Government updates guidance on the UK National Security and Investment Act

The UK government has published new guidance on the National Security and Investment Act (NSIA) focused on early-stage ventures, spin-outs and international investors, but has postponed a wider consultation on the regime.

The government had previously planned on launching a wider-ranging consultation on the NSIA regime this summer; however, it is now clear that this has become a casualty of the upcoming election.

No consultation is now expected to take place before the election on 4 July, with any subsequent action turning on the voting outcome. Labour has previously stated its proposals on changes to the NSIA as part of its "securenomics" plan that was first unveiled by the shadow chancellor, Rachel Reeves, last year.

The government has, however, published a new statement on section 3 of the NSIA, explaining how it expects to exercise its call-in power as well as updated guidance on the NSIA. The updated guidance is intended to provide clarification on the government's approach to the NSIA and reduce uncertainty for businesses and investors.

Exercise of the call-in power

The statement explains how the secretary of state expects to exercise the call-in power and provides further information on the approach taken to assessing risk posed by certain trigger events, acquisition targets, acquirers and the nature of control being acquired.

Notably, it discusses the potential call-in of acquisitions involving the incorporation of a new entity, where the incorporation includes a change of control of an existing asset or entity. Examples considered here are transfers of intellectual property (IP) and control over certain assets in newbuild energy infrastructure.

Universities and research bodies

The government has updated the guidance for investments in higher education and research-intensive sectors. This includes several examples of investment into entities such as universities, university spin-outs, and research organisations, among others. It also covers investments into qualifying assets such as IP, tangible property (for example, laboratory equipment), land or trade secrets.

In particular, the government has confirmed that it is interested in academic collaborations or acquisitions that relate to the 17 sensitive areas in the NSIA. The guidance further clarifies that for the purpose of involvement in university research, qualifying acquisitions under the NSIA may include contract or sponsored research, licensing IP and gaining control or greater control over a qualifying asset generated by the research it has funded.

Outward direct investment

The government has also updated guidance on outward direct investment (ODI), where a UK person is acquiring an entity or asset outside the UK. The updated guidance states that the NSIA may apply where an acquiring party gains control over a qualifying entity or qualifying asset outside the UK where:

• the qualifying entity carries on activities in the UK;
• the qualifying entity supplies goods or services in the UK; or
• the qualifying asset is used in connection with the carrying out of activities or supply of goods or services in the UK.

The section 3 notice also indicates that there are situations where ODI may constitute an acquisition under the NSIA, including, for example, the transfer of technology, intellectual property and expertise as part of the investment or when forming joint ventures overseas.

Notification forms

In addition, the guidance contains new advice for parties completing a notification form, including ensuring that each response is clear and can be read as a standalone response, as well as making sure that each applicable notifiable area is included.

It suggests further information that is helpful for a party to submit with its notification, including:

• why the party believes that the acquisition does or does not raise national security concerns;
• the rationale for the acquisition;
• relevant financial information; and
• details of related acquisitions or existing relationships between the target and acquirer.

The guidance also stresses the importance of not submitting a notification prematurely, highlighting that a lack of necessary information may cause delay or rejection by the government.

Osborne Clarke comment

The updates will be of interest to the ventures community. While the NSIA regime may first appear to be focused on transactions involving persons acquiring "control", it allows for government intervention in a wide range of venture transactions. This includes where a person acquires votes or shares in an entity of as low as 25% or even lower, where the person acquires voting rights that provide negative control over class consents or "material influence" over the entity.

The early-stage ventures community should take note of the highlighted possibility of call-ins and mandatory notifications for spin-out transactions. Where existing businesses are considering spinning out non-core elements of their businesses into separate ventures, careful advice will need to be taken on any NSIA implications.

Similarly, players in the well-established university spin-out, incubator and accelerator markets will want to take notice of the updated guidance, which emphasises the government's interest in reviewing transactions in the higher education and research-intensive sectors.

UK-based investors of all stages are also commonly making investments into businesses outside of the UK, and these businesses often operate across geographical borders. The updated ODI guidance means that investors will need to be aware of the potential for the NSIA to apply even when they are looking at opportunities abroad.

Osborne Clarke's OC Ventures team has considerable experience in assessing the potential application of the NSIA to transactions and helping clients avoid falling foul of the regime, risking their transactions being void and incurring potential civil and criminal penalties. From start-up to venture financing growth journeys to sale, IPO or international expansion, the team has a track record advising businesses, entrepreneurs and investors drive innovation. Our OC Ventures resource centre brings together experts from our international network to deliver a holistic and seamless service to clients throughout the ventures ecosystem.

Vincent Guereca-Adair, a Trainee at Osborne Clarke, contributed to this Insight.