The UK government announces changes to the mandatory notification regime under the National Security and Investment Act. What are the implications for life sciences and technology companies?
Last week, the UK government confirmed changes are expected to the UK’s FDI regime following a 12 week consultation. The amendments to the mandatory notification regime in the National Security and Investment Act 2021 (the NSIA) will come into force later this year.
The proposed changes are two pronged: narrowing certain sectors under the mandatory notification regime to promote investment while expanding other sectors considered key to national security.
Key takeaways are set out below:
Redefining Artificial Intelligence (AI) to exclude ‘off-the-shelf’ AI tools – refining the definition of AI to avoid capturing businesses which use AI tools but whose primary business is not the research and development of goods, services or software that use AI technologies. This should streamline investment and M&A processes. Companies that only use “off-the-shelf” or “non-consumer” AI systems will be exempted from the regime.
New business friendly exemptions – Companies in the Communications sector will benefit from a new de minimis exemption. Separately to this consultation, the government will proceed with its previously announced exemption of intragroup reorganisations with no change in ultimate beneficial ownership.
Increased scrutiny through an expansion of the mandatory regime – introduction of new Semiconductor, Critical Minerals and Water sectors, and new aggregate cumulative and incremental capacity thresholds of 500MW into the Energy sector regime.
No de minimis threshold for emerging technologies - the government has decided not to introduce de minimis/materiality thresholds, or to otherwise narrow, definitions in Data Infrastructure, Synthetic Biology, Advanced Materials, Energy, Critical Suppliers to Government, and Suppliers to the Emergency Services sectors. This is aimed at ensuring that emerging technologies and their diverse uses fall within the mandatory notification regime where necessary for national security.
The government intends to provide updated and detailed guidance for most sectors to address stakeholder feedback and improve legal certainty for the investment community. However, some investors will still want to see further reforms, such as a "fast-track" or "green lane" process for known, low-risk acquirers (e.g., those who have been cleared in previous transactions or are based in "Five Eyes" nations) and a further narrowing of the definitions of certain sensitive sectors.
The "AI" carve-outs will offer relief to many businesses that use AI-based tools for incidental activities, such as customer analytics, which might otherwise be caught under the current mandatory notification regime. However, due to the significant sanctions for failing to comply with the NSIA, parties involved in M&A or investment must remain vigilant. Companies potentially operating within the NSIA’s sensitive sectors should undertake a thorough assessment to determine if a mandatory notification is required.
More detail on these amendments to the schedules to the NSIA (Notification Acquisition) (Specification of Qualifying Entities) Regulations 2021, and the key implications for life sciences and tech companies, is set out in the table below.
| Sector | Key changes proposed | Implication for tech & life sciences companies |
|---|---|---|
| Regime scope to be narrowed | ||
| Artificial Intelligence | To narrow the scope of this sector to carve out from the mandatory notification regime:
| These exemptions will mean that entities which are only involved in end-use AI systems (such as SaaS and B2B startups using AI for standard automation) will no longer need to make mandatory notification filings. This will allow for a smoother run to completion for investment and M&A in those areas while allowing regulators to focus their attention on frontier AI that develops or modifies advanced AI or conduct related high-risk R&D. |
| Communications | Introduce a de minimis exemption from the regime for providers of Associated Facilities with annual turnover of less than £5 million (other than those that operate a cable landing stations, which will not benefit from the exemption). To narrow the definitions of to ensure that only repair and maintenance companies will only be caught if they:
| The changes will allow for smoother investment and M&A in low-risk SMEs, while tightening the government’s control over critical subsea data links and landing stations. |
| Intragroup reorganisations | To implement an exemption for internal reorganisations, meaning that transfers of shares or assets in sensitive sectors between parent and subsidiary or sister companies (i.e. where "ultimate beneficial ownership" doesn't change) will no longer require a mandatory filing. | This should significantly lower legal costs and reduce implementation timelines for corporate groups looking to restructure. |
| Sector | Key changes proposed | Implication for tech & life sciences companies |
|---|---|---|
| Regime scope to be expanded | ||
| Semiconductors | To create a new standalone Semiconductors schedule to the NSIA out of part of the current Advanced Materials schedule, which will be merged with Computing Hardware. The existing Semiconductors sector will be expanded to include: advanced packaging techniques, activities involving the wider design process of processing units and memory chips, semiconductor-related devices, and advanced chip designs. | The government wants this sector to be broad, as semiconductors are both dual-use and foundational for a range of other critical technologies. Deep-tech operators will therefore need to be mindful that activities involving semiconductor hardware may well fall within the mandatory notification regime. Government guidance is expected to clarify the relevant definitions., particularly on how ‘packaging’ is defined and to clarify that the provision of all designs, materials, parts or products that are qualified or certified will be covered by the regime. |
| Critical Minerals | To create a new standalone Critical Minerals schedule to the NSIA out of part of the current Advanced Material schedule. This Critical Minerals schedule will cover all the minerals identified by the UK’s Critical Mineral Intelligence Centre, and will expand on the Advanced Materials schedule by adding definitions for exploration, extraction, processing and recycling those minerals. The government will consider whether additional strategically important minerals necessary for defence or scientific purposes should be brought in-scope too. The government is also proposing to narrow this sector slightly by limiting the scope of the definition of an “enabler” and clarify which exploration and extraction land rights fall within the regime. | The government wants to ensure that low-risk activities are not caught by the regime. However, companies using rare earths in any way (including Tech hardware and Med-Tech firms) will need to consider the new exploring, exploration, extraction, processing and recycling definitions, and whether these mean that a mandatory notification will be required. |
| Energy | Introduction of a cumulative capacity threshold for aggregators of 500MW (not the 1GW requested by stakeholders) and 500MW incremental thresholds. | Smart-grid and Energy-Tech startups may hit mandatory notification triggers earlier in their scaling journey than otherwise. Government guidance is expected to clarify the relevant definitions and capacity thresholds. |
| Suppliers to the Emergency Services | Introduce subcontractors to direct suppliers in the scope. However, only subcontractors with Non-Police Personnel Vetting Level 2 or above clearance requirements will be caught. | Government guidance is expected to clarify the relevant definitions, including on ‘subcontracting arrangements’. |
| Sector | Key changes proposed | Implication for tech & life sciences companies |
|---|---|---|
| Regime scope to be maintained | ||
| Data Infrastructure | The government will not include the de minimis exemption requested by stakeholders as the government believes such an exemption would risk inadvertently excluding small but mission-critical data centres and creating an aggregate risk if many sub-threshold data centres are acquired by one entity or group. | All third-party data centres, cloud service providers, and managed service providers will remain within scope of the mandatory notification regime. Government guidance is expected to clarify the relevant definitions. |
| Synthetic Biology | The government will not narrow the scope of these broad definitions as requested by stakeholders, other than some minor drafting changes to gene/cell therapy exemptions. | Life Sciences companies must continue to navigate a complex, highly technical regime that remains a "catch-all" for biotech innovation. Government guidance is expected to clarify the relevant definitions. |
| Advanced Materials | Other than carving out the Semiconductors and Critical Minerals schedules from the existing legislation, no changes are anticipated. | This schedule is particularly broad and technical, but the government will not be narrowing its scope. Government guidance is expected to include, inter alia,: a technical annex with plain-English explanations; closer cross-referencing with industry standards; and more examples, including on the different sub-sections within the Advanced Materials schedule and treatment of intellectual property. |
| Critical Suppliers to Government | Public sector data provision moved here from Data Infrastructure; updated security clearance requirements. | Guidance expected to clarify compliance requirements and to improve certainty for Gov-Tech firms by consolidating public sector service requirements into a single, clearer schedule. |
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