With U.S. Government Authorization For First Direct Equity Investment Into A Private Company In Cuba, Here Is Important Context And Details. About The Parties; About The Message.

Foremost, let everyone not lose, or worse ignore, what is most significant:  After eleven months of review, for the first time in sixty years the United States government authorized United States equity investment and financing for a private company located in the Republic of Cuba. 

There is now a choice where one week ago there was not a choice.  Gaining choice is important, though nothing is guaranteed- a sound business plan and a sound Republic of Cuba-based enterprise are prerequisites to a successful Office of Foreign Assets Control (OFAC) of the United States Department of the Treasury in Washington DC application.  Equally necessary is an understanding of the inter-agency review process applicable to complex, policy-driven OFAC licensing.   

The Biden-Harris Administration (2021- ) directed the OFAC to issue the first license authorizing an entity subject to United States jurisdiction (which is not affiliated directly or indirectly with an individual of Cuban descent) to deliver a direct equity investment to and authorizing direct financing (microloan) for an officially registered privately-owned company (in the service sector) located in the Republic of Cuba and owned by a Republic of Cuba national.  Neither entity in the transaction is connected with the other in terms of commercial relationships or family relationships.  The parties did not have connectivity prior to the transaction.  The OFAC license was submitted on 10 June 2021 and the OFAC license was issued on 10 May 2022. The U.S.-Cuba Trade and Economic Council assisted the parties during the process.  

An LLC was specifically created in the United States to serve solely as the equity delivery vehicle and financing delivery vehicle for the transaction.  The use of an LLC was to lend familiarity both in the United States and in the Republic of Cuba. 

The self-employed and owners/management of micro, small, and medium-sized enterprises (MSMEs) and the government of the Republic of Cuba remain in debate as to degrees of latitude, flexibility, and opportunity.  Debating regulations occurs in every country.  Betting against the self-employed and MSMEs is a mistake.  The decision by the Biden-Harris Administration has shifted the odds in favor of the private sectors. 

During the last three years, the government of the Republic of Cuba has enacted statutory, regulatory, and policy changes impacting the self-employed and MSMEs located in the Republic of Cuba.   

While the process remains incomplete and uneven both from the perspective of the government of the Republic of Cuba and the perspective of those impacted, an important result has been an expansion of the role of the self-employed and MSME’s within the commercial, economic, and political infrastructure of the Republic of Cuba.

Coinciding with decisions by the government of the Republic of Cuba relating to the re-emerging private sector, beginning in 2019 the U.S.-Cuba Trade and Economic Council expanded its search for opportunities to support the re-emerging private sector.  A focus was toward the movement of capital and enhancing export and import channels although statutes, regulations, and policies within the Republic of Cuba governing such activity had yet to be fully implemented and statutes, regulations, and policies in the United States did not yet exist. 

An existing, twenty-two year focus of the U.S.-Cuba Trade and Economic Council was seeking from the OFAC the re-establishment of direct correspondent banking and re-establishment of U-turn transactions for financial institutions located in the United States and in the Republic of Cuba primarily so transactions relating to the export from the United States of authorized agricultural commodities, food products, healthcare products, and for authorized services would be direct rather than require the use of a financial institution located in a third country. 

• Incredulously, the Obama-Biden Administration (2009-2017) had authorized United States-based financial institutions to have correspondent accounts at financial institutions located in the Republic of Cuba, but did not authorize Republic of Cuba-based financial institutions to have correspondent accounts with financial institutions located in the United States. 

• For perspective, since the first agricultural commodity and food product exports using provisions of the Trade Sanctions Reform and Export Enhancement Act (TSREEA) of 2000 were delivered to the Republic of Cuba in December 2001, more than US$6.6 billion in cash payments have been paid to United States-based exporters- with every payment needing to transit through a third-country financial institution, for which it would receive a unnecessary commission.  Healthcare product exports (US$27.3 million since 2003) using provisions of the Cuban Democracy Act (CDA) of 1996 also require the use third-country financial institutions to effectuate payment to the United States-based exporters.

In the first half of 2021, a post viewed on a social media platform led to an email sent to the owner of a service-related company created by a Republic of Cuba national residing in the Republic of Cuba and operating in the Republic of Cuba.  The question posed: Would the owner of the company be interested in receiving an equity investment and loan to support the expansion of the company? 

Once the owner of the company agreed to the idea of an equity investment and loan, several months of discussions and negotiations commenced where the parties had the advice of legal counsel and outside advisors.

With the goal of maintaining confidentiality and ease of communication, John Kavulich, president of the U.S.-Cuba Trade and Economic Council, using personal funds created an LLC for the specific purpose of providing the equity investment and loan to the Republic of Cuba-based company.  Mr. Robert Muse, a Washington DC-based attorney of preeminent experience, was retained to draft the Contingent Investment Contract and to create and shepherd the license application (with supporting materials) submitted to the OFAC.  Mr. Muse had experience with drafting and shepherding OFAC license applications for companies where once issued the OFAC licenses would set precedent.

With that, an eleven-month process commenced.

If the OFAC were to issue a license, the expectation was to make public as quickly as possible the existence of the license.  This was consistent with the U.S.-Cuba Trade and Economic Council’s efforts since its creation in 1994- to expand lawful, transparent, accountable, and efficient opportunities for United States companies to engage with entities located in the Republic of Cuba and ensure that those opportunities become public for all to use or not use; their choice.

Why not identify name of the United States-based entity nor the name of the Republic of Cuba-based entity?

The first issue is addressed above.

As to the second issue, the parties need to await the decisions by the government of the Republic of Cuba.  There remains much to do, and the parties require privacy to do it.

There have been comments about the decision by the Biden-Harris Administration to authorize the OFAC to issue a license for the first direct equity investment in and first direct financing to an officially-registered, privately-owned company in the Republic of Cuba.

Individuals subject to United States jurisdiction residing in the United States have since the first one hundred and five self-employed categories were authorized in 1993 in the Republic of Cuba provided financial support to family members and friends.  Giving funds to an individual to create a business is not an unusual occurrence in any country.  What comes next, as the business matures, as the business seeks to expand, are investors who provide capital in return for equity and individuals and bankers who providing financing.  Where individuals criticize the government of the Republic of Cuba for a lack of transparency they too should applaud the Biden-Harris Administration for bringing legality and transparency to where it had been lacking.

Everyone seeking to support the use of the re-emerging post-COVID-19 private sectors in the Republic of Cuba- restaurants (paladars), bed and breakfasts (Airbnb-connected), manufacturers (equipment, food products, etc.), service providers (repair, Internet applications, refurbishment, design, cleaning, artists, etc.) should be applauding the recognition by the OFAC of the essential expansion from gifting to equity investment and financing.

The government of the Republic of Cuba will now respond to the initiative of the government of the United States.  The response may not require much effort- perhaps clarification of an existing regulation or policy; perhaps a new regulation or policy.  The result needs to provide a landscape welcoming for direct equity investments and direct financing to the self-employed and MSMEs. 

The Biden-Harris Administration has grasped an offensive commercial posture, as it should, which is reflected in part by previous statements:

• “Which is why I’m proud to say: If you look at my presidency so far, it’s a jobs presidency and it’s a small business presidency.”  Joseph Biden, 46th President of the United States 

• “But Cuba is not represented solely by its leadership. There are many different sectors that we can and should work with to support progress in Cuba- including entrepreneurs, religious groups, universities, young people and human rights defenders.”  Joseph Biden, 46th President of the United States 

• “The United States recommits to accompanying the Cuban people in your quest to determine your own future.  We will support those improving the lives of families and workers, cuentapropistas who have forged their own economic paths, and all who are building a better Cuba- and a better tomorrow for themselves in Cuba.”  Antony Blinken, United States Secretary of State  

Is not taking a chance, adopting a strategy for the unknown, what being an entrepreneur is all about?  The company in the Republic of Cuba moved at a speed faster than the government of the Republic of Cuba and at a speed faster than the government of the United States.  In the business community, taking such a risk is applauded.