Entrepreneurs sometimes assume that because their eight-person company is a startup in Snowflake, Arizona, it won’t participate in international transactions. That’s somewhat restrictive thinking, and startup founders should think big. Part of thinking big is considering doing business in the U.K., Dubai, and Venezuela. And along with this will be complying with export controls and U.S. sanctions.
Do Export Controls and U.S. Sanctions Apply to My Startup?
Built Inexplains that export laws, foreign investment controls, and sanctions prohibitions can apply to domestic companies. This is so even if they only do business within the United States. As a result, it’s in every U.S. entity’s interest—especially those in technology—to have some rudimentary knowledge of U.S. trade controls.
Ignoring these rules can result in a number of problems. They can arise at every stage of a company’s growth process.
Let’s look at some examples of how trade controls affect your startup.
Export controls or sanctions could prohibit certain funding opportunities or acquisitions. That could mean foreclosing significant opportunities at the last minute. So, you may have already spent a fortune preparing the transaction, only to see nothing for your investment. If your startup is thinking about a funding round seeking acquisition, the export classification of your products or sensitive personal data that your startup gathers may preclude certain foreign persons, entities, or funds from investing. If your business involves what the U.S. government considers “critical infrastructure,” additional prohibitions could be applicable.
Many startups have foreign employees. If so, they may require government approval to have access to work on your own technology. Plus, if you hired them without the required federal permissions, your startup will have committed a very costly violation. Transfers of U.S. technology to foreign persons within the U.S. is an export unless the foreign person has official permanent resident status. As a result, export controls and sanctions prohibit any foreign individuals holding only work visas access to work on your technology exports. This is true unless you’ve obtained an export license authorizing technology transfer to that person’s home country.
Restricted Parties, Another Form of Export Controls
Every U.S. entity must make certain that doesn’t do business with any restricted party. The restricted party lists include persons, entities, and organizations with whom the U.S. government has prohibited U.S. citizens from transacting. That means either directly or indirectly. Restricted parties are people and entities sanctioned for foreign policy and national security purposes, narcotics traffickers, transnational criminal organizations, terrorist organizations, foreign sanction evaders, and more. Moreover, foreign countries also publish their own export controls. Based on where your company does business, these foreign lists may also be applicable. A violation of these prohibitions can mean large fines and penalties. Plus, if it’s done knowingly, it can mean a jail sentence.
Classifications of Export Controls
If a customer asks you for the export classification of your startup’s product, but you don’t know it, it can mean weeks spent trying to determine this in the midst of a time-sensitive contract. Many customers understand and are committed to complying with U.S. trade controls, primarily due to the fact that they work in high-risk industries. In addition, some have previously suffered the consequences of a violation.
In any event, knowledgeable customers — especially those who may use your product abroad or export it — will demand that you disclose the export classification of the product. These customers will want to appreciate the accompanying regulatory limitations and requirements and make certain that these limitations dovetail into their business plan. based upon the complexity of your product’s export classification analysis, your startup may need to submit a classification request to the federal government. This takes time to prepare and process, and these types of delays in the middle of a transaction can cost your company valuable customers.
If parties in sanctioned locations are using your online product or service, your startup may be violating U.S. sanctions, despite the fact that you didn’t know or support the activity. As far as embargoed countries, most activity — including direct and indirect exports of goods and services — is totally prohibited. This includes providing online services to any individual in an embargoed location like Iran, Syria, Cuba, North Korea, or the Crimea in Ukraine.
Selling to Foreign Entities
If your exit strategy is to sell your startup to the highest bidder and if you sell your technology to a foreign party without first determining whether any export controls apply or a CFIUS (Committee on Foreign Investment in the United States ) filing is warranted, you may have an export or CFIUS violation. If this happens, the U.S. government could unwind the transaction and force the foreign party to divest. As a result, it’s important to preemptively consider whether any export or CFIUS-related restrictions may apply to potential foreign buyers or investors so you don’t waste valuable time and effort negotiating with parties that may not legally be able to close the transaction.
Summary of Export Controls and Sanctions
While your U.S. startup may not need to know chapter and verse about U.S. trade controls; however, you should understand that these rules don’t just impact those doing brick-and-mortar business abroad. You should try to avoid the obvious pitfalls and retain a trusted advisor with the relevant experience to help you identify potential issues and prepare for activities and transactions that may have a global connection— even if it might not be readily apparent.
U.S. entrepreneurs should contemplate these rules, so they don’t get shut down before they start.