Key Notes:
- A new Executive Order prohibits U.S. investments in semiconductors and microelectronics, quantum information technologies, and artificial intelligence capabilities in China and other countries of concern and imposes certain notification requirements.
- Certain passive and similar investments will be excepted from the restrictions.
- An Advanced Notice of Public Rulemaking seeks public comment on the scope of restrictions, notification requirements, and exceptions by September 28.
On August 9 President Biden signed an “Executive Order on Addressing United States Investments in Certain National Security Technologies and Products in Countries of Concern” (EO), which authorizes the Secretary of the Treasury to regulate certain U.S. investments into “countries of concern” in entities engaged in activities involving sensitive technologies that are critical to U.S. national security. Currently, the only identified country of concern is the People’s Republic of China (China), including the Special Administrative Regions of Hong Kong and Macau. Simultaneously, the Department of the Treasury (Treasury) released an Advanced Notice of Proposed Rulemaking (ANPRM) setting forth more proposed details on the scope of such investment restrictions and the manner of implementing this requirement and seeking public comment.
In a statement, the White House was careful to note that the United States is “committed to taking narrowly targeted actions to protect our national security while maintaining our longstanding commitment to open investment.”
Executive Order Restrictions
According to a Fact Sheet published by Treasury, the EO is necessary “to address the national security threat to the United States posed by countries of concern that seek to develop and exploit sensitive or advanced technologies and products critical for military, intelligence, surveillance, or cyber-enabled capabilities.” The EO prohibits U.S. investments in three advanced technology sectors in China and other countries of concern and imposes certain notification requirements for other sensitive outbound investments. The three sectors are (i) semiconductors and microelectronics, (ii) quantum information technologies, and (iii) artificial intelligence (AI) capabilities.
Notably, notwithstanding the three specified categories of national security concerns, the EO also instructs the Secretary of the Treasury – in consultation with other relevant executive departments and agencies, such as the Department of Commerce – to further define sensitive technologies and products that have a “critical role in accelerating the development of advanced military intelligence, surveillance, and cyber-enabled capabilities.”
As such, the new outbound investment screening regime will not take effect until after Treasury finalizes regulations to administer and enforce the “narrowly targeted” national security program.
Proposed Rulemaking
Treasury’s ANPRM is intended to provide initial details on key terms, the subsets of technologies and products within the three sectors, and aspects of the program’s implementation. Among other things, Treasury is seeking input on the subsets of national security technologies and products related to semiconductors, quantum information technology, and AI systems described in the ANPRM.
The ANPRM notes that Treasury is considering implementation of the EO through the establishment of a program that would (1) prohibit certain types of investment by U.S. persons into certain entities located in or subject to the jurisdiction of a country of concern, and certain other entities owned by persons of a country of concern, with capabilities or activities related to defined technologies and products; and (2) require submission of a notification to the Secretary of the Treasury by U.S. persons for certain types of investment into certain entities located in or subject to the jurisdiction of a country of concern, and certain other entities owned by persons of a country of concern, with capabilities or activities related to defined technologies and products.
The types of transactions anticipated to be covered by the national security program are those that could provide intangible benefits, such as acquisition of equity interests (e.g., via mergers and acquisitions, private equity, venture capital, and other arrangements), greenfield investments, joint ventures, and certain debt financing transactions that are convertible to equity.
Treasury has announced that it anticipates establishing some exceptions to the new outbound investment screening regime, namely certain types of passive and other investments “that may pose a lower likelihood of conveying intangible benefits.” For example, a U.S. investment into publicly traded securities, index funds, mutual funds, exchange-traded funds, certain investments made as a limited partner, committed but uncalled capital investments, and intracompany transfers of funds from a U.S. parent company to its subsidiary are all types of potentially excepted investments.
Importantly, the ANPRM states that Treasury is not contemplating that the program will involve “a case-by-case review of U.S. outbound investments.” Instead, the intention with any final regulations and program is that “the transaction parties will have the obligation to determine whether a given transaction is prohibited, subject to notification, or permissible without notification.” Parties to such transactions would also be expected to “know,” have “reason to know,” or “reason to believe,” based on publicly available information and other information available through a reasonable due diligence, whether the transaction is a covered transaction. Finally, the ANPRM states that the program will not apply retroactively to past outbound investments.
The ANPRM does not itself implement the EO and is not draft regulatory text. The ANPRM will be followed by draft regulations at a later date after Treasury has reviewed and considered input from other agencies and public comment. Overall, the ANPRM puts forth 83 specific questions covering various aspects of the program and seeks comments and views from any interested parties.
Written comments on this ANPRM must be received by September 28, 2023, and must be filed either via the federal government eRulemaking portal under Docket ID TREAS-DO-2023-0009 or RIN 1505-AC82 (preferred filing method) or via mail to: U.S. Department of the Treasury, Attention: Meena R. Sharma, Acting Director, Office of Investment Security Policy and International Relations, 1500 Pennsylvania Avenue NW, Washington, DC 20220.
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