Recommend Improvements to FIRRMA to Avoid Unintended Consequences on Startup Investment
WASHINGTON, DC – At a congressional hearing today, NVCA Board Chair Scott Kupor, Managing Partner of Andreessen Horowitz, testified on the need to protect U.S. innovation, security and competitiveness, but cautioned lawmakers not to overlook the unintended consequences of proposed legislation to reform the Committee on Foreign Investment in the United States (CFIUS). Testifying before the U.S. Senate Committee on Banking, Housing and Urban Affairs at a hearing entitled “CFIUS Reform: Examining the Essential Elements,” Kupor shared with lawmakers the fundamentals of venture capital investing as well its importance to the U.S. economy before outlining concerns with S. 2098 the Foreign Investment Risk Review Modernizations Act of 2017 (FIRRMA) and the unintended consequences it would have on venture capital and investment into innovative startups.
“FIRRMA is well meaning legislation intended to deal with a real challenge. However, as drafted FIRRMA produces many questions about the filing obligations of U.S. venture capitalists when a fund has any amount of foreign LPs,” remarked Kupor in his prepared testimony. “FIRRMA also raises significant questions when a U.S. startup accepts foreign investment, even if that investment is for a small stake in a startup or when co-investing with U.S. investors. We appreciate the opportunity to work with this committee and FIRRMA’s sponsors to modify the bill in key ways that keeps in place its intended effects while avoiding serious issues for startups and venture capitalists.”
“As drafted, FIRRMA is ambiguous in its application to a venture capital fund with foreign LPs. FIRRMA appears to be written with foreign direct investment in mind, i.e. a scenario where a foreign person invests capital directly into a company,” continued Kupor. “The legislation does not specifically speak to the common practice of a foreign person that invests in a U.S. venture fund, which in turn invests in a critical technology company. We are concerned that this ambiguity—especially when combined with a broad grant of rulemaking authority to CFIUS—will cause unnecessary confusion, cost, and burden for the venture capital industry, as venture firms will be left without a clear understanding of whether they must file with CFIUS and under what circumstances.”
In his testimony, Kupor outlined several concerns with FIRRMA.
Concern: Ambiguity with FIRRMA’s impact on VC funds with foreign LPs.
Solution: FIRRMA be amended to clearly specify that U.S. venture funds with foreign LPs are not implicated by the covered transaction definition, nor does the fund take on foreign personhood for purposes of FIRRMA merely because it has foreign LPs.
Concern: FIRRMA might stifle foreign strategic investors that have become a key aspect of startup economy.
Solution: FIRRMA should specify that a CFIUS filing is not needed if the foreign strategic investor takes a de minimis stake in the startup and broaden the passive investment test to provide assurance to foreign strategic investors that they are not impacted by FIRRMA.
Concern: CFIUS is not given enough authority to exempt countries.
Solution: Broaden the factor by which CFIUS can grant exemption to capture a wider universe of U.S. strategic partners that ought to be exempted from the covered transaction definition, as many of these countries are important sources of capital for high-growth U.S. companies.