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On August 9, 2023, the Biden Administration took the first
significant steps towards implementing a new regime to restrict and
regulate U.S. investments in certain Chinese technology sectors.
The President released an Executive Order (“EO”) alongside an
Advance Notice of Proposed Rulemaking
(“ANPRM”) by the Department of the Treasury
(“Treasury”) that provides a framework for the U.S.
Government to prohibit, or require notification of, U.S. investment
into Chinese entities engaged in certain activities relating to:
(1) semiconductors and microelectronics; (2) quantum information
technologies; and (3) artificial intelligence (“AI”)
systems.
Comments on the ANPRM are due September 28, 2023, after which
Treasury will publish draft regulations.
Executive Order
In the introductory language to the new EO on “Addressing
United States Investments in Certain National Security Technologies
and Products in Countries of Concern,” President Biden states
that “countries of concern” are engaged in long-term
strategies to acquire and advance certain technologies that support
their military, intelligence, surveillance, and cyber-enabled
capabilities. The EO identifies these strategies as a threat to the
national security of the U.S. The EO goes on to describe how
countries of concern are exploiting the benefits of U.S. outbound
investment in those technologies sectors, which, in addition to
capital, often includes the intangible benefits such as
“enhanced standing and prominence, managerial assistance,
investment and talent networks, market access, and enhanced access
to additional financing.” While the EO acknowledges that the
open global flow of capital is a key aspect of U.S. policy, it
identifies the critical nature of certain national security
concerns as requiring regulation of outbound investments in these
areas.
The EO directs Treasury to issue regulations defining two types
of outbound investments in the three industry sectors: (1) those
that are prohibited; and (2) those that require notification to
Treasury. The EO also provides high-level definitions for certain
of the key terms. Of particular note:
- Countries of Concern are defined as those countries listed in
Annex A to the EO. The initial country of concern
identified in Annex A is China, along with the special
administrative regions of Hong Kong and Macau. - A Covered Foreign Person, in which investment will be either
prohibited or notifiable, is defined as a Person of a Country of
Concern that is engaging in “activities” (to be defined
by the regulations) relating to Covered National Security
Technologies and Products. - Covered National Security Technologies and Products are the
technologies and products that will be defined by the new
regulations in the three critical national security areas: (1)
semiconductors and microelectronics; (2) quantum information
technologies; and (3) AI systems. - A Person of a Country of Concern includes (1) citizens and
permanent residents of a country of concern who are not U.S.
persons; (2) an entity organized under the laws of, or having a
principal place of business, in a country of concern; (3) the
government of a country of concern (including all subdivisions), or
a person or entity owned, controlled, directed by, or acting on
behalf of such a government; and (4) any entity owned by any of the
persons identified in (1)-(3). - For the purpose of identifying the people and entities that
will be subject to the new regulations, a U.S. Person means U.S.
citizens and permanent residents, wherever located, any entity
organized under U.S. law (including all foreign branches of such
entity), and any person in the U.S.
Treasury ANPRM
Simultaneously with the EO, Treasury released the ANPRM
1 to provide further details regarding the
Administration’s current thinking on the new regime and solicit
comments from the public. In a Fact Sheet accompanying the ANPRM, Treasury
notes that U.S. laws already prohibit or restrict the export of
many of the technologies covered by the new regime to China. The
purpose of restrictions on U.S. investments in those sectors is to
prevent “helping accelerate the indigenization of these
technologies in the PRC.” Unlike the inbound foreign
investment review process administered by the Committee on Foreign
Investment in the United States, Treasury noted that it does not
contemplate the new outbound investment program would entail a
case-by-case review process of U.S. outbound investments. Rather,
Treasury expects the transaction parties to have the obligation to
determine whether a transaction is prohibited, subject to
notification, or permissible without notification.
The ANPRM seeks comment on a number of areas where Treasury
intends to further elaborate on the definitions in the EO in its
future draft rule. Provisions of note include:
- With respect to a Covered Foreign Person, Treasury is
considering elaborating on the EO’s definition, to cover as
follows:
(1) a person of a country of concern that is engaged in,
or a person of a country of concern that a U.S. person knows or
should know will be engaged in, an identified activity with respect
to a covered national security technology or product; or (2) a
person whose direct or indirect subsidiaries or branches are
referenced in item (1) and which, individually or in the aggregate,
comprise more than 50 percent of that person’s consolidated
revenue, net income, capital expenditure, or operating
expenses.
Among other input, Treasury is seeking public comment on the
unintended consequences of such a definition, including the likely
impact on U.S. investment flows and investment flows from third
countries.
- Treasury is considering the following definition for Covered
Transaction, which will trigger the prohibition or notification
requirements of the new regulations:
a U.S. person’s direct or indirect (1) acquisition
of an equity interest or contingent equity interest in a covered
foreign person; (2) provision of debt financing to a covered
foreign person where such debt financing is convertible to an
equity interest; (3) greenfield investment that could result in the
establishment of a covered foreign person; or (4) establishment of
a joint venture, wherever located, that is formed with a covered
foreign person or could result in the establishment of a covered
foreign person.
Treasury further notes that it is considering included
“indirect transactions” within the scope of Covered
Transactions to reach investment that could be used to evade the
new rules, including investing through a third-country entity.
Treasury also identifies the following transactions and
activities that it does not intend to include within the definition
of Covered Transactions: “university-to-university research
collaborations; contractual arrangements or the procurement of
material inputs for any of the covered national security
technologies or products (such as raw materials); intellectual
property licensing arrangements; bank lending; the processing,
clearing, or sending of payments by a bank; underwriting services;
debt rating services; prime brokerage; global custody; equity
research or analysis; or other services secondary to a
transaction.”
- Treasury also discusses its intent to identify Excepted
Transactions, which will not trigger the requirements of the new
rules. The definition of Excepted Transactions that Treasury is
considering would exclude from coverage: (1) investments (a) into
publicly-traded securities, (b) into index funds, mutual funds, and
other similar instruments, or (c) made as a limited partner, under
certain circumstances; (2) acquisitions of an entity, or all of the
assets of an entity, located outside of a Country of Concern; (3)
an intracompany transfer of funds from a U.S. parent company to a
subsidiary; and (4) a transaction pursuant to a binding, uncalled
capital commitment entered into before the issuance of the EO. - Treasury provides extensive definitions that it is considering
for each of the three Covered National Security Technologies and
Products categories. In addition to the specific technology
elements included under each category, the ANPRM defines the
activities with respect to each category that will trigger coverage
under the rules. Those definitions are too detailed to summarize
here and should be reviewed carefully by U.S. persons that engage
in investment in Chinese entities operating in technology sectors.
Treasury is seeking feedback on the specifics and potential
consequences of each of the definitions. Within the semiconductors
and microelectronics and AI systems categories, Treasury is
considering defining classes of both prohibited and notifiable
transactions. For the quantum information technologies category,
Treasury is considering only a class of prohibited
transactions.
We expect that the draft regulations, when issued by Treasury,
will include some material changes to the ANPRM definitions and
provisions that are based on feedback received from the public. We
will monitor these developments carefully and provide updates in
future Alerts.
Footnote
1.Treasury formally published the ANPRM in the
Federal Register on August 14, 2023.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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