Most tech companies may be spared from the strict new foreign investment national security test rules, with the government releasing draft legislation on the significant reforms.
The federal government announced the reforms to the foreign investment rules in early June, the most significant changes to the critical infrastructure laws since they were first introduced.
It has now unveiled draft legislation for the first tranche of reforms, focusing on which businesses will be covered by the strict new national security test when trying to receive a foreign investment.
The new laws will cover telcos, critical infrastructure operators, companies manufacturing defence technology for another country and those storing or with access to classified or personal data relating to defence and intelligence personnel.
Under the changes, the Treasurer will be handed new powers to change, block or divest an attempted investment in an Australian company by a foreign player if it is deemed to be necessary by a new national security test.
The current $275 million threshold will be scrapped, with the test to apply to any company deemed to be a “national security business”. This aims to prevent investments in some sensitive sectors slipping through the cracks and not being tested, while other rules will be streamlined to make it easier for non-sensitive businesses to secure foreign investment.
“The presence of monetary thresholds means investment in some of our most sensitive sectors are not screened, even where an investment raises national security concerns. Businesses in these sectors may be vulnerable if their valuations are below existing screening thresholds,” the government said.
Treasury has now unveiled draft legislation for the reforms and is running consultations on them for the next month. It is doing this in two parts, with the first legislation released mainly covering the definition of a “national security business” that the new rules will apply to.
“National security businesses are endeavours that if disrupted or carried out in a particular way may create national security risks. This means that national security risk may arise if national security businesses are controlled or influenced by persons acting not in Australia’s interests,” the draft explanatory memorandum said.
Businesses to be covered by the new rules include telcos, critical infrastructure operators including data centres, any business involved with the development, manufacturing or supply of critical goods or technology for a military end-use by defence and intelligence personnel of another country or businesses providing other services to these groups.
The laws also cover businesses that store or have access to security classified information and businesses that collect, store, maintain or have access to the personal information of defence and intelligence personnel which “if accessed or disclosed could compromise Australia’s national security” or used to gain influence.
After the changes were first flagged, there were concerns in the tech sector that they could impact local companies and startups seeking to raise funding from overseas, or those looking to achieve an exit.
The definition used in the draft legislation isn’t as all-encompassing as previously feared, and won’t include most tech companies, Australian Investment Council chief executive Yasser El-Ansary said.
“Some aspects of these reforms will bring closer scrutiny to investments into businesses deemed to be in sensitive sectors,” Mr El-Ansary told InnovationAus.
“Some types of businesses that fall within the critical infrastructure and information technology sectors could potentially come in for closer review by the Foreign Investment Review Board (FIRB), but that’s not a surprise given the government’s desire to play a more hands-on role in managing the national interest in a cyber-enabled world.”
“Overall though, the definition of what constitutes a ‘national security business’ is not as broad-ranging as was originally suggested – the proposed design looks to be quite targeted, which ultimately will mean that not every type of tech business will be exposed to FIRB controls.”
The planned efforts to streamline the process for companies not defined as “national security businesses”, which will be outlined in draft legislation next month, will also likely benefit tech companies, Mr El-Ansary said.
“There are important reforms included in this package that will help to simplify the way the regime applies to private capital investment in Australia. Businesses looking to attract private capital investment to help grow and expand domestically and internationally will benefit from some of the changes proposed in these reforms,” he said.
“The private capital industry relies on the flow of inbound investment from institutions such as pension, university and sovereign wealth funds in developed markets all over the world, and the way the existing foreign investment regime works results in a number of handbrakes being imposed on that inbound flow of capital.
“We want to make sure that these changes ultimately lead to more investment capital being made available to support the growth of Australian businesses, which is critically important to our capacity to create tens of thousands of jobs across our economy in the years ahead,” Mr El-Ansary said.
“We will continue to work with government on these proposed reforms to ensure they deliver the market outcomes that the policy design objectives set out to achieve.”