The U.S. Department of Defense (DOD) is offering to match U.S. companies with investors through its new Trusted Capital Program. The impetus for the program is to counter what the DOD characterizes as “adversarial capital”: foreign investment in U.S. companies through which foreign governments seek to acquire sensitive U.S. technology or data. The recent outbreak of COVID-19 has increased the Pentagon’s interest in the program, as it recognizes both (i) that in particular small companies and startups face significant uncertainty as to whether their funding streams will continue, and (ii) that foreign governments, through foreign companies, could take advantage of the uncertainty to obtain sought-after technology or intellectual property.
Traditionally, the U.S. government has relied on the Committee for Foreign Investment in the United States (CFIUS) to identify and mitigate foreign acquisitions or investments that threaten U.S. national security or, if necessary, require the purchaser to divest from the U.S. company. CFIUS, however, imposes significant burdens on companies and investors. Specifically, the legal analysis and due diligence necessary to determine whether CFIUS has jurisdiction over a transaction impose high costs on the parties in terms of time and money. Additionally, where CFIUS does have jurisdiction, parties may need to spend further time and expenses to file notices or declarations with CFIUS. Recently imposed filing fees for certain transactions can reach up to $750,000.
What Is the Trusted Capital Program? Established in May 2019 pursuant to the 2018 National Defense Authorization Act, and hosting its first event in November 2019, the Trusted Capital Program seeks to serve as a proactive complement to CFIUS by matching prescreened investors with companies working on technology or products of national security interest. While receiving some criticism as a necessary but insufficient solution to the U.S. government’s efforts to foster innovation in critical technologies and protect them from foreign exploitation, the program does provide a beneficial investment environment for companies and capital providers.
The program provides a secure ecosystem of capital and companies for the U.S. government to support while also providing participating businesses and investors a number of benefits. For instance, companies have access to vetted investors interested in funding the companies’ areas of focus. DOD conducts necessary due diligence, likely minimizing time and cost to the parties. Both companies and investors gain access to and insight regarding the government’s national security priorities. Investors tend to be private equity and venture capital firms focused on technology. Such firms are free from foreign government influence and derive the majority of revenue from U.S. sources.
Sectors of Focus. Strong company candidates typically develop critical technologies in a number of sectors, including:
- Health care
- Unmanned aerial systems
- Artificial intelligence
- Directed energy
- Nuclear energy
- Castings and forgings
- Rare earths
- Semiconductors and microelectronics
How Companies Can Join. Companies are encouraged to participate through various Venture Days events hosted jointly by the military services and academic institutions. Upcoming virtual events include:
- May 2020: AFWERX and Army Futures Command (COVID-19 response)
- June 2020: Air Force Life Cycle Management Center
- June 2020: Special Operations Command (Artificial Intelligence Solutions with Subcomponents in Small Maneuver and Influence Operations)
Consider In-Q-Tel (IQT). Companies interested in the Trusted Capital Program may also be interested in another U.S. government-connected investment possibility, IQT, which is a nonprofit strategic investor in companies developing technology of interest to national security agencies. Established in 1999, IQT works with venture capital companies to identify technology that will be commercially successful and have high impact on national security. IQT investments typically range from $500,000 to $3 million. IQT partners with a company to adapt its technology to national security customers’ requirements. Following a pilot program, the customers purchase the product from the company.
In April 2020, Q-CTRL, an Australian company that develops quantum engineering and software tools, announced an investment by IQT to support quantum technology for national security missions. Other IQT focus areas include:
- Data analytics
- Artificial intelligence/machine learning
- Ubiquitous computing
- IT solutions
- Commercial space
- Power and energy
- Remote sensing
Although different from the Trusted Capital program, IQT may also offer smaller companies working on critical technologies opportunities for funding sources in unpredictable times.