Safeguarding National Security Amidst Foreign Investment in Defense Tech

April 15, 2024

By Phillip Euell, Diaz Reus Of Counsel

In recent years, the U.S. tech industry has seen a significant shift towards embracing national security and defense. This transition is part of a wider cultural evolution within Silicon Valley, transitioning from a traditionally cautious stance on military collaborations to actively supporting national defense initiatives. This change is driven by a variety of factors, including economic and geopolitical threats, such as escalating tensions with Russia and China, and the acknowledgment of advanced technologies’ pivotal role in modern warfare and security.

The increasing focus on national security and defense innovation has attracted substantial investment from venture capital firms, many of whom now prioritize the defense tech sector. As a result, defense tech startups have experienced a surge in funding, which supports the development of technologies like hypersonic missiles, performance-enhancing wearables, and satellite surveillance systems. This influx of capital demonstrates the strategic significance of the defense tech sector and boosts investor confidence in its potential for growth, anticipated to expand markedly in the forthcoming years.

Significant returns on investment in the defense tech sector have not only benefited American venture capitalists but have also drawn attention from foreign investors. However, unlike their American counterparts, the investments of foreigners are subject to federal scrutiny under the Committee on Foreign Investment in the United States (CFIUS) regulations, as revised by the Foreign Investment Risk Review Modernization Act (FIRRMA), which broadened CFIUS’s scope. Post-FIRRMA, transactions that had traditionally come under the review of the CFIUS resulting from non-U.S. person control, now include certain minority investments that do not grant control but involve critical technologies, executing critical infrastructure functions, or gathering specific sensitive personal data from over one million U.S. citizens. Under the law, such businesses are designated as a «TID U.S. business” or TID; and, typically, startup defense tech enterprises qualify as TID under the critical technologies component, as many of their technologies or products are listed on either the Commerce Control List (CCL) or the United States Munitions List (USML).