Illustration: Sarah Grillo / Axios

Congress is working on legislation that could theoretically prevent a San Francisco-based venture capital firm from investing in a Los Angeles-based startup. It could also stop a New York-based private equity firm from acquiring an Indianapolis-based tech company.

Bottom line: None of this is intended. But that's the thing about trade wars: They can come with a whole slew of unintended consequences.

At issue is the CFIUS fix bill being pushed by Sen. John Cornyn (R-TX), with bipartisan support in both chambers and from the White House. In its current incarnation, the legislation could prevent U.S. investment funds from investing in sensitive U.S. tech companies (e.g., semiconductors, cybersecurity software, etc.), so long as those funds have any Chinese limited partners.

Investment industry trade groups are working to gain support for carve-outs, arguing that most of these limited partners are passive. And that's gaining some traction in the House, but less in the Senate (so far). Treasury just seems to want a bill done, so it's fairly agnostic.

Complications:

  1. Legislators generally dislike carve-outs.
  2. Many VC funds are currently exempt from most SEC reporting requirements, so it could be difficult for CFIUS to know identities of VC firm LPs, what percentage of the funds rhey hold or if they have control.
  3. Private equity funds do have a bit more scrutiny on them, but Dodd-Frank rollback efforts and SEC budget cuts could soon create VC fund parallels.

There is also a separate discussion about Treasury using emergency powers to restrict Chinese investments in U.S. companies, which could result in reciprocal action that would make it harder for U.S. firms to invest in China.

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