The US Treasury Department is reviewing an investment in Manus AI, a Chinese startup valued at US$500 million.

Led by venture capital firm Benchmark, the investment is under scrutiny for potential non-compliance with 2023 restrictions on investments in Chinese companies, according to Semafor.

Benchmark’s legal team clarified that Manus AI is not developing AI models directly but operates as a platform integrating existing models.

The company is incorporated in the Cayman Islands, a structure commonly used by Chinese firms seeking foreign capital.

The investment has drawn criticism, with Founders Fund partner Delian Asparouhov commenting on the potential consequences.

🔗 Source: TechCrunch

🧠 Food for thought

1️⃣ The Cayman Islands structure is a standard pathway for Chinese tech funding

The Manus AI incorporation in the Cayman Islands follows a well-established pattern used by Chinese tech companies to access foreign capital while navigating regulatory restrictions.

By 2020, Chinese companies represented more than 60% of the total value of equities issued by firms in tax havens, with the Cayman Islands being the preferred jurisdiction 1.

This offshore structuring isn’t primarily about tax benefits but rather about circumventing Chinese regulations that restrict foreign ownership in strategic sectors, particularly technology 2.

The practice typically involves Variable Interest Entity (VIE) structures that provide foreign investors with control and profit claims without formal equity ownership, which explains why Benchmark’s lawyers may have felt comfortable with the arrangement 1.

Major Chinese tech companies including Alibaba, Tencent, and Baidu have long utilized this approach, establishing a precedent that many smaller tech firms follow 2.

Approximately 70% of foreign portfolio equity investment in China comes through these tax haven affiliates, demonstrating how entrenched this practice has become in the Chinese tech ecosystem 1.

2️⃣ AI investments face intensifying regulatory scrutiny amid US-China tensions

The Treasury Department’s review of Benchmark’s investment in Manus AI reflects a broader trend of increasing regulatory oversight of cross-border AI investments.

Recent Manus developments