Defence Innovation Meets Global Capital: Key Insights for Startups and Investors
Click “Subscribe Now” to get attorney insights on the latest developments in a range of services and industries.
Overview
Canadian companies that operate in sensitive technology, including sectors deemed important for national security, now face heightened national security scrutiny when raising capital under Bill C-34’s National Security Review (“NSR”). This regime extends government oversight under the Investment Canada Act (“ICA”) beyond traditional acquisitions of control to include early-stage financings, minority investments, and other non-control transactions and introduces mandatory pre-implementation filing requirements expected to come into effect with implementing regulations.
As a result, founders and foreign investors in defence, among other sensitive industries—which list is expected to be expanded once implementing regulations are finalized—should treat national security clearance, or at the very least, proactive engagement with the federal authorities, as a core legal component alongside corporate, intellectual property, and competition items. Thus, term sheets, definitive agreements, diligence checklists, and closing plans should be updated to reflect governmental pre-closing notifications, extended timelines, and a higher probability of mitigation measures.
This is particularly relevant for the acquisition of, or foreign investment in Canadian companies operating in: aerospace, space and satellite technology; robotics and autonomous systems; sensing and surveillance; advanced weapons; space technology; and AI-driven defence applications, to name a few, which are increasingly attractive to foreign venture capital, but sit at the intersection of commercial innovation and national security. As such technologies often hold “dual-use” applications, they serve both civilian and military purposes and, therefore, trigger heightened scrutiny under the NSR regime.
A Structural Shift in Canadian Investment Screening
For years, most companies and investors focused on the ICA’s longstanding “Net Benefit” thresholds and assumed government reviews were a big‑deal, big‑number issue. That is no longer the case. Although the ICA’s Net Benefit regime historically mattered less to venture deals because of high enterprise‑value thresholds (C$1.452 billion as of 2026 for most private WTO investors), recent reforms significantly expanded national security powers.
Under the NSR regime, any non‑Canadian investment may be reviewed if it could be “injurious to national security”, including minority stakes that provide access to sensitive intellectual property (IP), data, or board/strategic influence. There are no enterprise‑value thresholds under this regime.
Yes, you read that right: there are no enterprise-value thresholds under NSR.
National security concerns are particularly likely to arise where minority financing rounds include board or observer rights with broad information access; where foreign defence contractors or state-influenced, controlled or owned investors participate through equity investments, joint ventures, convertible instruments, or SAFEs capable of creating strategic influence; where IP licensing, R&D collaboration, cloud infrastructure, or AI model hosting arrangements provide continuing access to sensitive technologies or datasets; where assets such as AI models, training data, robotics systems, lab platforms, or defence-related certifications are transferred; or where cross-border restructurings relocate key IP, manufacturing capabilities, or model development activities to jurisdictions subject to foreign influence.
Key Takeaways
For founders and VC funds, this new regime affects how deals are structured, who invests, and what rights investors receive. Practical implications and recommended best practices are outlined below.
General Implications:
- Investors linked to state-owned enterprises or non-allied jurisdictions face the highest level of scrutiny. Allied countries, such as the U.S. and other Five Eyes partners are viewed more favourable, but are not automatically exempt from review.
- Governance and control rights matter as much as ownership percentage. Board seats, observer rights, and unrestricted access to information all raise concerns by granting access to sensitive technology and data.
- Reviews can extend deal timelines (reviews can vary from 45 days in simple cases to between 150 – 225+ days in more complex cases).
- Review results can vary from unconditional transaction approval to conditional approval with mitigation measures or undertakings, control restrictions, divesture requirements or full prohibition.
Best Practices for Startups and Founders:
Best Practices for Foreign Investors and VC Funds:
- Screen deals for ICA exposure early in the due diligence process.
- Prepare for government review periods and potential undertakings.
- Structure governance rights carefully and assess whether board rights, observer access, vetoes, or technical reporting rights create national security concerns.
- Narrow technical access rights to what is commercially necessary and avoid unrestricted access to sensitive IP, export-controlled technology, or defence-related data.
- Contact FIRES Branch proactively (voluntary filing 45+ days prior to closing, and at least 75+ days prior to closing where application for net benefit review is required).
- Monitor Canada Gazette for defence-specific regulations.
Pre-filing Requirements and Retroactive Voluntary Filings
As of now, there are no mandatory pre‑implementation filing requirements under the NSR, though mandatory notifications and Net Benefit applications still apply under the ICA framework. A mandatory NSR pre‑filing regime was introduced in Bill C‑34 and is expected to come into force once implementing regulations are finalized.
For the time being, voluntary notification is a key tool for certainty. Investors may submit a voluntary notification under the National Security Review of Investments Regulations. Once certified complete, this starts the statutory NSR timelines, including an initial 45‑day period for the government to decide whether to issue a notice that an NSR may be ordered. Without a voluntary notification, the government may initiate an NSR for up to five years after implementation. Accordingly, even post‑closing voluntary notification can materially shorten the window for potential review and provide greater certainty and peace of mind.
Conclusion
As Canada’s NSR regime continues to evolve, foreign investors in Canadian defence startups, M&A acquirers and VCs should consider the evolving regulatory environment in relation to foreign investments in sensitive industries. Deal success is increasingly shaped not only by valuation and commercial fit, but also by how early and effectively parties anticipate concerns around control, access to sensitive material technology and assets, and foreign investor participation. In practice, proactive structuring and early legal assessment are becoming essential tools for preserving deal certainty and avoiding last-minute regulatory friction.
Disclaimer
This article is provided for general informational purposes only and does not constitute legal advice. It is not intended to be, and should not be relied upon as, a substitute for advice from legal counsel. Parties should seek qualified advice before relying on any information contained herein or proceeding with any investment or transaction.
Contacts
