Foreign investment crackdown risks ‘strangling’ tech

Denham Sadler
National Affairs Editor

Australian tech companies which receive any funding from overseas defence or national security agencies will be subject to the new national security test under new reforms which risk “strangling” early-stage firms, Q-CTRL founder Professor Michael Biercuk says.

Significant changes to Australia’s foreign investment rules passed Parliament late last year and are now in effect. The reforms included the scrapping of the monetary threshold, with all companies deemed to be “national security businesses” now subject to screening.

The Treasurer also has new call-in powers to block or divest an existing investment in an Australian company.

Guidelines released by Treasury last month revealed further details on how these changes will function in practice and which companies will be subject to the test.

Michael Biercuk
Q-CTRL chief executive Michael Biercuk

Along with tech companies producing services for military purposes, any firm which has received funding from defence or national security agencies in Australia or overseas will be subject to mandatory notification for security screening by the Foreign Investment Review Board (FIRB) if they are seeking foreign investment, a potentially time-consuming and expensive process.

Mandatory notification will be required for “any business that receives innovation, research or development funding from defence or national security agencies in Australia or from equivalent agencies overseas, and any business that produces goods, technology or services for military use that are subject to export controls”, the guidelines state.

While most Australia defence funding is for acquisition contracts, in overseas jurisdictions such as the US defence agencies are significant funders of basic scientific research, Professor Biercuk said.

Q-CTRL has twice subcontracted through the University of Sydney for research programs like this with the US, and this is common practice in the quantum computing sector, he said.

“Yet other companies pursuing a similar strategy are instantly branded a national security business. That to me is really alarming as much as the specific call out for quantum,” Professor Biercuk told InnovationAus.

“We simply need to make sure that we don’t hold onto technology so tightly that we strangle it. That’s the path we’re going down right now as an unintended consequence of this.”

Being subject to mandatory national security screening could potentially be fatal for an early-stage tech form seeking foreign investment, Professor Biercuk said.

“For a large organisation undertaking some land acquisition for hundreds of millions of dollars, a six month review process is inconvenient. But for a startup with eight months-worth of money, it is an existential risk,” he said.

“The real impact is the uncertainty here which makes Australia less attractive for foreign capital and it puts smaller businesses that are trying to get into these areas at risk based on the fact they don’t know how long it’ll take to get the investment cleared.”

The guidelines outline which companies will be subject to the new screening, which will take place when a foreign investor proposes to invest in what is deemed to be a national security business.

These are defined as “endeavours that if disrupted or carried out in a particular way may create national security risks”, including critical infrastructure operators and those manufacturing or supplying critical goods or technology for military or defence use.

Data companies storing information from defence forces or the personal information of those in the defence force will also be subject to the test.

Other companies will also be asked to voluntarily flag a foreign investment in order to avoid the potential of the Treasurer using the new “call-in” power to request a review.

Companies such as those operating in critical minerals, artificial intelligence, advanced manufacturing and quantum firms developing technology for civilian use and domain name systems are encouraged to voluntarily notify the FIRB.

Quantum computing firms developing technology for military use will be required to notify FIRB, while others developing tech for other uses are asked to voluntarily notify the authorities.

This removes any ambiguity that quantum companies could avoid the new national security tests, Professor Biercuk said.

“This has removed some ambiguity – I do believe a number of companies are trading on that ambiguity, and felt they could find ways around it, but that clearly has been closed off,” he said.

“Calling out quantum in this way is a very bold move – it signals that the government sees this as a defence technology irrespective of who is doing it, what level of maturity they are, how much capital they have and what direct engagement they have with defence.”

Professor Biercuk called on Treasury to introduce a new threshold to determine whether a startup or tech firm is actually a national security business.

“We’re very keen to work with Treasury to get this right – we want to ensure there is a balance, and we are not opposed to looking after national security. Ultimately all you need is a threshold based on the scale of defence contracts,” he said.

“If you’ve raised $500 million, the risk that disruption to the business poses is quite different to a company with two co-founders existing now on ramen noodles and a family investment. It’s just not the same, but we are treating them the same.

“If the objective is really to ensure that a business suffering a change of ownership doesn’t disrupt national security, then there has to be a test for how much integration a company has with defence supply chains. There is no suitable justification to say a team taking a basic science and research grant is a threat to defence supply chains if they were to vanish somehow.”

The federal government is also cracking down on potential foreign influence on Australian research, with revelations that “dossiers” are being created on research grants applicants’ potential foreign influence.

The Opposition has raised concerns that this is putting the reputations of academics at risk and threatening the integrity of the research agency.

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