US Firm’s Split From Chinese Affiliate May Create Outbound Investment Loophole, Lawmakers Say
The leaders of the House Select Committee on China are seeking information from venture capital company Sequoia on its investments in Chinese technology companies after the company announced it planned to split from its Chinese affiliate by March. In an Oct. 17 letter sent to Sequoia executives, Reps. Mike Gallagher, R-Wis., and Raja Krishnamoorthi, D-Ill., said that even though the company’s split from Sequoia Capital China is a “step in the right direction,” questions remain about whether the move will “staunch future flows of American capital to problematic” Chinese companies.
The split “may insulate some types of capital flows from regulatory scrutiny they would have otherwise been subject to” under the Biden administration’s recent executive order that will set prohibitions on certain outbound investments in China (see 2308090066 and 2309220050), the letter said. It may also give Sequoia Capital China a “free hand to continue funneling U.S. capital into” Chinese companies, the lawmakers said.
“Now, by becoming a wholly independent and foreign company, Sequoia Capital China will be free to make investments that would have otherwise created legal liability or reputational harm to Sequoia Capital (and scrap even the internal restrictions imposed by its U.S.-based partner),” the letter said. “At the same time, it appears likely that [Sequoia Capital China] will be able to continue to draw upon a large pool of American capital in executing such investments.”
The lawmakers said Sequoia Capital China’s “significant U.S. dollar investments” in Chinese entities -- including those in the artificial intelligence and semiconductor sectors -- have “included certain investments that contributed to the [Chinese Communist Party’s] human rights abuses.” These have included investments in Chinese drone maker DJI, which is on the Commerce Department’s Entity List.
To stop American capital and expertise from flowing to these Chinese companies through foreign entities like Sequoia Capital China, the lawmakers said “it would be necessary to cover not just the fund-to-company transaction, but also the investment made by the [limited partners] or other entities that are the source of capital in the first instance.”
The letter asks the Sequoia executives to answer a range of questions, including the names of the artificial intelligence, chip or quantum companies that it has invested in since 2010 and that have "significant" ties to China; the dollar amount of each of those investments; and any business expertise that might have been transferred under those transactions. The lawmakers also asked how Sequoia Capital would “respond” if the U.S. placed a company that Sequoia Capital or Sequoia Capital China invests in on a sanctions or trade restriction list, such as the Entity List.
A spokesperson for Sequoia didn’t comment.