Investing in AI companies: national security implications

If you’re thinking of investing in a company which is developing AI or an AI based product, it’s essential that you consider if government notification is required prior to making the investment. Under the National Security and Investment Act 2021 (the Act), acquisitions of shares in companies carrying out activities in specific sectors, including the development of certain AI, must be notified to the government. Failure to notify when required will result in a transaction being void, and the parties involved may be guilty of criminal offences.

In order to determine whether your transaction is caught by the government’s mandatory notification requirement under the Act, firstly, you must consider whether the number of shares you are acquiring is a ‘trigger event’. A ‘trigger event’ occurs when control of a qualifying entity is obtained.

Generally, control will be obtained if the percentage of shares and/or voting rights you acquire in the company increases:

a. from 25% or less to more than 25%

b. from 50% or less to more than 50% or

c. from less than 75% to 75% or more

As a result, even if you’re not acquiring 100%, or even if you are already a shareholder of the company and you are simply seeking to increase your shareholding, your investment could be caught. Similarly, joint interests and indirect interests, including interests held by a nominee, can also be caught. As such, even if you are investing via a nominee, a holding company, or a chain of companies, it’s important to consider the implications of the Act.

Secondly, you need to consider the business of the company you’re investing in, and whether this would be a qualifying entity. Any entity can be a qualifying entity, provided it carries on activities, or supplies goods or services, in the United Kingdom.

Next, you need to determine whether the business performs certain activities within one of the 17 areas of the economy that requires a notification to be made. Artificial intelligence is one of these 17 areas. The other areas are:

• advanced materials

• advanced robotics

• civil nuclear

• communications

• computing hcardware

• 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

Finally, you then need to consider whether the activity carried on by the company is caught by the Act. In relation to AI companies, you must consider:

• whether the qualifying entity carries on research into, or develops or produces goods, software or technology that use AI; and

• whether the AI work of the qualifying entity is used for identification or tracking, advanced robotics or cyber security

If the answer is yes to both of these questions, and you are gaining some control of the company as a result of a trigger event (as set out above), then you are legally required to submit a mandatory notification to the government.

The mandatory notification regime under the Act is complex, and we would always strongly advise seeking professional advice if you are acquiring shares in such a company to determine whether notification is required.