Navigating Foreign Investment in Defense Tech: Strategic Considerations for Growth and Compliance
The defense technology sector is experiencing heightened capital inflows as companies race to scale production and accelerate deployment in response to a rapidly evolving threat environment and increased defense budgets in the U.S. and across the world. This fundraising frenzy, while an accelerant for growth, has reignited debate around foreign investment in defense firms. Companies that are looking to raise capital should carefully review possible investors and their relationships with foreign actors.
In recent weeks, prominent U.S. Senators have called the Committee on Foreign Investment in the United States (CFIUS) to investigate allegations of Chinese investment in certain companies with defense contracts. Additionally, in 2021 and early 2022, CFIUS investigated foreign investments in two U.S. space companies that eventually resulted in forced divestitures. As defense tech companies pursue aggressive growth strategies, maintaining strategic discipline around foreign ownership interests has become critical, not only for securing government contracts, but also for navigating increasingly complex CFIUS reviews.
Considerations for U.S. Defense Tech Companies Accepting Foreign Capital
Defense tech companies raising capital should conduct thorough due diligence on all potential investors, including domestic firms. Even U.S.-based private capital with substantial foreign limited partners can trigger foreign ownership, control, or influence (FOCI) concerns. Companies should evaluate whether voluntary CFIUS filings are appropriate, even when not strictly mandatory.
The consequences of inadequate diligence can be severe. Companies that accept foreign investment without CFIUS clearance face potential scrutiny in the future, which can occur years after the initial transaction. Beyond additional CFIUS examination, political exposure presents additional reputational risk. Establishing robust data protection measures and governance frameworks early can strengthen a company’s position should voluntary disclosure become necessary.
Considerations for U.S. Companies Investing in Foreign Capabilities
U.S. investors and defense tech companies pursuing foreign acquisitions face similar challenges. European nations are demonstrating heightened sensitivity around foreign direct investment in strategic sectors, increasingly prioritizing national sovereignty in defense sectors.
As in the United States, recent European case studies have demonstrated the emerging trend, with heightened government scrutiny and intervention creating significant resistance or forcing the collapse of deals. Notable examples of such scrutiny include government intervention halting the sale of certain space-related assets to private equity and the acquisition of a manufacturer producing dual use components facing German government resistance – with governments in both cases citing concerns around sovereignty and strategic autonomy.
These cases signal an ongoing shift in how allied nations view U.S. investment in defense and dual-use technology. U.S. companies should anticipate extended timelines, heightened scrutiny, and potential political intervention even in transactions that appear commercially straightforward. Early engagement with foreign investment review bodies and careful structuring to address sovereignty concerns have become essential elements of cross-border defense tech M&A.
Ongoing Considerations Post-Transaction
Foreign investment considerations do not end at deal closure or regulatory clearance. Companies must maintain continuous awareness of their ownership structures and how they may impact future strategic options. Cap table composition that poses minimal issues for a Series A startup can become disqualifying for DoW contracts or problematic for subsequent M&A as the company matures. Regular reviews of foreign ownership positions, governance rights, and information access become essential compliance activities.
Additionally, companies should recognize that regulatory and political environments evolve. What CFIUS or foreign investment authorities approve today may face different scrutiny tomorrow as geopolitical tensions shift and national security priorities change. Maintaining awareness of ownership structures, documenting compliance efforts, and preserving relationships with specialized legal and advisory resources position companies to navigate these dynamics successfully. In an era where defense technology increasingly determines strategic advantage, disciplined capital strategy serves both growth objectives and national security imperatives.
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