laws.
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“foreign national”: A foreign national would be someone who cannot satisfy one of the two items below:
(1) a citizen of the United States, or
(2) someone who owes a permanent allegiance to the United States.
- Note, a US green card holder would be considered a foreign national.
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“foreign government”: A foreign government means any government or body exercising governmental functions, other than the U.S. Government or a subnational government of the United States. The term includes, but is not limited to, national and subnational governments, including their respective departments, agencies, and instrumentalities.
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“foreign entity”: A foreign entity means any branch, partnership, group or sub-group, association, estate, trust, corporation or division of a corporation, or organization organized under the laws of a foreign state.
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“foreign-controlled entity”: A foreign-controlled entity means any entity over which control in any form is exercised or exercisable by a foreign national, foreign government or foreign entity. For purposes of the CFIUS Regulations, “control” means the power, direct or indirect, whether exercised or not exercised, to determine, direct or decide important matters affecting an entity.
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The foregoing terms do not encapsulate the totality of “foreign persons” that would be subject to CFIUS Regulations. Please consult your legal counsel to determine if you would need to disclose your status as a foreign person for purposes of CFIUS.
What Happens If an Investor in a Venture Fund is Classified as a Foreign Person Under CFIUS Rules?
If an investor meets the definition of a foreign person under CFIUS, most funds simply need to make note of this in their records. However, the fund may also:
- Require additional disclosures or legal reviews.
- Proactively seek CFIUS clearance before accepting the investment.
- Impose restrictions on the investor’s ability to influence fund decisions and/or restrict the investor’s access to confidential, non-public portfolio-level data and information.
- In some cases, the fund may decline the investor’s commitment to the fund to avoid regulatory complications.
How Does CFIUS Affect Venture Capital Investments?
CFIUS has the power to review and, in some cases, restrict foreign investments in sensitive U.S. businesses, particularly in technology and infrastructure sectors. If a VC fund invests in such businesses and has significant foreign investors, it may need to file a CFIUS notice and obtain approval before proceeding with certain transactions.
Where Can I Learn More?
For further details on CFIUS regulations and their implications for venture capital investments, investors can refer to the official CFIUS website: U.S. Department of the Treasury – CFIUS
This article is not intended to serve as legal advice. If you have questions about how these requirements apply to your investment, or your status as a foreign person, please consult with your legal or compliance advisor.