On August 9, 2023, the Biden Administration issued a long-awaited Executive Order (the EO) that is intended to address the potential national security threats posed by outbound investment from the United States to certain countries of concern. The EO identifies each of the People’s Republic of China, the Special Administrative Region of Hong Kong, and the Special Administrative Region of Macau as a country of concern (Country of Concern). Concurrent with the EO, the U.S. Department of the Treasury issued an Advance Notice of Proposed Rulemaking (ANPRM) that provides additional details on the intended scope of the new program and solicits public comments on various issues related to the program’s development and implementation.

The Executive Order

Although the EO does not itself prohibit any activity, it directs the Treasury Department, in consultation with the U.S. Department of Commerce and other U.S. government agencies, to establish a targeted national security program to prohibit – or require notification of certain types of – outbound investment into (i) certain entities located in or subject to the jurisdiction of a Country of Concern, and (ii) certain other entities owned by persons of a Country of Concern (such persons, covered foreign persons).

More specifically, the EO requires the Secretary of the Treasury to issue implementing regulations that:

• Require U.S. persons to notify the Treasury Department of certain investments involving “covered national security technologies and products”; and
• Prohibit U.S. persons from engaging, directly or indirectly, in certain other investments involving “covered national security technologies and products” that pose a particularly acute national security threat due to their potential to significantly advance the military, intelligence, surveillance, or cyber-enabled capabilities of Countries of Concern.

The EO defines “covered national security technologies and products” as sensitive technologies and products (as determined by the Secretary of the Treasury) in the following three sectors:

• Semiconductors and microelectronics;
• Quantum information technologies; and
• Artificial intelligence.

The EO also gives the Treasury Department authority to investigate violations of the EO and pursue available civil penalties for such violations.

Advance Notice of Proposed Rulemaking

The ANPRM lays out a framework for implementation of the program. The ANPRM identifies a number of key issues for public comment, including:

• The definition of “U.S. person” and “covered foreign person”;
• The scope of covered transactions and excepted transactions;
• The types of technologies and products that will qualify as “covered national security technologies and products” within the three sectors identified in the EO; and
• Various other considerations relating to how the program will operate in practice.

The comment period will remain open until September 28, 2023. These comments will help inform the Treasury Department’s drafting of the implementing regulations.

Key Takeaways

As expected, the EO is narrowly tailored to target a specific subset of U.S. outbound investment into China. However, the impact of the EO on Chinese investment more broadly will depend largely on how the implementing regulations evolve over the next several months. We also expect Congress to play a larger role in the implementation of the program going forward.

A&O’s Global Investment Compliance Group will continue to track these developments closely and provide further updates as the rulemaking process develops.