Key Takeaways: CFIUS and Other Foreign Investor Considerations for Venture Capital 

For venture capital investors, proactive diligence, thoughtful deal structuring, and attention to key shifts in investment regulation are essential, particularly when participating in cross-border transactions or investing in companies operating in sensitive sectors. Failure to consider potential regulatory obligations, such as those imposed by the Committee on Foreign Investment in the United States (CFIUS), can lead to sudden disruptions in future financings, acquisitions, or exits. By identifying risks early, especially those related to cap table composition, investor rights, and national security exposure, VCs can better safeguard deal value and maintain strategic flexibility throughout a business’s lifecycle.

Foreign capital and foreign partnerships can be essential resources for growth in emerging companies, particularly when US capital may undervalue a potential business. Foreign capital and these partnerships are more prevalent than ever before, and they are occurring earlier in a company’s lifecycle.

While national security regulations have at times been viewed as distant issues, they are becoming increasingly important for investors to track and consciously address rather than simply react. The growing reality is that governments are heightening their focus on protecting critical technologies and infrastructure from foreign influence, foreign direct investment reviews (e.g., CFIUS), outbound investment programs, and government contracting obligations.

What then should VC investors consider regarding the regulation of foreign investment, the optimal structuring and contractual strategies for managing risk, and the practical implications for funding, growth, and exits?

• Start early: Consider foreign investment risk and potential mitigation strategies early in the business’s lifecycle. Small investments in a venture or other early-stage business can become more significant in size and provide foreign investors key rights in the business. These investments can attract scrutiny at the time of the investment or later on, resulting in unexpected inquiries that can be costly both in terms of time and dollar value.
• Clean cap table: Avoid unknown or undocumented foreign limited partner interests especially in critical technology, critical infrastructure, and sensitive personal data industries, as well as other sectors that may attract heightened attention.
• Allocate rights prudently: Avoid overbroad rights in SAFE investments, convertible notes, or side letters that could create jurisdictional risk, both at the time of execution and conversion. Seemingly nominal rights, for example traditional minority investor protections or the right to appoint a board observer, can result in additional scrutiny. Where appropriate, consider leveraging CFIUS regulatory safe harbors for passive investments and US-managed funds and incorporating contractual limitations on rights that could trigger control or covered transaction status under the Defense Production Act.
• Collaborate across counsel: Venture, M&A, regulatory, and national security lawyers must coordinate early in the process to understand goals, identify risks, and implement potential mitigations.
• Be proactive: Screening language, diligence, and strategic structuring can reduce risk and expand available options for protection from regulatory inquiries.
• Expect more to come: Outbound investment rules are just getting started, and US government contract requirements continue to evolve; expect continued enforcement evolution and other disclosure requirements to expand.

Ultimately, proactive diligence and careful structuring—especially in cross-border or sensitive sector investments—can avoid costly surprises and preserve exit optionality.