House China Panel Probes Sequoia Capital Over Chinese Tech Investments

Chairman Mike Gallagher (R-Wis.) presides over the first hearing of the U.S. House Select Committee on Strategic Competition between the United States and the Chinese Communist Party, in Washington on Feb. 28, 2023. Kevin Dietsch/Getty Images

The U.S. House China panel has requested details about Sequoia Capital’s Chinese investments in national security technologies, including artificial intelligence (AI), quantum computing, and semiconductor companies.

The panel is concerned that the company’s spinoff of its China operations will enable it to evade new controls on U.S. outbound investment to China.

Silicon Valley-based Sequoia Capital, one of the United States’ most prominent venture capital firms, reported $56 billion in assets under management, with 95 percent attributed to clients that are non-U.S. individuals, in its latest regulatory filing. Its Chinese investments focus on the technology, consumer goods, and health care industries.

In June, the company announced that it would split into three entities by March 2024. Sequoia China will be called HongShan, which means “Sequoia,” and the Indian and Southeast Asia business will be called Peak XV Partners. The U.S. and European entity will continue to be called Sequoia Capital.

Bipartisan leaders of the House committee, in a letter dated Oct. 18,  expressed concerns to the firm that “the split will give Sequoia Capital China a free hand to continue funneling U.S. capital into PRC companies,” using the abbreviation of the official name of the country, the People’s Republic of China.

In August, President Joe Biden issued an executive order prohibiting U.S. outbound investments to China in “national security technologies”—AI, semiconductors, and quantum computing. The Treasury Department has published preliminary rules, which listed limited partnerships into a venture capital fund or other pooled funds as excepted investments under the order.

“In short, a core underlying concern, that significant amounts of American money will continue to capitalize deeply problematic PRC companies, is likely to remain absent further congressional or executive branch action,” Rep. Mike Gallagher (R-Wis.), chair of the House Select Committee on the Chinese Communist Party (CCP), and Rep. Raja Krishnamoorthi (D-Ill.), the panel’s ranking Democrat, wrote.

Neil Shen, founding and managing partner of Sequoia Capital China, speaks at the Global Financial Leaders Investment Summit in Hong Kong on Nov. 2, 2022. Peter Parks/AFP via Getty Images

HongShan’s tech portfolio includes Chinese drone maker DJI, facial recognition tech firm DeepGlint, and ByteDance, the parent company of the social media platform TikTok. The committee leadership said in the letter that DJI and DeepGlint assisted the CCP’s persecution of Uyghurs in Xinjiang, which the U.S. State Department has identified as genocide.

The lawmakers also expressed concern that HongShan had invested in Chinese companies building AI for the CCP’s military.

“Now, by becoming a wholly independent and foreign company, Sequoia Capital China will be free to make investments that would have otherwise created legal liability or reputational harm to Sequoia Capital (and scrap even the internal restrictions imposed by its U.S.-based partner). At the same time, it appears likely that HongShan will be able to continue to draw upon a large pool of American capital in executing such investments,” the lawmakers wrote.

They asked Sequoia to provide a list of China-based companies that Sequoia Capital and HongShan invested in and whether such companies receive funding or revenue from Chinese state-backed entities. In addition, they asked for the companies’ risk assessment considerations in investments related to national security and human rights concerns.

“We’ve received the letter, are reviewing it, and will respond,” a spokesperson for Sequoia Capital said in a statement. “Since 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.

“As announced in June, we will move to completely independent partnerships and become distinct firms with separate brands no later than March 31, 2024.”

The lawmakers gave Sequoia a Nov. 1 deadline to submit its response.