The Chinese owner of California-based Grindr, the world’s largest gay dating app, was forced to sell the app after the Committee on Foreign Investment in the United States determined the ownership constituted a national security risk—a signal that foreign investment in U.S. social-media companies will be highly scrutinized from now on.
The Chinese owner, gaming company Beijing Kunlun Tech Co., acquired a major stake in Grindr in 2016. CFIUS flagged the deal and chose to intervene three years after the deal closed.
CFIUS is an interagency committee led by the Department of Treasury that reviews, modifies, and has the power to prohibit proposed foreign acquisitions and investments in U.S. businesses. CFIUS has been around for many years but has historically been primarily interested in foreign acquisitions of U.S. companies in the defense industry and certain critical infrastructure.
In August 2018, President Donald Trump signed into law the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA), which significantly expands CFIUS authority to review deals. The rationale for the law, as stated by Congress, is that the national security landscape has shifted in recent years, and so have the nature of the investments that pose the greatest risk to national security.
One major driving force was concern that China is weaponizing investment in advanced technology industries and data privacy.
Under the new law, CFIUS can review transactions in numerous new industries, including deals that involve U.S. companies that hold sensitive personal data of U.S. citizens. It was anticipated that health-care companies and U.S. financial institutions would undergo scrutiny under the newly expanded jurisdiction due to their possession of sensitive personal data. Social network apps were not, however, an obvious suspect.
CFIUS did not disclose its exact concern over the Grindr acquisition because its review and conclusions are confidential. U.S. officials familiar with the situation, however, noted that the government is nervous that the personal data that companies like Grindr collect could be exploited by China to coerce U.S. officials with security clearances and members of the public.
Grindr users grant access to sensitive information, including their real-time location and HIV status. The app has a track record of data privacy concerns after sharing certain user information with third-party vendors.
Watching Foreign Investment in Social Media
CFIUS is making a statement through its Grindr decision. Foreign, especially Chinese, acquisitions and investment in social-media companies that hold personal data, such as geolocation and health information, will now be highly scrutinized and potentially denied.
The government is treating access to sensitive personal data of U.S. citizens as a national security issue, in the same way as access to military weapons.
The decision also showcases CFIUS’s expanded power as a gatekeeper on major deals. Beijing Kunblun and Grindr had the opportunity to voluntarily notify CFIUS of the deal and seek approval before the deal closed. They chose not to. CFIUS has rarely reversed completed acquisitions. In this case, however, it decided to flex its new muscles and unwind a deal that closed three years ago.
The lesson for U.S. companies and foreign investors is that CFIUS is now clearly focused on social media and other industries that hold personal data of U.S. citizens and that CFIUS review should not be bypassed because CFIUS is not afraid to act.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Nevena Simidjiyska is a partner in the Corporate Department of Fox Rothschild LLP and co-chair of the firm’s International Trade Group. As an M&A and international trade attorney, she advises clients on the restrictions on foreign investment and acquisition of U.S. companies and counsels them through the review process conducted by CFIUS. She can be reached at email@example.com.