October 30, 2019
The U.S. has yet to define the specifics of a 2018 law designed to limit foreign access to critical technologies. In the meantime, Chinese investors continue to put money in U.S. startups and venture capital funds. U.S. tech entrepreneurs also welcome a connection with China, and investment between the two countries remains significant. The tangle of investments in a single company can make it hard to determine provenance. Even so, successful Chinese AI startup SenseTime Group was blacklisted by the Trump administration.
The Wall Street Journal reports that the law increased the power of the Committee on Foreign Investment in the U.S., CFIUS, to look into “minority investments in critical tech companies through which foreign investors could influence a company’s business decisions.” Under the law, startups fundraising from foreign investors should get CFIUS approval.
Cooley LLP attorney William Newsom noted that, “CFIUS has broad authority to unwind deals after they have closed if it determines the technology should be restricted, so not reporting a foreign investment can be risky.”
According to New York-based Rhodium Group, when the law was passed, “the amount of Chinese venture investment in the U.S. during the first half of 2019 declined about 27 percent in dollar terms from the second half of 2018.” But there’s been pushback. At the Silicon Valley Innovation & Entrepreneurship Forum, China’s deputy consul general Ren Faqiang said, “some people in Washington want to decouple the two economies. We disagree.”
CFIUS also “appears ill-equipped to police the venture-capital industry,” notes WSJ, and “the government also hasn’t codified which technologies are off-limits to foreigners, so some startups and investors don’t see the need to file with CFIUS.” Some Chinese investors are also “taking pains to conceal their identity” or trying other tactics. As retired senior U.S. intelligence officer Nicholas Eftimiades put it, “the policies we have put in place have not been all that effective in limiting China’s technology ambitions.”
Bloomberg reports that Hong Kong-headquartered SenseTime Group, valued at $7.5 billion, is “emblematic of the clash between the world’s two biggest economies.” Co-founder Xu Bing was in New York to encourage more collaboration on artificial intelligence when he heard that the Trump administration blacklisted his company, by putting it on the Commerce Department’s “Entity List.” While China seeks growth in technology, the Trump administration is “increasingly adamant about containing China’s rise.”
Some startups, many of them headed by former academics, are caught in the middle. Since they can no longer access U.S. hardware, they plan “to focus on software for facial recognition and other applications.” SenseTime, which raised an additional $2.5 billion last year from Japan and Singapore, plans to appeal the ruling. “We’re very much prepared for the long game,” said SenseTime co-founder/chief executive Xu Li. “Entrepreneurship is a marathon, not a sprint.”