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The China committee of the US House of Representatives has asked Sequoia Capital to provide details about investments in artificial intelligence and other high-tech sectors in the country made by the venture capital firm and its former Chinese arm since 2010.
In a letter to Sequoia obtained by the Financial Times, Mike Gallagher and Raja Krishnamoorthi, the top Republican and Democrat on the congressional panel, respectively, asked Sequoia to list investments in groups developing AI, machine learning, chips and quantum that are based or have “significant operations” in China.
Sequoia has come under scrutiny from lawmakers amid security experts’ concerns about US capital flowing to groups in China that help the country’s military. It has also faced criticism over investments made by its former affiliate, Sequoia Capital China. The arm is in the process of splitting from Sequoia and is now called HongShan.
The request for information comes four months after Sequoia moved to cut ties with the country by splitting its business in the US and Europe from entities that invest in China and India. Sequoia’s business had been the most successful effort by a Silicon Valley firm to capitalise on China’s tech boom.
Multiple people with knowledge of the firm’s move said Sequoia had hoped it would ease scrutiny from US officials and lawmakers that has been rising amid soaring geopolitical tensions between Washington and Beijing.
“By splitting its US and PRC entities, Sequoia is taking a step in the right direction by reducing the flow of US expertise to problematic PRC companies,” Gallagher told the Financial Times.
“But this doesn’t solve the deeper problem — Congress needs to pass legislation to prevent Americans from funding the Chinese Communist party’s military build-up and human rights abuses.”
In the letter sent on Tuesday, the lawmakers questioned if Sequoia’s decision to sever ties with its Chinese arm — which will be finalised by March 31 — would insulate some capital flows from US regulatory scrutiny.
HongShan relied on limited partners — the investors in its funds — to finance its deals, they said, so the split would “not prevent continued investment by US institutional investors into HongShan”.
The lawmakers said HongShan was also “likely” to scrap the national security screening mechanism that Sequoia had created to evaluate investments by its companies as scrutiny rose in Washington.
Sequoia said it would respond after reviewing the letter. A spokesperson said that “since their inception, each entity operating under the Sequoia brand has been independently owned, had separate investment teams, managed their own funds, and made independent investment decisions”.
American limited partners have not been targeted by President Joe Biden or Congress, and a number of institutions that invest in HongShan are confident they will be able to continue their relationship with the Chinese firm after the Treasury finalises restrictions on outbound investment mandated by a White House executive order in August.
The letter further accuses HongShan of funnelling US capital into investments that contributed to human rights abuses and military modernisation. HongShan said there was “no truth” to claims that it invests in businesses that operate “against our strict risk and compliance protocol, including violation of human rights and military involvement”.
In one example, the committee said HongShan had invested in a group called DeepGlint whose facial recognition technology was being used to control Uyghurs in Xinjiang. It said Sequoia and HongShan had provided capital to ByteDance, the parent company of the video social media app TikTok, which “exposes millions of Americans to CCP surveillance and influence”.
Krishnamoorthi told the FT that the letter marked the “next phase” in an investigation into how US money and expertise was “fuelling Chinese Communist party human rights abuses, military modernisation, and the technological advancement of a major competitor”.
He added that it was critical to understand how Sequoia and GGV, another San Francisco-based venture capital firm that recently decided to hive off its Asia-focused business, were approaching investment in China.
The lawmakers have asked Sequoia to respond by November 1. Among their demands was a request to identify any limited partners in Sequoia Capital or HongShan that are domiciled in China or that manage funds on behalf of state-owned or affiliated entities. It also asked Sequoia to confirm that roughly 50 per cent of HongShan’s limited partners are US investors.
Additional reporting by Kaye Wiggins in Hong Kong
Read the full article here
