At a press availability on May 10, Under Secretary of Defense for Acquisition and Sustainment, Ellen Lord, discussed the “matchmaking” service the Department of Defense (“DoD” or “Department”) is helping to create, to put small and struggling firms together with trusted sources of capital. This program may be viewed as a positive step that is an essential complement to the prohibitory actions that have dominated U.S. policy aimed at combatting certain foreign investment in the industries of the future.
This program originated in the fertile mind of a DoD lawyer newly assigned to support the Department’s role in the Committee on Foreign Investment in the United States (“CFIUS”) program. The lawyer worked on the Department’s efforts to block foreign (primarily Chinese) investment in capital-starved U.S. start-ups and other small companies on the grounds that allowing a takeover of those companies would endanger the national security of the United States. The lawyer recognized that prohibiting those companies from raising capital from foreigners would not ensure that the critical technologies being developed would be available to the United States; if there was no one to step in and provide the necessary capital once the would-be foreign investor was blocked, the company would likely fail. What, the lawyer wondered, could the Department do to ensure that the technologies – identified in the CFIUS process as being important to the national security of the United States – would continue to be developed and under the control of U.S. persons?
Working with clients within Industrial Policy and other organizations within what is now Acquisition and Sustainment, and with others across the Department, and with staff of the Armed Services Committees in the House and Senate, the lawyer drafted the statutory basis for the Trusted Capital Marketplace program, Section 1711 of the National Defense Authorization Act for Fiscal Year 2018. That provision directs the Secretary to
(a) …carry out a pilot program to assess the feasibility and advisability of increasing the capability of the defense industrial base to support –
(1) production needs to meet military requirements; and
(2) manufacturing and production of emerging defense and commercial technologies.
Among the activities under the pilot program authorized by the provision is
(5) Giving awards to third party entities to support investments in small- and medium-sized manufacturers working in areas of national security interest, including debt and equity investments that would benefit missions of the Department of Defense.
The Trusted Capital Marketplace program is in its early stages, with the forthcoming selection of one or more entities to establish a Trusted Capital Marketplace, with functional management the responsibility of a non-profit Trusted Capital Marketplace Manager. Selection is scheduled to take place on May 17.
We will be watching the development of the Trusted Capital Marketplace closely, and assessing its utility as a source of financing in lieu of foreign funding for small and other struggling companies developing technologies identified by DoD as being important for national security. We will also be assessing whether investment in such companies by trusted sources of capital is supported by the Department in a way that makes those investments a winning business proposition. There is potential here for a win – win – win (the small company, the trusted source of capital, and the Nation), but whether that potential is realized depends on how the program develops over the next year.