In December, Cloud Constellation was finalizing receipt of a $100 million investment that would help the startup deploy a ring of secure data-storage satellites in low Earth orbit.

By spring, Cloud Constellation had walked away from the deal, citing a review by the Committee on Foreign Investment in the United States, or CFIUS, as one of the reasons.

Cliff Beek, CEO of Cloud Constellation, said that the funds — roughly a third of what the company estimates it needs to build and launch its satellite constellation — were too difficult to accept because they came from a Chinese company.

“We did not close the round for various reasons,” Beek said in an interview. “One very important reason was our desire to do business with the U.S. government. And of course, other strategic relationships questioned the source of our funding as well.”

The Chinese company poised to invest in Cloud Constellation was Hong Kong-based HCH Group, a former Hughes Network Systems subsidiary the U.S. satellite communications company spun off in 2013.

Beek said the U.S. Commerce Department, one of seven federal agencies with a seat on CFIUS, was wary of the HCH Group investment.

Cloud Constellation’s satellite manufacturing partner, LeoStella of Seattle, was also leery of the HCH Group funds, Beek said.

CFIUS reviews can delay or cancel investment activity deemed a threat to U.S. national security. Prior to the Foreign Investment Risk Review Modernization Act of 2018, CFIUS focused primarily on mergers, acquisitions and investments where a foreign entity claimed 10 percent or more of a U.S. business. Under the new law, CFIUS can review any foreign investment in critical technologies if the foreign investor obtains certain rights, including access to information that is not publicly available and membership on a company’s board of directors.

The Foreign Investment Risk Review Modernization Act does not target China specifically, but it is widely seen as an attempt to limit Chinese investment in advanced technology, critical infrastructure and businesses that collect personal data on U.S. citizens. Chinese deals are likely to garner significant CFIUS attention, according to entrepreneurs, investors and attorneys who specialize in international trade.

CFIUS, which is chaired by the U.S. treasury secretary and draws its members from the State, Defense, Justice, Commerce, Energy and Homeland Security departments, thwarted a $416 million investment in satellite connectivity provider Global Eagle from Beijing Shareco Technologies in 2017. This year, the U.S. Federal Communications Commission blocked China Mobile’s application to provide cellular services in the U.S. following a negative CFIUS review.

Beek said Cloud Constellation still benefited from working with HCH Group, because while the equity investment didn’t close, it showed the potential of Cloud Constellation’s business.

“The experience was helpful, but it was clear early on — when the inbound calls were coming in from certain customers and vendors, and of course the U.S. government — that this investment was not the path for us to go down,” he said.

Cloud Constellation is in discussion with three separate groups that could invest without raising CFIUS concerns, Beek said.

Cloud Constellation still could count HCH Group as a customer one day, Beek said, and is working with the company on Asia-Pacific service offerings.

Beek said the difficulty CFIUS presents for U.S. startups courting foreign investment should trigger a broader policy discussion about how the United States can offset lost opportunities.

“If foreign investment is precluded into companies deemed as developing critical technologies, can economic incentives be legislatively made for private equity groups engaging in early stage investments?” he asked. “How do we create a pathway that legislates incentives for new investments in our space companies?”

This article originally appeared in the Oct. 7, 2019 issue of SpaceNews magazine.