CALGARY — Financial services firm Neo Financial could face heightened scrutiny in its bid to become an officially recognized payments provider in Canada after the Pentagon designated Tencent—reportedly a key Neo investor—as a company with links to China’s military. 

In November, The Logic first reported that a Chinese investor whom Neo declined to identify had led a new $362-million Series D funding round, which included $112 million in equity and $250 million in debt. The Globe and Mail later identified the investor as Chinese tech giant Tencent, which reportedly now holds a roughly 10 per cent stake in Neo, according to a term sheet outlining the deal. 

On Monday, the U.S. Defense Department blacklisted Tencent and a handful of other well-known Chinese companies—including battery maker CATL, which supplies Ford, Tesla and other major automakers—on national security grounds. 

Inclusion on the list comes with no specific legal ramifications, but serves as a stark warning to American—and by extension, Canadian—companies about the risks of doing business with the listed entities. Tencent’s stock closed 7.3 per cent lower in Tuesday trading in a sign of investors’ awareness of the news. 

U.S. intelligence agencies have long claimed that Chinese technology companies pose a national security threat given their close proximity to other sectors and government bodies, including its defence forces. In a report last month the U.S. Defense Department asserted the country’s broader military strategy aims to “strengthen [China’s] instruments of national power by melding aspects of its economic, military and social governance.” 

Calgary-based Neo is one of Alberta’s most prominent startups, and the company’s executive team—composed of former SkipTheDishes executives Andrew Chau, Chris Simair and Jeff Adamson, as well as Calgary entrepreneur Kris Read—has laid out ambitious plans to disrupt Canada’s financial sector through a range of low-fee financial products including rewards-based credit cards. 

In a written statement, a Neo spokesperson said the company is Canadian-controlled and that no investors have access to clients’ customer data or personal information. 

“As a part of our latest round of financing, there were no changes in governance or control, and no board seats were provided,” said the spokesperson, who declined to identify themselves despite The Logic’s requests. “The lead investment has been made passively in a minority position.”

In a press release, Tencent said that it was “neither a Chinese military company nor a military-civil fusion contributor to the Chinese defense industrial base” and that its inclusion on the list was a “mistake.” The statement said the company would try to convince the U.S. to remove it from the list, and would take legal action if necessary.

Neo has applied to be recognized as an official payments company under the Bank of Canada’s new regulatory mandate, which will see the bank supervising digital firms. Applicants will be subject to a national security screen conducted by Finance Canada. 

The legislative changes fall under the Retail Payments Activities Act, which received royal assent in 2021 and which comes into full force later this year. Ottawa introduced the regulations to protect the rising number of Canadians who use innovative digital platforms, rather than traditional banks, for their financial needs. 

Fintechs like Neo, which offers credit cards, savings accounts and other products, will have to acquire Bank of Canada approval by Nov. 1. 

The Bank of Canada website lists Neo as an applicant, but the company declined to clarify the status of its bid, or even verify it had applied. 

Spokespeople for Finance Canada and the federal innovation department, which oversees national security reviews, did not immediately respond to The Logic’s request for comment. 

A spokesperson for Conservative leader Pierre Poilievre also declined to comment. 

Brigitte Goulard, senior counsel at legal firm Torys, said companies applying for payment service provider status will be screened based on a company’s foreign ownership, among other things. Goulard did not speak to Neo’s application in particular as she is not familiar with the specifics. 

“When they apply to be a PSP—a payment service provider—they have to disclose in their application form if they have any foreign ownership, and foreign ownership to the extent that it may create some issues with the government.” 

According to documents The Logic obtained, the Chinese investor accounted for $68 million, or roughly 60 per cent, of the $112 million Series D equity raise. Other investors, which Neo publicly identified, included Shopify founder Tobi Lütke and Silicon Valley venture capitalist Peter Thiel’s Valar Ventures. 

Shares in Neo’s latest fundraise sold for around US$5 apiece, far below the US$19 per share the company had received in its previous round. 

The company claims to have 1.3 million customers and expects to reach profitability sometime this year, according to a document to prospective investors viewed by The Globe and Mail.

With files from Laura Osman in Ottawa.