What Happened?
On August 9, 2023, President Biden issued a much-anticipated “outbound investment” Executive Order (E.O.) that seeks to blunt the advancement of “countries of concern” in sensitive technologies and products critical to the military, intelligence, surveillance, or cyber-enabled capabilities of such countries. The Executive Order specifies the People’s Republic of China (PRC), together with the Special Administrative Regions of Hong Kong and Macau within the “countries of concern” designation. Halting China’s advancement in critical dual-use technologies and associated capabilities is also a focus of multiple committees in the U.S. House and Senate.
The E.O. calls for the establishment of a new program designed to circumscribe certain venture capital, private equity, and other transactions in critical technology areas within “countries of concern.” This program will be implemented and administered by the Department of the Treasury, in consultation with relevant executive departments and agencies such as the Department of Commerce. The Secretary of the Treasury is directed to issue regulations that: (1) prohibit U.S. persons from undertaking certain transactions and (2) require U.S. persons to notify Treasury of certain transactions involving “national security technologies and products in the below categories:
Semiconductors and microelectronics: Consideration is being given to prohibiting U.S. investments in PRC entities engaged in the development of electronic design automation software or semiconductor manufacturing equipment; the design, fabrication, or packaging of advanced integrated circuits; and the installation or sale of supercomputers. NOTE: Treasury may require notification for U.S. investments in PRC entities engaged in the design, fabrication, and packaging of less advanced integrated circuits.
Quantum information technologies: Consideration is being given to prohibiting U.S. investments in PRC entities engaged in the production of quantum computers and certain components; the development of certain quantum sensors; and the development of quantum networking and quantum communication systems. NOTE: Treasury is not currently considering a separate notification requirement for quantum information technologies.
AI: Consideration is being given to requiring notification for U.S. investments in PRC entities engaged in activities related to software that incorporates an artificial intelligence (AI) system and is designed for certain end-uses that may have military or intelligence applications and pose a national security risk.
The Treasury Secretary will further define sensitive technologies and products in these categories for purposes of the prohibition and notification requirement. The E.O. provides the Secretary with the authority to investigate, as appropriate, violations of the Executive Order and accompanying regulations, as well as authority to pursue penalties for violations.
What Does This Mean?
This Executive Order dramatically expands the Treasury Department’s purview to include U.S. private sector overseas investment in areas of national security concern, namely semiconductor and micro-electronics, quantum information technologies, and artificial intelligence. Companies that previously invested in China in efforts involving these technologies were required to comply with U.S. export controls under ITAR and the EAR, as well as the domestic legal and regulatory regime. In light of this E.O., U.S. companies with plans to invest in China – and likely other yet to be specified “countries of concern” – now need to consider and assess: (1) whether investments in the aforementioned categories will be permitted, (2) incorporate compliance and notification processes for such outbound investments within their businesses, and (3) incorporate these legal requirements into training for U.S. and international staff.
What’s Next?
Immediately following the release of President Biden’s Executive Order (E.O)., Treasury issued an Advance Notice of Proposed Rulemaking (ANPRM) seeking public comment on various topics related to the implementation of the E.O. The rulemaking provides the likely framework for implementation, including:
Requirements on U.S. persons: The program anticipates that U.S. persons, wherever they are located, will be responsible for adhering to the prohibition and the notification requirement.
Specific categories of covered transactions: The program is anticipated to focus on U.S. persons undertaking certain types of transactions that could convey 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.
Involving covered foreign persons: The restrictions are anticipated to apply to investments in entities that are engaged in activities related to defined sub-sets of technologies and products, and that are organized under the laws of a country of concern, have a principal place of business in a country of concern, or are majority-owned by country of concern individuals or entities.
Deliberate approach to excepted transactions: Treasury is considering creating an exception for certain types of passive and other investments that may pose a lower likelihood of conveying intangible benefits or resulting in unintended consequences. Treasury is considering excepting certain U.S. investments 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 from a U.S. parent to its subsidiary.
What to Do?
Review for Potential Impact: U.S. companies need to rapidly assess the potential impact of these proposed restrictions on their investment plans, business operations, and revenue.
Provide Comments: If potentially affected, companies should take advantage of the opportunity to shape the draft implementing regulations. The ANPRM specifies that Treasury is requesting comments by September 28, 2023. While comments are not limited to these areas, Treasury is seeking input on:
- The sub-sets of national security technologies and products related to semiconductors, quantum information technology, and artificial intelligence systems as well as definitions of terms described in the ANPRM.
- How to shape a prohibition on U.S. investments in PRC entities engaged in activities related to software that incorporates an AI system and is designed for particular end uses with national security implications, such as military surveillance end uses.
- Feedback on the definitions and their potential implications on scope to ensure these measures are appropriately tailored in the final regulations.
Prepare: This regulatory effort has strong bipartisan support and will not go away. Potentially affected businesses should begin preparing now to:
- Identify in detail potential impacts to business operations to include impacts on legal commitments/agreements.
- Appropriately adjust overseas investment planning and consider alternatives, as necessary.
- Expand internal compliance structures and compliance training for U.S. and international staff.
The Chertoff Group can help you prepare for these requirements. Please contact us at info@chertoffgroup.com
Links to Key Documents:
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- Link to the Executive Order
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- Link to the White House Press Release
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- Link to Treasury’s Fact Sheet
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- Link to Treasury’s Outbound Investment Program Website
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- Link to Treasury’s Press Release
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- Link to the Federal Register Notice
