What do TikTok and Grindr have in common? | Mobile Dev Memo


This past Friday, President Donald Trump told a press pool aboard Air Force One that he would take action to ban TikTok, the video messaging app, from the United States. His statement was declarative and leaves little room for interpretation: “As far as TikTok is concerned, we’re banning them from the United States.”

First, a very abbreviated background on TikTok’s current precarious position: the company is a subsidiary of China-domiciled ByteDance, and Chinese companies are required to comply with data requests from the government. TikTok had been flagged as a potential national security threat as early as last November, and in recent weeks, in order to avoid a ban in the US similar to the one that is currently in place in India, ByteDance had proposed selling a majority state of TikTok to American investors (which was rejected by the Trump administration) or divesting the company to American ownership completely. Serious acquisition discussions between ByteDance and potential suitors, especially Microsoft, had apparently been progressing meaningfully before Friday, but those discussions seem to have now been paused absent further clarity from the White House.

In October 2019, Senator Marco Rubio sent a letter to Treasury Secretary Steve Mnuchin requesting that the Committee on Foreign Investment in the United States (CFIUS) review ByteDance’s 2017 acquisition of Musical.ly, which was later renamed TikTok, as that acquisition had been completed without government oversight. The CFIUS is charged with investigating foreign investment into American companies for the purpose of monitoring national security risks; the number of China-related transactions covered by the CFIUS has exploded in recent years (per the CSIS think tank):

Steve Mnuchin last week confirmed that TikTok is still under CFIUS review, and that the panel would be making a recommendation to the President soon. And while the legality of an outright ban is dubious and the mechanics are complicated, there is precedent in the CFIUS ordering divestiture: they did so with LGBTQ dating app Grindr, which was acquired by Beijing Kunlun Tech in 2018. In March 2019, the CFIUS informed Beijing Kunlun Tech, which had not submitted its plan to acquire Grindr to the committee ahead of time, that it had a June 2019 deadline to sell the app after its ownership was deemed a security risk.

One interesting wrinkle to the CFIUS review of ByteDance’s Musical.ly acquisition: Musical.ly was a Chinese company, headquartered in Shanghai when it was acquired, although it had a large Santa Monica office. This excellent legal analysis of the situation concludes that the acquisition remains within CFIUS purview.

Mobile advertising network Applovin similarly had its $1.4BN acquisition by Chinese private equity firm Orient Hontai Capital blocked by the CFIUS in 2017; the firms ultimately agreed to an $841MM debt investment. In 2018, Applovin accepted a $400MM minority-stake investment from US private equity fund KKR, valuing the company at $2BN.

The CFIUS committee is led by Treasury secretary Steve Mnuchin and is comprised of members of the Defense, State, Justice, Commerce, and Homeland Security departments. According to law firm Cleary Gottlieb, the committee has the authority to review any “covered transaction” that would result in the ownership of a US business by a foreign entity.

The committee was convened by President Ford in 1975 out of fear of Japanese acquisition of strategically important American companies, but it has received renewed relevance as President Trump amplifies his hostility with China over trade imbalances. The CFIUS can review proposed, in-process, and completed acquisitions, and it passes its recommendations onto the President, but the CFIUS’ mere rejection of a deal can be enough to stop or reverse it. The CFIUS’ review process can take between four and eight months.

Similar to Grindr, and consistent with the comments made by Secretary Mnuchin last week: the CFIUS could recommend that ByteDance’s acquisition of Musical.ly be rejected post hoc, forcing a sale. This seems like a more likely outcome than trying to orchestrate an outright ban: India (and Australia, which is considering banning the app) is able to block citizens’ access to the app using a national-level firewall, similar to that of the Chinese government’s, which effectively bans many US-based digital products. The US doesn’t have access to any such national blocking facility, and so a ban in the US would need to be enforced at the distribution (app store) level, which would require the application of legal acrobatics.

Photo by Vincent Guth on Unsplash

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