Private investment plays a crucial role in supporting defense and national security technology companies in the United States, with venture capital and private equity often providing billions in funding each year. However, this financial backing comes with its own set of risks. According to a report by the Office of the Director of National Intelligence, foreign entities have increasingly been using the complex ownership structures of private equity and venture capital firms to gain access to sensitive assets from startups and early-stage companies.
In light of these developments, regulators have intensified mandatory national security risk assessments for firms involved in research, development, and government programs, both classified and unclassified. The SF 328 Certificate Pertaining to Foreign Interests is a crucial tool used by government agencies to establish whether a company is under foreign ownership, control, or influence. While previously this requirement was applicable mainly to companies needing access to classified information, recent changes as outlined in Section 847 of the National Defense Authorization Act signal a stronger stance.
The extended requirements now mandate that all “covered contractors and subcontractors,” those with Department of Defense contracts valued over $5 million, disclose beneficial ownership and any foreign influence. These updates come on the heels of a government request for comment on a draft revision of the SF 328, and a new DoD FAR supplement clause is anticipated shortly.
The measures are not without broader implications. The Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) programs also face added scrutiny under the Extension Act of 2022, which necessitates foreign disclosure forms with proposals. Notably, these changes could transform the defense industrial base, affecting approximately 300,000 companies once integrated into the anticipated cybersecurity maturity model certification program.
For investors and startups, these regulatory shifts mean closer examination of foreign funding sources, alongside a requirement for deeper due diligence processes. To navigate the complexities of national security requirements, expert legal input is imperative to identify and mitigate potential risks proactively.
For further insights from the analysts, explore the full article by Cooley’s Grant Schweikert and Umer Chaudhry.