Trump’s attack on TikTok is setting off alarm bells in Silicon Valley about how any foreign deal is now at risk of ‘unpredictable’ government intervention

Trump

  • The Trump administration’s moves to throttle TikTok are serving as a kind-of wake-up call for the venture and startup communities about the risk of doing business with foreign companies and investors. 
  • The administration’s attack on TikTok has been rooted in two longstanding authorities that it has been using more aggressively to scrutinize foreign investment, particularly in tech firms.
  • Both authorities give presidents and their aide wide discretion to act in the interests of national security, a concept that they are free to define for themselves and increasingly has been considered to encompass economic issues.
  • Venture investors say the moves add to the risks of dealing with foreign buyers and investors and may make them wary of doing so.
  • Visit Business Insider’s homepage for more stories.

The Trump administration’s crackdown on TikTok has served as a kind of wake-up call for Silicon Valley about the risks of getting in bed with foreign investors and companies.

On Friday, the president issued an executive order ordering TikTok parent ByteDance to undo the merger that led to the app’s expansion into the US and around the world. The order followed one from last week that would effectively ban the video-sharing app in the US. And those actions came in the wake of threats by the administration to force a sale of TikTok’s US and other operations and essentially undo a years-old acquisition that paved the way for its expansion into this country.

Together, the moves show the increasingly skeptical view the US government is taking of foreign investment — particularly from China — into technology and internet companies. They also illustrate the president’s far-reaching powers to block or unwind such deals — even years after the fact — or to throttle foreign-owned companies seeking to do business in the US.

“I don’t feel that enough of the venture companies and the [private equity] backed companies in tech and data understand that this … could be a real issue,” said Doreen Edelman, a partner at Lowenstein Sandler and the chair of the law firm’s global trade and policy group.

The president is using his emergency powers to attack TikTok

The president’s moves against TikTok have been undergirded by two primary sources of power — the International Emergency Economic Powers Act, or IEEPA, and the Committee on Foreign Investment in the United States, or CFIUS, which itself has its foundation in a series of laws and executive orders. Both IEEPA and CFIUS allow the president to take steps to protect national security.

IEEPA allows the president to restrict or bar US individuals or companies from doing business with a foreign entity after declaring a national emergency related to an “unusual and extraordinary threat” from a foreign actor. The law has been used primarily to put in place sanctions, such as those Jimmy Carter slapped on Iran following the hostage crisis in that country that started in 1979 and those that Trump put on foreign actors who interfered in US elections.

Trump’s executive order last week was based on his authority under IEEPA. Having already declared in May of last year that the acquisition of certain technologies and services represents a national emergency, the president asserted that TikTok represents one part of that threat. In his order, he declared that in 45 days any transactions between US individuals or entities and TikTok would be prohibited.

The president has extremely broad powers under IEEPA and companies or individuals targeted by it have little way to defend themselves in court against it, said Amy Deen Westbrook, a professor of international and commercial law at Washburn University School of Law.

“We’re talking about a national security determination by the executive, which is almost unreviewable,” Westbrook said.

Trump’s cabinet and aids have also been scrutinizing TikTok

CFIUS, meanwhile, is an interagency group composed of the heads of presidential cabinet members and advisors, including the secretaries of Treasury, State, and Defense. The committee has the power to review transactions involving foreign actors purchasing or investing in US companies or real estate. It can rubber-stamp such deals, force the parties involved to modify the deals to address national security concerns, or recommend to the president that the deals be blocked.

It was the president’s authority under CFIUS that he used Friday to order the unwinding of ByteDance’s 2017 acquisition of Musical.ly, which led to TikTok becoming a worldwide phenomenon.

In the past, the parties involved in foreign investments or acquisitions weren’t required to notify CFIUS. But under a 2018 update to the laws underlying the committee, such parties now have an obligation to alert it to certain deals, most notably those involving companies that are involved in the production of particular technologies or infrastructure or that collect sensitive data on 1 million or more US individuals.

Some of CFIUS’ authorities are extremely broad. It can review and force changes to deals long after they were finalized by the parties involved, if it was never notified about them when they happened. That retrospective power can extend back to deals that are years, potentially even decades old.

“There’s no time limit,” Edelman said. “Anytime in the future,” she continued, “the government can decide this is a national security issue and come after the transaction and require a divestiture.”

And a decision by CFIUS to rubber-stamp by sending the parties a so-called no-action letter doesn’t necessarily mean they’re home free. In 2006, the committee gave approval for a transaction in which a Dubai-based company would purchase a British one that operated several US ports. Despite CFIUS’s approval, Congress objected to the deal and essentially forced the Dubai company to sell the US operations to an American firm.

“Even if you negotiate one of these mitigation agreements with CFIUS or even if CFIUS gives you the thumbs-up right away, there’s no guarantee that that’s a permanent approval,” Westbrook said.

Another tricky thing about the CFIUS rules is that it takes a very broad look when considering the nationality of parties involved in a transaction. An individual or entity can be considered a US business even if it’s based elsewhere and has a minimal presence in this country. The statute underlying the committee defines a US business as simply a person or entity engaged in interstate commerce in this country, no matter where they’re actually based.

On the flip side, an acquirer or investor can come under scrutiny even that entity is based in the US or a friendly country. The CFIUS process looks at whether such parties are ultimately owned or controlled by foreign actors that may trigger a national security concern.

TikTok got snared by CFIUS’s broad powers

TikTok got caught up by both of those CFIUS provisions — the committee’s broad definition of nationality and its power to review deals long-since closed — thanks to parent company ByteDance’s acquisition in 2017 of rival video sharing service Musical.ly. The app, previously focused on a Chinese audience, became a US and global phenomenon after that deal. ByteDance rebranded Musical.ly, which already had tens of millions of users around the world, as TikTok, combined the app with its own, and used Musical.ly as the basis for TikTok’s global expansion.

Both ByteDance and Musical.ly were based in China. At the time of the deal, ByteDance was not required to notify CFIUS about it, and it didn’t do so.

But Musical.ly had a US office in Santa Monica and millions of US users. That was enough for CFIUS to have the authority to launch a retroactive review of the deal two years after the parties announced it.

In terms of the size of the presence a company has to have in the US to fall under CFIUS’ jurisdiction, “there’s no de minimis,” Edelman said. “There’s no lower threshold.”

Another complicating factor: With both CFIUS and IEEPA, “national security” is left largely undefined, the legal experts told Business Insider. That’s intentional, because it allows the government to adapt to new challenges or policy priorities as times and administrations change.

In years past, national security was usually construed in terms of military or geopolitical threats, rather than economic ones. But that’s no longer the case.

“The distinction between economic and national security or military-national security is fully blurred at this point,” Westbrook said.

Venture investors are worried about the risks

The stepped-up use of CFIUS and IEEPA by the Trump administration — and potentially by its successors — poses a distinct risk for the venture and startup industries. The vast majority of startups that don’t go out of business are acquired, either by other companies or by private equity firms.

Foreign buyers play a big role in that market. Nearly 30% of all venture-backed startups that were acquired last year were bought by foreign companies, according to PitchBook. And of all the money that was spent to buy or acquire those startups, nearly 40% came from foreign investors.

At least some venture investors are worried about the increasing scrutiny the government is giving to TikTok and other such deals. The Trump administration’s concern about China’s access to data on American citizens and companies and China’s encouraging of censorship of information critical of it companies based there is legitimate, said Duncan Davidson, a general partner at venture firm Bullpen Capital

But the way the administration has gone about addressing those concerns seems unprincipled and is leading to a lot of uncertainty in the market, he said. Such moves make Duncan less likely to invest in foreign companies or pursue foreign buyers of his startups.

“It seems a little random,” he said. “Unpredictability is not good.”

Venture investing already entails lots of risk, said James Currier, a managing partner at venture firm NFX. Investing in foreign-based startups adds even more potential complications — legal, cultural, geopolitical — on top of that, he said.

Venture investors invest for the long term, not expecting a payoff for 10 or more years into the future. They have lots of experience weighing risks over such time scales. Many successful ones choose to focus solely on their home markets rather than investing overseas as a way of mitigating such risks, Currier said.

Currier isn’t as concerned as Duncan about the impact of Trump’s moves against TikTok and other companies on venture investing. But, he said, the aggressive stance the Trump administration has taken toward foreign investment, particularly from China, does compound the problems faced by firms that invest in or seek investment from foreign companies and pushes such firms into largely uncharted territories. Few venture investors have experience navigating trade wars and how such disputes can affect their investments, he said.

“This stuff is not predictable,” Currier said. “There’s no historical intuition,” he continued, “that we as a group have about how these governments might impact the outcome for one of these companies 6, 7, 8 years from now.”

Business Insider reporter Max Jungreis contributed to this story.

Got a tip about startups, venture investing or TikTok? Contact Troy Wolverton via email at twolverton@businessinsider.com, message him on Twitter @troywolv, or send him a secure message through Signal at 415.515.5594. You can also contact Business Insider securely via SecureDrop.

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