New US sanctions against Russia are still hypothetical. However, tech companies and investors from Russia, China and other countries should carefully prepare for the new conditions of doing business in the United States.
Donald trump came in the 2008 presidential election with the bright slogan “Make America Great Again!” Today the White House realizes this promise unpopular economic decisions. In particular, holds a strong restrictive policy towards other countries in the field of Commerce and national security of the United States. So, trump’s policy towards China has resulted in 10% growth of tariffs on the import of Chinese goods annually imported into the US worth $200 billion if the USA and China have reached agreement on mutually beneficial tariffs in trade between the two countries, the US government threatens to further their rise.
From raising taxes will hurt American companies such as 3M, Tesla and Ford — they can expect a rise in the cost of components that they purchase annually in China worth over $100 million, However, the tramp meets the manufacturers that they need to transfer production processes in the US, not to depend on duties. In particular, the President suggested Tim cook to move to America manufacturing of Apple products.
Technology in focus
The increase in fees for China is not merely an attempt to equalize the trade balance between this country and the United States, but also a struggle for the technology. Washington has long criticized China for forced transfer of technology: its transfer may require with a company that wants to enter the Chinese market. Many corporations is going for the market with a billion consumers. The American chamber of Commerce in Shanghai estimates that in 2018, 21% of the 434 interviewed members of the chamber noted the pressure to force them to transfer technology to Chinese companies. Moreover, in aviation industry the percentage is even higher — 44%, almost the same he is in the chemical industry — 41%.
In an effort to prevent the transfer of critical technologies, the United States controls companies operating in China and affiliated with the American technology corporations, as well as to strengthen control over the transfer of technology to Chinese companies. In August 2018, the U.S. Congress passed, and President of the trump signed a new law — “the Act on the modernization of the consideration of the risks of foreign investment” (Foreign Investment Risk Review Modernization Act, or FIRRMA), which significantly expanded the number of types of transactions that fall under the control of the Committee on foreign investment in USA (Committee on Foreign Investment in the U.S., or CFIUS). Yet in practice it was not, but the text of the document can understand how to avoid its negative impact on the business.
Business under the microscope
Against Russia and Russian companies earlier sanctions mainly consisted of a ban on the purchase of certain technologies or high-tech products, for example, in the oil or military industry. Now, every technology company will have to consider the law FIRRMA, which covers much more operations on the US market.
CFIUS informed the Committee considered only the transactions in which a foreign person or Corporation has obtained control over the American company. Registration of the transaction according to the old rules was not mandatory and was considered to be the so-called “security zone” (safe harbor). However, under the new act, such registration became mandatory and required a wider range of cases than before the adoption of the aforementioned act.
If a foreign person or Corporation makes an investment in an American company, producing, developing, or testing izgotavlivaem “critical technologies”, registration is required. Registration is required if a foreigner:
— controls the American company making the investment
— gets access to nonpublic information about the essential technology
— has the right to appoint members of the Board of Directors
— has the right observer in the Board of Directors, or is involved in decision-making related to these technologies.
The list of critical technologies in the law is not exhaustive, so a lot will depend on the position of controller for its use. At the moment, still no company came under CFIUS decisions, but it increases the uncertainty of which technologies will be recognized as critical in real cases. It is clear that there can be included components for aircraft manufacturing, production of computers, rockets, nuclear power, certain chemicals, nanotechnology, biotechnology, semiconductors, machine learning systems and artificial intelligence, robotics and some other technologies. Almost all of them are considered the best in Russia and important for both Russian and American markets. Working with them promises high profits, but a truly capacious American market may lead the Russian and other non-us company to violate the act FIRRMA.
Foreign investors get ready
The list of technologies provided in the new law are so broad that many U.S. companies in which foreign persons hold shares, it makes sense to think about the preparation of the required registration, or at least consult with a lawyer.
The law provides for short form registration, according to which CFIUS within the 30 days considering a deal and makes one of following decisions:
— requires advanced registration
— reports that could not come to a definite conclusion
— notifies about the end of the review.
The new rules will have to take into account foreign investors who purchase shares in U.S. companies developing nanotechnology. Almost always to make investment decisions information is available the obligation to disclose, and this automatically brings the transaction under CFIUS jurisdiction, so it will require registration.
FIRRMA the law also specifies the penalty for failure to comply with these requirements, up to the full cost of the transaction. Thus, sanctions for the violation of FIRRMA can be very significant. The definition of “American business” is very wide: for example, CFIUS may find it required to register the transaction, in which a single point of contact for foreign companies with U.S. sales over the Internet because there product can buy American users. Thus, the Russian company selling products in the United States, may also fall under the jurisdiction of the Committee.
In the above cases under the act FIRRMA includes all investors, both from Russia and from other countries. This may be a state Fund (e.g., Mer or Sberbank Private Banking), private investors, structured outside the United States (for example, Starta Capital, Runa Capital) and other companies.
The space of uncertainty
Several significant highlights of the new law remained unspecified until now. For example, not too obvious, is it necessary to register the formation of the American company to a foreigner-founder, if he is involved in “critical technologies,” or this action is only required from foreign corporations. That is, at the moment it is not clear whether it is necessary to be Russian citizen to open a company in USA and started to sell services based on artificial intelligence, register their ownership of the company.
CFIUS also has the right to consider transactions in which there are signs of attempts to evade registration requirements that, in theory, leads to the fact that any transaction involving foreign persons may fall under consideration. In particular, there is a paradox: if the company restricts access of foreign investors to non-public information concerning the technology, whether it is an attempt to evade the requirements of compulsory registration and, therefore, will be whether it is immediately under the jurisdiction of the Committee?
Finally, the law exempts from registration of mutual funds under the exclusive control of American Manager, in which foreign investors do not have access to nonpublic information about significant technology companies invested by the Fund. That is the American venture capital Fund, which has raised funds from non-us investors will be exempt from registration investment deals with companies that develop “critical technologies” if foreign investors are the only investors in the Fund.
The opposite effect
Summing up, it can be noted that the new legislation creates a significantly more stringent regime of access to American technology and articulates a more complex and mandatory registration requirements the broad layer of technologies that have not previously come under the jurisdiction of the U.S. government. Obviously, companies with investments in the US, or just leading a business there, you need to consult with lawyers to avoid potentially costly problems.
This law will have an impact not only on Russian investors and potential foreign players, bringing their technology to the American market, but also in the United States. American start-UPS will become more difficult to access money and intellectual resources. In such circumstances, non-us investors can switch to Finance companies in other jurisdictions, accelerating the development of the competitors of American business.
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