Tech reaction mixed to increased scrutiny on foreign investments as overseas buyers express interest

Reactions from members of the Canadian tech community have been mixed in regards to the federal government decision, last week, to tighten oversight of foreign investments into Canadian companies during the pandemic.

“It could be dangerous if not managed effectively … but it could also save Canadian companies.”
– Elaine Kunda, Disruption Ventures

The move comes as BetaKit has learned of a foreign buyer expressing interest to the Canadian Advanced Technology Alliance in purchasing a Canadian company “inexpensively” amid the COVID-19 downturn.

The government’s new policy is part of an effort to curb “opportunistic investment behaviour,” as many Canadian businesses are worried about cash and seeing valuations fall amid the global crisis.

In his Sunday press briefing, Prime Minister Justin Trudeau noted the policy is a way to support Canadian startups.

“We also recognize that there are perhaps some startups with brilliant ideas that are facing a cash crunch right now that we would very much want to remain Canadian for the coming years who could be exposed to predatory foreign investors,” the prime minister said.

“We’re really happy that it’s on the [government’s] radar,” said Suzanne Grant, CEO of the Canadian Advanced Technology Alliance (CATA).

Grant told BetaKit the organization has already received emails from an undisclosed foreign company that expressed interest in buying a Canadian technology company “inexpensively.” Grant said the emails were received after the onset of the pandemic, but would not provide additional details on the matter. She did note that CATA has identified other small companies being bought out by large companies and foreign powers.

“If we could get companies funded and there wasn’t a risk that would be even better,” said Grant.

RELATED: Federal government commits additional $250 million in IRAP funding to support high growth startups

The new policy applies to all Canadian businesses but there is a particular focus on companies in the public health sector and those involved in the supply of critical goods and services, the Investment Review Division of Innovation, Science and Economic Development Canada (ISED) said in an April 19 statement.

In Canada, foreign investors are required to file an application with the Minister of Innovation, Science and Industry (currently Navdeep Bains) and to obtain approval in advance. Under the national security review provisions of the Investment Canada Act, which applies to foreign investments, the government can block an investment, allow an investment with conditions, or order the divestment of an already-completed deal.

The period of enhanced scrutiny is set to apply until the economy recovers from the effects of the COVID-19 pandemic. The government said it will be even more vigilant in looking at foreign investments by state-owned investors or private investors that are closely tied to or subject to direction from foreign governments.

“The government “must ensure such measures are temporary.”
– Brian Kingston, Business Council of Canada

“Some investments into Canada by state-owned enterprises may be motivated by non-commercial imperatives that could harm Canada’s economic or national security interests, a risk that is amplified in the current context,” the ISED statement noted.

Kim Furlong, CEO of Canada’s Venture Capital & Private Equity Association (CVCA), called the policy’s intent to mitigate predatory behaviour during the crisis “noble.”

“However, to truly comprehend the impact we will need to better understand how it is applied in practice,” Furlong told BetaKit. “In this respect, the CVCA is very much willing to work with the government to ensure competitive and innovative business activities are not impeded.”

Canada’s decision to tighten down on foreign investment scrutiny comes less than a year after the CVCA penned a letter urging United States agencies to exempt Canadian investors from a law aimed at increasing oversight of foreign investments in US businesses. Canada was later exempted from the regulations, which were meant to address growing national security concerns over foreign exploitation of certain investments.

Elaine Kunda, managing partner at Disruption Ventures, told BetaKit she would not be supportive of the Canadian government’s recent measure long term. She argued that such a decision should come with additional financial support to startups who are cash-strapped.

RELATED: Minister Bains says retaining top tier tech talent critical to Canada’s economic recovery

“It could be dangerous if not managed effectively,” she said. “But it could also save Canadian companies. Hopefully, it comes with further government investment so that these companies don’t have to rely on foreign investment or take-over.”

Jim Balsillie, chairman of the Council of Canadian Innovators (CCI), told The Globe and Mail on Sunday the policy change confuses foreign direct investment with foreign portfolio investment. He noted that it ignores the range of assets needed to protect the interests of Canadians.

Grant echoed Balsillie’s point that the policy does not clearly define foreign investment.

On Monday, the CCI told BetaKit it is currently in talks with the federal government in an attempt to get the policy statement updated to “better reflect the needs of the ecosystem and Canadian companies.”

Canada is not the first nation to enact tighter regulations over foreign takeovers during COVID-19. Australia temporarily tightened its rules on foreign takeovers at the end of March over concerns that strategic assets could be sold off unfavourably due to the pandemic. The European Union also warned that the crisis could “amplify state-owned economic actors’ penchant for strategically investing in critical and future sectors” in European nations.

It appears the Canadian government is simply following the lead of other nations, said Matt Roberts partner at ScaleUP Ventures.

RELATED: CVCA urges government to expand BDC programs, take additional measures to support Canadian startups

“I don’t see it as a negative or positive,” Roberts told BetaKit.

Roberts also speculated that Canada may be targeting countries that are not included in existing free trade agreements, such as China. He observed, however, that the Chinese government is slowing down its ability to move capital out of its own jurisdiction.

Brian Kingston, vice president of the Business Council of Canada, called the decision a “prudent response,” in a tweet, but stressed that the government “must ensure such measures are temporary.”

Photo by Floriane Vita on Unsplash

Isabelle Kirkwood

Isabelle Kirkwood

Isabelle is a Vancouver-based writer with 5+ years of experience in communications and journalism and a lifelong passion for telling stories. For over two years, she has reported on all sides of the Canadian startup ecosystem, from landmark venture deals to public policy, telling the stories of the founders putting Canadian tech on the map.

0 replies on “Tech reaction mixed to increased scrutiny on foreign investments as overseas buyers express interest”