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The National Security and Investment Act 2021 (NSI Act) is part of a global trend. The , , , and others have recently tightened measures on screening investments. Indeed, the EU has only to increase transparency and enhance scrutiny on foreign direct investment (FDI) screening.

Thomas Janssens of echoes the above point: ‘2022 has already seen a new regime come into force in the UK, while across the world, governments are paying greater attention to investments in dual-use and emerging technologies deemed critical to both military and economic strength.’

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The NSI Act gives the government the power to, among other things, intervene in a wide range of investments, prohibit transactions that may raise national security concerns, and apply mandatory notification obligations to acquisitions of certain shares or voting rights.

The NSI Act particularly applies to . The government has released highlighting 17 ‘high-risk’ sectors – including artificial intelligence, energy, synthetic biology, computing hardware, and so on – all of which will face particularly stringent scrutiny.

In this article, we explore the impact of the NSI Act on investment. We question whether compliance acts as a deterrent for future investment and discuss how the recent success in FDI and tech investment makes the potential deterrent of the NSI Act all the more concerning.  

Compliance as a deterrent

The introduction of the NSI Act means, in practice, that businesses need to discuss the obligations of the Act at early stages of any potential deals or investments. That inevitably results in heightened scepticism from foreign investors, as Tom Brassington, partner at , says in the ³ÉÈËÓ°Òô Market Tracker Report: ‘Some overseas bidders remain concerned as to whether their deals face an unacceptably high risk of hitting roadblocks.’

Compliance to the NSI Act may prove a deterrent to investment. Investors are aware that the notification procedure will likely impact time spent on relevant transactions. They are also aware that any complications will cause further delay or perhaps even a void transaction.

And, importantly, they are aware of the strict consequences that results from non-compliance. Sanctions for , with organisations facing fines of up to 5% of world turnover or £10 million, imprisonment of up to five years, and director disqualification for up to 15 years.

Trends in FDI and tech

The NSI Act came into force on 4 January, so the real impact of the Act remains to be seen. But the potential impact raises concerns, particularly because FDI has been booming in the UK, particularly in the tech space. The NSI Act threatens successful areas of investment.

Consider, for example, that inward and outward foreign investments has recently seen increases. In 2020, according to data found in the ³ÉÈËÓ°Òô Global Index, the UK’s inward FDI position continued its upward trend, increasing by £288.7bn to £1,929bn. Outward stock also increased, hitting £1,660bn. That shows a successful few years, particularly successful once you factor in all the other economic and geo-political challenges.

Investment in the tech space has seen profound growth, too. , for example, UK tech companies have raised more venture capital funding in the first five months of 2022 than in the whole of 2020. The UK is currently only second to the US when it comes to start-up investment, attracting greater funding than China, France, and India.

Plenty of that investment comes from the international community. US investors have already put a whopping £6.1bn into the UK tech sector in 2022, for example, and investors from Asia have taken part in more than 60 deals, investing more than £2.3bn. shows the extent of the threat posed by the NSI Act.

It is likely that the NSI Act will particularly hit tech start-ups, many of which rely on timely funding and possess less flexibility than later-stage companies. According to , Chief Legal Officer at , the NSI Act is already biting UK start-ups, with many forced to postpone funding rounds due to the new legislation.

As mentioned above, the extent of impact remains to be seen, but the potential deterrent to investment caused by the NSI Act may prove damaging. The damage may well be exacerbated by the fact the NSI Act particularly effects areas of economic and financial importance, areas that have been in recent years.