National Security and Investment Act (NSI): What founders and start-ups need to know

The government must now be notified in advance of acquisitions of or investments in companies that may pose a risk to national security. The eligibility criteria for notification is broad and covers many of the sectors UK start-ups commonly operate in.

The government now have powers to intervene in, and even block, acquisitions and investments that may pose a security risk. There are severe penalties for non-compliance and time implications for the approval process that businesses need to be aware of.

About The National Security and Investment Act (NSI)

The NSI Act is administered by the Investment Security Unit (ISU) in the Department for Business, Energy and Industrial Strategy (BEIS).

What you need to do to make sure transactions you are involved in are compliant?

The NSI Act applies to all transactions that are planned and in progress as well as any transactions that were completed after 12 November 2020.

There are four main steps to follow…

  1. Check if the NSI Act rules apply to your transaction.
  2. Check if your transaction meets the criteria for a voluntary or mandatory notification.
  3. If notification is required, submit a notification using the National Security and Investment service.
  4. After notification, the government will review your transaction and either clear it, impose certain conditions, or block or unwind it.

National Security and Investment Act (NSI) - the details

1. Check if the NSI Act rules apply to your transaction

The government has set out a number of ‘trigger events’ to determine if a transaction qualifies. A transaction will only qualify if all of the following conditions apply:

  • the transaction is of a right or interest in, or in relation to, a qualifying asset* or qualifying entity**
  • the entity or asset being acquiring is from, in, or has a connection to the UK
  • the level of control you acquire over the qualifying entity or qualifying asset meets or passes a certain threshold (for example, your stake or voting rights in a qualifying entity becomes higher than 25%)
  • the transaction was not completed before 12 November 2020.

(source:UK Gov NSI guidance)

* A qualifying entity is any entity (other than an individual) including a company, a limited liability partnership, any other body corporate, a partnership, an unincorporated association, a trust.

** Qualifying assets include land, tangible moveable property, ideas, information or techniques which have industrial, commercial or other economic value (‘intellectual property’).

2. Check if your transaction meets the criteria for a voluntary or mandatory notification

The UK government has created a simple flowchart to help with this process of identifying whether a transaction qualifies for notification. This is the best place to start in assessing whether a notification should be made.

Check out the National Security and Investment Act (NSI) flowchart.

Mandatory Notification

A mandatory notification is one where the government must be informed of a transaction.

This occurs where all trigger events at 1) are met and the transaction is in one of the following 17 ‘sensitive’ areas of the economy:

  • Advanced Materials
  • Advanced Robotics
  • Artificial Intelligence
  • Civil Nuclear
  • Communications
  • Computing Hardware
  • Critical Suppliers to Government
  • Cryptographic Authentication
  • Data Infrastructure
  • Defence
  • Energy
  • Military and Dual-Use
  • Quantum Technologies
  • Satellite and Space Technologies
  • Suppliers to the Emergency Services
  • Synthetic Biology
  • Transport

Check the full mandatory notification criteria in the government NSI guidance.

The government must give approval for all transactions that qualify for mandatory notification. If a qualifying transaction takes place without this approval, it is considered void and there are civil and criminal penalties for completing a notifiable transaction without gaining the necessary approval.

A civil penalty could require you to pay up to 5% of your organisation’s global turnover or £10 million, whichever is greater.

There is a retrospective validation process if a notifiable transaction has been completed without notifying the government.

Voluntary notification

A voluntary notification can be made where there is a transaction that meets the qualifying criteria but is not in one of the 17 sensitive areas of the economy.

Even if a notification is not made, the government still has the power to call in a transaction for a full national security assessment if it suspects the transaction may pose a national security risk.

Moreover, the government can assess transactions up to 5 years after they have taken place and up to 6 months after becoming aware of them if they have not been notified.

Check the full voluntary notification criteria in the government NSI guidance.

3. Submitting a notification under the National Security and Investment Act

Mandatory and voluntary notifications (and retrospective validations) are made via the National Security and Investment service.

The service can be used by:

  • notifying parties (such as acquirers)
  • representatives of notifying parties (such as law firms)

Access the National Security and Investment service.

4. Government reviews and national security assessments of transactions

After submitting a notification form, you will thereafter receive a case reference number and confirmation that your form has been accepted or rejected. Following this, you may need to resubmit a notification form if more information is required.

Accepted notifications enter in to a review period, at the end of which the government will either:

  • clear the transaction (tell you it can go ahead)
  • call in the transaction for a full national security assessment
  • request further information,
  • require you or people involved in the transaction to attend an attendance notice meeting

If a full national security assessment takes place, the end result (possibly after an extended assessment period), will be that either the government

  • clears the transaction,
  • allows the transaction to go ahead subject to conditions
  • blocks the transaction

What founders and start-ups need to consider

The NSI Act will certainly change things for transactions in and relating to the UK. It’s worth noting that the government expects that most notifications will be cleared rather than called in, and that the outcome of the government’s decision will be communicated during the first 30 working day review period.

However, founders and start-ups will need to factor in time for NSI processes for qualifying transactions. In the event of a full national security assessment being required and this going into an extended assessment period there could be lengthy delays to transactions. Founders will have to consider how to communicate and mitigate these risks during any transaction processes, bearing in mind this could take in excess of 2 months.

Thereafter, penalties for not complying are significant and can include severe financial penalties (the greater of 5% of global turnover or £10 million), and imprisonment. It’s therefore critical that the NSI Act is considered during every transaction.

Get legal support in relation to the National Security and Investment Act (NSI)

In conclusion, the introduction of the National Security and Investment Act (NSI) is likely to impact many UK start-ups and investors. The 17 sensitive areas of the economy cover many of the sectors where start-ups operate, including AI, computing hardware, energy and more, so mandatory notifications will not be unusual.

By offering stage-specific legal advice, we help high-growth businesses and start-ups to mitigate risks and comply with matters like the NSI. If you have a legal question on the NSI and how it may affect a planned transaction, please get in touch with our lawyers today.