The National Security And Investment Act: What Founders Need To Know

The National Security and Investment Act 2021 (the "NSI Act") is legislation that was introduced by the UK government in 2022. Its purpose is to give the government the power to look into investments made in UK businesses and intervene if they think an investment might pose a risk to the UK's national security.

If you are a founder of a company looking to raise money or exit, the NSI Act is something you should have on your radar. If the fundraise or sale you're looking to carry out is caught by the NSI Act then a notification needs to be made to the UK government before the transaction can complete. Completing a transaction in breach of the NSI Act can have significant repercussions.

The key features of the NSI Act are:

• Mandatory notifications: these are notifications that need to be made to the UK government for some transactions.
• Voluntary notifications: these are notifications that might need to be made for transactions which don't otherwise require a mandatory notification but may still pose national security concerns.
• Call in powers: can be used by the government to "call-in" transactions with a national security risk – in other words, these powers allow the government to look into transactions caught by the NSI Act, whether or not it was notified.

We'll go into more detail on each of these features below.

Does the NSI Act apply to my business?

The NSI Act applies to transactions involving companies which operate in what the government have identified as "sensitive" areas of the UK economy – in essence, these are sectors which impact on the UK's national security.

There are 17 sensitive areas:

• Advanced materials
• Advanced robotics
• Artificial intelligence
• Civil nuclear
• Communications
• Computing hardware
• Critical suppliers to Government
• Suppliers to the emergency services
• Cryptographic authentication
• Data infrastructure
• Defence
• Energy
• Military and dual-use
• Quantum technologies
• Satellite and space technology
• Synthetic biology
• Transport

There is nuance to these headline descriptions – for example, just because you run a company that uses AI does not mean that your company is captured within the scope of "artificial intelligence" for the purposes of the NSI Act. If you are not sure whether your company is caught by one or more of these sectors, the government has published guidance on them which you can find here.

Deciding whether your business operates in a sensitive area or not requires careful review and can be more of an art than a science. If there is any ambiguity, it seems that companies tend to err on the side of caution and work on the assumption that the NSI Act does apply (more on that below in the context of the voluntary notification regime).

It's worth noting that it's not just UK incorporated businesses that are caught by the NSI Act – the regime also applies to foreign companies if they operate in one or more of the 17 sensitive areas and carry out business in the UK.

I think my company operates in one of the "17 sensitive areas" and I'm looking to do a fundraise – what do I need to do?

The answer to this question really depends on the nature of the fundraise you are planning. Even if your company is clearly operating in a sensitive area, you are only required to notify the government under the mandatory notification regime to the extent an investor is acquiring more than 25%, more than 50% or more than 75% of the shares or voting rights in your company.

Let's say your company develops AI software that's used for advanced robotics and is clearly operating in at least one of the 17 sensitive areas. You're looking to raise money for your business which will result in a new investor getting 15% of the company's shares in the company. In this situation, there is no requirement to submit any notification under the NSI Act.

If, however, the fundraise would result in a new investor receiving 30% of the company's shares, then the NSI Act will require that the investor notifies and gets clearance from the government before the investment is made. This requirement to notify the government will also apply if your investor is an existing shareholder holding 15% of the shares, and their investment will take them to over 25%, or if they already hold 25% and their investment will take them to over 50%, etc.

Although it is usually the acquirer or investor that is the party that actually submits the notification filing, the company will need to work with them to provide the required information, and if a notification is needed it will need to be built into your transaction timetable.

If the transaction is caught by the mandatory notification regime and you don't notify the government the potential repercussions can be serious. As well as fines and potential criminal penalties, the transaction may be ordered to be unwound completely – in other words, the government can order the deal be reversed so that the investor would need to dispose of their new shares to take the company back to the position it would be in had the investment never taken place.

My company operates in one of the "17 sensitive areas" but I'm only looking to sell some IP – do I need to worry about the NSI Act?

Although the mandatory notification requirement is only for the acquisition of shares or control in corporate entities (companies, LLPs, corporate bodies etc.), the UK government has taken action in connection with the acquisition of assets (such as IP) if it thinks the transfer of that asset might risk national security.

This is where the voluntary notification regime becomes relevant. If you have a business operating in one of the 17 sensitive areas which is looking to sell or licence a key asset to someone, it may be sensible to submit a voluntary notification. The voluntary regime is also relevant if you're not sure whether your business operates in one of the 17 sectors.

What's the benefit of voluntarily notifying the government? The main reason is that, if the UK government looks at a transaction and decides it is within the scope of the NSI Act, it can "call-in" the transaction for scrutiny. If the government then decides the transaction raises national security concerns, it might impose a "final order" which could impose conditions on the transaction, or potentially unwind the transaction completely.

A voluntary notification provides you with this "call-in" decision in advance of a transaction completing, reducing the risk of a surprise review after closing.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.