As the People’s Republic of China (PRC) has emerged as a major economic power and competitor, the U.S. has leaned heavily on and enhanced its foreign direct investment regime over recent years to protect its national security and economic interests from acquisition by foreign companies — largely driven by its concern over both direct and indirect Chinese investment in the U.S. In 2018, Congress enacted the Foreign Investment Risk Review Act (FIRRMA)[1], amendments strengthening its national security law known as the Committee on Foreign Investment in the United States (CFIUS).

Under CFIUS, a foreign company seeking to acquire a controlling interest in a U.S. business may voluntarily file a notice with the Committee for a determination of whether the prospective ownership by the foreign investor threatens national security. The Committee then conducts a review and, if the acquisition has national security implications, the Committee can then conduct a more in-depth investigation. If the Committee makes a determination that national security will be threatened, it can recommend to the president that it block the transaction unless the transaction is abandoned by the parties or unless the Committee and the parties enter into an agreement to place conditions on the acquisition to mitigate the national security concerns. The FIRRMA Amendments made substantial changes directed at protecting U.S. technology from being acquired to the detriment to the U.S.’s technological competitiveness.

The PRC has responded by adding to its longstanding laws regulating and, in some cases, prohibiting foreign investment in Chinese enterprises with its own foreign direct investment (FDI) regime. In 2020 the PRC’s National Development and Reform Commission (NDRC) adopted issued the Measures for the Security Review of Foreign Investments (Security Review Measures)[2], a national security regime modeled on CFIUS.

The Biden Administration is now considering introducing for the first time an outbound investment regime, most likely by Executive Order, which reportedly would prohibit, limit or discourage certain types of investments by U.S. investors in Chinese enterprises and enterprises of other “unfriendly” countries.

These foreign direct investment regulatory actions must be viewed with the backdrop of a series of other legislative and regulatory measures and countermeasures that the U.S. and China have taken in battling for competitive superiority and protectionism. Both countries have issued export control and trade measures to restrict trade that is perceived by that country as threatening its national security. Both companies have imposed trade tariffs on exports from the other country. President Biden and then-President Trump issued Executive Orders limiting U.S. companies from doing business with Huawei or purchasing Huawei’s 5G network products. Trump took executive action against TikTok and WeChat and issued an Executive Order prohibiting the purchase, exportation, or other transfer to Chinese entities on information and communications technology or services that threaten U.S. national security in several respects.[3] Biden has taken executive action prohibiting U.S. companies from investing in securities of Chinese companies with military ties.[4] And the PRC has taken countermeasures and has responded in kind in reaction to these actions. A discussion of every aspect of this U.S.-China competition is beyond the scope of this article, which will focus on the foreign direct investment laws and measures each country has enacted and discuss their legal implications.

U.S. Inbound Foreign Direct Investment

CFIUS

Filing under CFIUS for the most part is voluntary, with certain exceptions. However, if the Committee discovers a transaction over which it has jurisdiction subsequent to the closing of the transaction, it can require the parties to file a notice. If it then determines that the transaction threatens national security, it can require a rewind of the transaction and divestiture of the acquisition, or alternatively require mitigation of the national security threats.

CFIUS has jurisdiction to review acquisitions in a U.S. business in which a foreign person will have a controlling interest or minority non-passive investments in certain types of U.S. businesses called U.S. TID businesses. A U.S. TID business is one that either (1) owns, operates, supplies or services critical infrastructure as identified in the CFIUS regulations, or (2) produces or develops critical technologies, or (3) maintains or collects sensitive personal data of U.S. citizens that may be exploited so as to threaten U.S. security. The term “critical technologies” has been expanded to include “emerging and foundational technologies”, which the U.S. Department of Commerce has identified through its export control restrictions to include subsets of technologies relating to advanced computing, advanced engineering materials, artificial intelligence, autonomous systems and robotics, biotechnologies, communication and networking technologies, quantum information technologies, and semiconductors and microelectronics. The concept of “emerging and foundational technologies” was introduced by FIRRMA and expanded the scope of critical technologies beyond the traditional defense industry and munitions items that had traditionally been targeted. The U.S. Department of Commerce have now folded the concept of emerging and foundational technologies into a broader basket of export-controlled categories called “Section 1758 technologies.”[5] This expansion clearly focused on preventing or curbing China’s acquisition of certain U.S. technology.[6]

The inclusion of “sensitive personal data” of U.S. citizens within CFIUS’s expanded scope is intended to protect the U.S. from foreign cyberattacks and other invasive uses of personal data of U.S. citizens that might threaten U.S. national security or allow for the tracking of U.S. citizens.

FIRRMA also expanded CFIUS’s coverage to include the ownership, lease, or “concession” of certain real estate. To be a covered transaction, that real estate has to be either located within or functioning as part of maritime ports or airports or presenting a national security threat to sensitive military or other government facilities. The latter is defined as located either (i) in “close proximity” to such facilities, (ii) as to reasonably allow eavesdropping or the collection of intelligence from such facility, or (iii) so as to possibly expose national security activities (as defined above) at such facility.

The parties to the transaction can file either a declaration, which is an abbreviated short form filing for expedited determination, or a notice, which is a more full-blown filing with a lengthier review period. The filing of a declaration is designed for transactions for which the parties do not foresee any national security threats within CFIUS’s purview and for which the parties anticipate an expedited sign-off by the Committe Upon filing of a declaration, if the short form declaration will not suffice, the Committee can require the filing of a notice. If the Committee has national security concerns, it can order an investigation, which entails a lengthier review process.

CFIUS creates a carve-out pathway, although somewhat limited, for foreign investment through U.S. funds. Moreover, if a U.S. fund does not own, and does not intend to acquire, portfolio companies that engage in national security activities, foreign investment in that fund is not really affected by CFIUS. Congress made an attempt to balance protecting national security by its regulation of foreign direct investment in the U.S. with allowing the free flow of capital into the U.S.

Executive Order 14083

President Biden issued Executive Order 14083, titled Executive Order on Ensuring Robust Consideration of Evolving National Security Risks by the Committee on Foreign Investment in the United States on Sept. 15, 2022, further instructing the Committee on additional guidelines to implement in considering CFIUS filings. The Executive Order is designed to ensure that CFIUS remains an effective tool to combat foreign access to sensitive data and technologies that could be used to the detriment of national security interests of the U.S. These guidelines focus on foreign investments that potentially could (1) cause supply chain disruptions, (2) provide foreign access to manufacturing capabilities, services, critical mineral resources, or technologies that are fundamental to United States technological leadership, such as microelectronics, artificial intelligence, biotechnology and biomanufacturing, quantum computing, advanced clean energy, and climate adaptation technologies, (3) erode U.S. cybersecurity or allow cyber intrusions or other malicious cyber-enabled activity (including interference in U.S. elections), (4) provide foreign direct or indirect access to capabilities or information databases and systems in furtherance of malicious cyber-enabled activities adversely affecting the interests of the U.S. or U.S. persons, including the sabotage of critical energy infrastructure, and (5) pose threats to U.S. national security by advances in technology, including by considering potential risks posed by foreign persons who might exploit access to certain data on U.S. persons to target individuals or groups within the U.S. and the transfer of U.S. persons’ sensitive data to a foreign person who might take actions that threaten to impair the national security of the U.S. The Executive Order instructs the Committee to consider incremental investments over time in a nationally sensitive sector or technology that cumulatively could threaten national security and a series of acquisitions in the same, similar, or related U.S. businesses involved in activities that are fundamental to national security, as well as the cumulative control of any one type of critical infrastructure, energy asset, critical material, or critical technology by a foreign government or foreign person. The Executive Order further directs the U.S. Office of Science and Technology Policy to periodically publish a list of technology sectors that it assesses are fundamental to United States technological leadership in areas relevant to national security and instructs the U.S. Department of Commerce’s International Trade Administration to provide to the Committee in connection with any particular transaction under CFIUS review an analysis of the industry or industries in which the U.S. business operates and of the cumulative control of a foreign person, including, directly or indirectly, that of a foreign government, in that sector or industry.

China Inbound Foreign Direct Investment

Foreign Investment Law

The PRC has long regulated foreign investment into its country. That regulation has evolved over the years, culminating in enactment of the Foreign Investment Law[7] (FIL), which took effect on Jan. 1, 2020. That law provides for the same national treatment for permitted investments on a par with domestic enterprises. It still maintains prohibitions and restrictions on foreign investment in sectors identified in a “Negative List.”. These prohibitions apply as well to greenfield investments, not just acquisitions.

The FIL covers the following types of enterprises:

establishment of a foreign invested enterprise (FIE) in China, whether separately or jointly with a Chinese partner

acquisition of a Chinese enterprise

new greenfield project in China

investment in any other way prescribed by law or regulation.

The Negative List, officially known as the Special Administrative Measures for Foreign Investment Access,[8] is a national list of industry sectors periodically issued jointly by the NDRC and the Ministry of Commerce (MOFCOM) that identifies those industry sectors in which foreign investment either is prohibited or is restricted subject to certain conditions. A number of these industry sectors are industries sensitive to China’s national security, such as rare earth mining, defense industry sectors, telecommunications and news media, internet services, critical infrastructure projects and companies, and certain types of scientific research, among others. The Negative List (and its predecessor Foreign Investment Catalogue) has been the primary tool by which the PRC has overseen its national security interests in the context of foreign direct investment.

It should be noted that in 2013 the PRC introduced Pilot Free Trade Zones in a number of major municipalities. These Pilot Free Trade Zones were established in part as an experiment in opening up foreign direct investment geared for the needs or goals of the particular municipality and lessened certain restrictions and lifted certain prohibited sectors for foreign investments within the applicable Pilot Free Trade Zone under certain conditions. However, this author is unaware of any such loosening with respect to industry sectors sensitive to national security.

Security Review Measures

The NDRC and MOFCOM jointly issued Measures for the Security Review of Foreign Investments (Security Review Measures), effective Jan. 18, 2021[9]. These measures were authorized pursuant to Article 35 of China’s Foreign Investment Law. The Security Review Measures establish a governmental filing process for review and approval of certain foreign investments in China, similar to the CFIUS structure, except that filing is mandatory. Investments can be restricted or prohibited on the grounds of national security.

Filings under the Security Review Measures are required in the following industry sectors:[10]

Any investment in an industry that has a bearing on national defense and security, such as the defense industry

Any investment in locations near military or defense industry facilities

Control investments having a bearing on national security in agricultural products, important energy sources, important resources, manufacture of major equipment important infrastructure facilities, important transportation services, important cultural products and services, important IT and internet products and services, important financial services, key technologies and other important sectors.

“Control” is defined as either (i) 50% or greater equity ownership, or (ii) holding sufficient voting rights that enable the foreign investor to exercise major influence over the board or the shareholders of the enterprise, or (iii) other circumstances that enable the foreign investor to exercise major influence over the business operations and decision-making of the enterprise.

The following types of investments are subject to the jurisdiction of the Security Review Measures:[11]

Investments in newly constructed projects made in China, or establishment of enterprises in China, by foreign investors, whether independently or jointly with other investors

Acquisitions by foreign investors of equity rights in, or assets of, enterprises in China by means of merger or acquisition

Investments made in China by foreign investors through other means.

Either the foreign investor or both parties to the investment must file a declaration with the Office of the Operational Mechanism (OOM), which operates under the auspices of the NRDC and MOFCOM.[12] Filings can be made at the municipal and provincial levels.[13]

The OOM shall decide whether there is a need to conduct a security review of the declared foreign investment, and notify the party in writing, within 15 working days from the date on which the documentation is received from the party. If the OOM decides that there is no need for a security review, the party may invest.[14] The OOM may instead launch a special review, which it must complete within 60 days after it launches its special review. Upon conclusion, it is authorized either to approve the transaction, prohibit the transaction, or approve conditionally subject to mitigation factors.

Comparison between CFIUS and Security Review Measures

As is apparent, the PRC’s Security Review Measures are modeled after the CFIUS regime. Both establish governmental bodies with which parties can file and which will make the national security decisions. In investments in and acquisitions of non-defense industries, filings with the OMM must be made only for control investments, while CFIUS covers minority non-passive investments. On the other hand, the breadth of industries subject to national security review appears to be broader under the Security Review Measures than they are under CFIUS. While there are differences in language regarding the types of investments covered, as a practical matter the two regimes have similarly broad authority to reach any investment structure that will give a level of control or access to a foreign investor that could possibly threaten national security.

The concepts of “control,” while not identical, are similar and are tied to the ability of the foreign investor to influence the enterprise, although CFIUS also considers for minority investments whether the foreign person has access to material nonpublic technical information of the enterprise.

Both regimes cover real estate acquisitions in sensitive areas militarily, although the standards deviate somewhat.

Filings are mandatory under the Security Review Measures, and the parties cannot close the transaction until approved. Under CFIUS, filing is voluntary with certain exceptions, and the parties are not prohibited from closing the transaction prior to CFIUS clearance, but a closing prior to clearance is risky and subject to unwinding, so is not recommended. Both regimes allow for a short form initial filing, although under CFIUS an applicant can forego the short form declaration filing and file a long-form notice filing from the start. Each regime has set time frames within which the different stages of review must be completed by the governmental agency and by which a decision must be rendered.

China’s Outbound Investment Regulation

The PRC has regulated and tracked overseas outbound investment since 2014 and expanded its control over this cash outflow in 2018 with its adoption of the Measures for the Administration of Enterprises' Overseas Investment (2018 ODI Measures), which took effect on March 1, 2018.[15] Initially designed to regulate the outflow of capital from China, the 2018 ODI Measures introduced industry sector factors into its ODI regime. The 2018 ODI Measures require those seeking to invest overseas file with the NDRC and the local branch of the State Administration of Foreign Exchange (SAFE) prior to the cross-border payment. For “sensitive” overseas investments, the party seeking to make the investment must obtain NDRC approval. Once approval is obtained, the party must then register with a SAFE-approved foreign exchange bank to undertake the foreign exchange. For “non-sensitive” overseas investments, the party must simply file a notification with the NDRC.

“Sensitive” investments encompass investments in overseas projects in sensitive industries, in sensitive countries and regions, and in sensitive locations. Sensitive industries include the defense industry, development and utilization of cross-border water resources, news media, and other industries specified by other laws and regulations of the PRC, the latter of which are discussed below. Sensitive countries and regions include those with whom the PRC does not have diplomatic relations, those enmeshed in war or civil strife, those in which investment is limited by international treaty or agreement, and those deemed “sensitive” for this purpose by the PRC.[16]

The NDRC has indicated that the following types of ODI transactions will be scrutinized and are bases for denial:

Irrational overseas investments in real estate, hotels, movie theaters, sports clubs and the entertainment industry

Large investments in business lines that are not related to the core business of the Chinese investor

Outbound investments made by limited partnerships

Investments in offshore targets that hold assets with a value that is greater than the Chinese investors’ capital

Investments by newly established entities

Investments considered in violation of Chinese law.

Similar to the Negative List concept under the Foreign Investment law, the NDRC has come out with the following classifications of overseas investments: Encouraged ODI Investments, Restricted ODI Investments and Prohibited ODI Investments. Encouraged ODI Investments include investments in the Belt Road initiatives, those investments that enhance China’s technical capabilities, and those investments that relate to research and/or development, oil and mining, agriculture, and fishing. These are all industry sector investments which would benefit Chin Restricted ODI Investments include investments in real property, the entertainment industry, sports clubs, obsolete equipment, private equity, investment platforms established offshore without actual business, and investments that contravene environmental standards. Some of these sectors are discouraged in an attempt to prevent the flow of Chinese capital out of the country for speculative or foreign “safe haven” purposes, and some for social purposes. The third category, Prohibited ODI Investments, include investments in core military technology, gambling, sex industry and investments contrary to national security. This latter category encompasses China’s national security considerations and concerns.

Filings are made with the NDRC or its provincial offices. Larger investments (US$300 million or greater) are made at the national level, and lesser investments are made at the provincial level. As previously stated, if the project is a sensitive investment, approval must be obtained before proceeding with the investment. For non-sensitive projects, simply a notification filing is required. Upon approval or notification, the relevant office of the NDRC will issue a certificate authorizing the SAFE-approved bank to make the overseas transfer.

The ODI filing is less a national security regime and more a capital outflow and social policy mechanism, but national security is a specified statutory factor. Unlike recent outbound regimes of other countries, it is not designed to facilitate supply chain flows, which has become a centerpiece of some outbound investment regimes as a national security concern.

U.S. Outbound Investment Regulation

The CHIPS Act

On Aug. 9, 2022 President Biden signed the CHIPS and Science Act of 2022 to foster and fund the growth of, among other things, research in the development and production of, and the manufacture of, semiconductors, chips and related technology by American companies.[17] As part of that Act, American companies receiving government funds under the Act are prohibited from conducting or expanding semiconductor manufacturing in China and other adversary countries.[18] This Act is designed to promote the U.S. technological advantage in the semiconductor industry and to retard Chinas ability to develop its own semiconductor industry.

Biden Executive Order

On Aug. 9, 2023, President Biden issued Executive Order on Addressing United States Investments in Certain National Security Technologies and Products in Countries of Concern. Prior to this Executive Order, the United States did not regulate outbound foreign direct investments, but rather only inbound foreign direct investments through its CFIUS regime. Congress has been considering outbound foreign direct investment legislation, but in the interim Biden has issued this Executive Order. The Executive Order encompasses the U.S. investment into sensitive technologies and products involving semiconductor and microelectronic technologies, quantum information technologies, and artificial (AI) technologies that are critical for the military, intelligence, surveillance, or cyber enabled capabilities of a “Country of Concern.” The objective is to prohibit or oversee investments in these technologies that could threaten the national security of the United States.

The Executive Order

The Executive Order seeks in certain instances to prohibit certain types of investments by what is termed “United States Persons” in these technologies, which the Executive Order calls “national security technologies and products,” or referred to in this article as NSTPs, and in other instances to require notification to the U.S. Department of the Treasury on investments by United States Persons in NSTPs. The Countries of Concern identified in the Executive Order are the Peoples Republic of China, the Special Administrative Region of Hong Kong and the Special Administrative Region of Macau. Prohibited transactions are described as those that pose a particularly acute national security threat because of their potential to significantly advance the military, intelligence, surveillance or cyber-enabled capabilities of a Country of Concern. Notifiable transactions are described as those that contribute to the threat to the national security of the United States.

The Executive Order covers investment transactions in “Covered Foreign Persons.” A Covered Foreign Person is a foreign (i.e., non-U.S.) individual, entity or government of a Country of Concern who or that is engaged in activities involving one or more NSTPs. If it is an entity, it must be organized under that country’s laws or have its principal place of business there or be “owned” by a Covered Foreign Person. The Executive Order mandates the U.S. Department of the Treasury, together with the Department of Defense, the Department of Commerce, the Department of Energy and the Director of National Intelligence, to engage with allies in the national security concerns posed by Countries of Concern advancing NSTPs. The Order also mandates that the Treasury Department, in consultation with other agencies, issue regulations to implement this Executive Order, including considering enforcement penalties, civil administrative subpoena power, civil money penalties, divestment orders for prohibited transactions and potential criminal referrals.

Proposed Regulations

Less than a week later, on Aug. 14, 2023, the Department of the Treasury issued an Advanced Notice of Proposed Rulemaking, commonly known as an ANPROM, setting forth initial guidelines and seeking public comment on these guidelines. Comments must be submitted by Sept. 28. The guidelines are set forth below, but it should be kept in mind that these guidelines are subject to revision once the notice period has expired and the Treasury Department issues final regulations. The ANPROM poses 83 questions for public input on its proposed regulations. Nonetheless, the proposed regulations provide a glimpse at the scope of the final regulations. Given that the ANPROM followed the Executive Order by only nine days, one can speculate that these proposed regulations were in process well before the anticipated Executive Order was issued.

The focus of the ANPROM is on technologies that forms a basis of next-generation military, intelligence, surveillance and cyber-enabled capabilities. The ANPROM expresses concern that these technologies can lead to improving speed and accuracy of military decision-making and planning in logistics, can enable the compromise of encryption and other cybersecurity controls, and can advance mass surveillance capabilities. It also states that the risks of U.S. investment are not merely the flow of capital into these technologies, but the provision of indirect benefits such as the transfer of other intangible benefits from the U.S. investor in the form of enhanced standing, managerial assistance, access to investments and talent networks, market access and enhanced access to additional financing. As mandated by the Executive Order, the proposed regulations address both investments that would be prohibited and those for which notification would be required. The Treasury Department seeks to prohibit with respect to the prohibited investments described below any conspiracy formed to violate the regulations, any action to evade the regulations, any action by a United States Person to “knowingly direct transactions that would otherwise be prohibited” and to require a United States Person to “take all reasonable steps to prohibit and prevent any transaction that would otherwise be prohibited.” The proposed regulations elaborate on what constitutes “knowingly directing a transaction” to mean “to order, decide, approve or otherwise cause to be performed a transaction that would be prohibited under these regulations if engaged by a United States Person.” The regulations are to have a prospective impact only, although the Treasury Department is considering how to treat follow-on transactions of transactions existing prior to implementation of the regulations. The ANPROM states that the Treasury Department will review this program no later than one year after the regulations become effective to consider any changes in or expansion of the regulations.

Who Is Covered?

In keeping with the Executive Order, the proposed regulations encompass investments by a “United States Person” in a “Covered Foreign Person” with respect to a “Covered Transaction”. A United States Person would be defined as either a (i) U.S. citizen, (ii) a lawful resident of the United States, (iii) an entity organized under the laws of the United States or any of its jurisdictions, including such entities, and (iv) any person in the United States. This definition would encompass foreign branches, which has far-reaching implications.

“Covered Foreign Person” is a “Person of a Country of Concern” who has engaged in, or a Person of a Country of Concern that a United States Person knows or should know will be engaged in, an identified activity with respect to a covered NSTP. The term also includes an entity whose direct and indirect subsidiaries or branches constitute Covered Foreign Persons and which, individually or in the aggregate, comprise more than 50 percent of that entity’s consolidated revenue, net income, capital expenditure or operating expenses. This latter category captures parent companies whose subsidiaries and branches are otherwise covered. The term “Person of a Country of Concern” as used in the definition of “Covered Foreign Person” includes the following individuals and entities: (i) any individual that is not a U.S. citizen or lawful permanent resident of the United States and is a citizen or permanent resident of a Country of Concern; (ii) an entity with a principal place of business in, or entity incorporated in or otherwise organized under the laws of, a Country of Concern; (iii) the government of a Country of Concern, including agencies, states and provinces, municipalities and instrumentalities, or any individual owned or controlled or directed by or acting for or on behalf of the government of such Country of Concern; and (iv) any entity in which a person or persons identified in the first two categories holds individually or in the aggregate, directly or indirectly, an ownership interest equal to or greater than 50%. This last category is intended to capture entities outside of a Country of Concern that are majority-owned by persons or entities of a Country of Concern. The ANPROM specifically asks for comment on the challenges a United States Person would face in conducting due diligence imposed on a United States Person in determining whether the investment is a Covered Transaction.

The ANPROM states that the Treasury Department is considering adopting a knowledge standard to be applied to the United States Person, and which would be based on either actual or constructive knowledge. The ANPROM states or sets forth the standard it is considering. The United States Person would need to know, or reasonably should know based on publicly available information and other information available through a reasonable and appropriate amount of due diligence, that it is undertaking a transaction involving a Covered Foreign Person and that the transaction is a Covered Transaction. This standard is intended to avoid a United States Person from inadvertently violating the Executive Order and being subject to its regulations and sanctions.

What Types of Transactions Are Covered?

The types of transactions that constitute “Covered Transactions” include (i) equity investments through mergers and acquisitions, private equity and venture capital, (ii) greenfield investments, (iii) joint ventures, and (iv) certain debt financing transactions. The Treasury Department is considering how to treat convertible debt financings, particularly with respect to convertible debt outstanding prior to the effective date of the regulations. The proposed regulations exclude publicly traded securities and exchange-traded funds from the definition of “Covered Transactions.” The Treasury Department is also considering excluding certain types of limited partner investments into investment funds if certain parameters are met that would entail no involvement in the investment transaction by the United States Person or where it is beyond the United States Person’s ability to control the investment. It is also considering a di minimis threshold for limited partner investments. The Treasury Department is also considering several exemptions, including ones for buyouts of the entire interest of a “Covered Foreign Person” in an entity or assets located outside of a Country of Concern, for intracompany transfers of funds from a U.S. parent company to its subsidiary located in a Country of Concern, and a national security exemption for transactions that provide either an extraordinary benefit to the U.S. national security or an extraordinary benefit to the U.S. national interest in a way that overwhelmingly outweighs U.S. national security concerns.

Finally, the Treasury Department is considering the following carve-outs: (i) university-to-university research collaborations, (ii) contractual arrangements or the procurement of material inputs, such as raw materials, for any of the covered NSTPs, (iii) intellectual property licensing arrangements, (iv) bank lending, (v) processing, clearing or sending payments to a bank, (vi) underwriting services, (vii) debt rating services, (viii) prime brokerage, (ix) global custody, (x) equity research or analysis, and (xi) other services secondary to a transaction.

What Are the Covered NSTPs?

The proposed regulations set forth in relative detail the NSTPs that would be covered by the regulation, and identify those that would be prohibited and those on which simply notification is required. The Treasury Department stated its intention in the ANPROM to provide as much definition as possible so that a United States Person would know whether it can invest and/or whether notification is required. It identifies three technologies to which the Executive Order would apply. The first NSTP is semiconductors and microelectronics as related to certain advanced technologies and products. The investments that would be prohibited include (i) specific technology, equipment and capabilities that enable the design and production of advanced integrated circuits or enhance their performance; (ii) advanced integrated circuit design, fabrication and packaging capabilities; and (iii) the installation or sale to third party customers of certain supercomputers which are enabled by advanced integrated circuits. The transactions that would require only notification are those for the design, fabrication and packaging of other integrated circuits. Set forth in Annex I is a delineation of specific semiconductor and microelectronics technologies that would be prohibited under the regulations and those technologies for which only notification would be required.

The second category of NSTPs is quantum information technologies. These investments would be prohibited. Annex II sets for the delineation of quantum information technologies to which the prohibition would apply.

The third category is AI systems related to certain advanced technologies and products. The proposed regulations contemplate defining an AI system as “an engineered or machine-based system that can, for a given set of objectives, generate outputs such as predictions, recommendations, or decisions influencing real or virtual environments.” Investments into Covered Foreign Persons engaged in the development of software that incorporates an AI system and is designed to be exclusively used for military, government, intelligence or mass-surveillance and uses would be prohibited. Investments into Covered Foreign Persons engaged in the development of software that incorporates an AI system and is designed to be exclusively used for (i) cybersecurity applications, digital forensic tools, and penetration testing tools; (ii) the control of robotic systems; (iii) surreptitious listening devices that can intercept live conversations without the consent of the parties involved; (iv) non-cooperative location tracking (including international mobile subscriber identify (IMST) Catchers and automatic license plate readers) or facial recognition would not be prohibited and would require notification only. The Treasury Department specifically asked for comment on whether the exclusivity standard for both the prohibited AI investments and the notification AI investments should be replaced with a “primarily” standard.

The Notification Process

For notification-Covered Transactions, it is proposed that the notification must be filed within thirty days after the closing of the transaction. It is contemplated that filings could be made electronically through a government portal. The content of the notice would include (i) the identity and nationality or place of incorporation of the persons engaged in the transaction; (ii) basic business information about the parties; (iii) the date of the transaction; (iv) the nature of the transaction; (v) a description of the basis for determining that the transaction is a Covered Transaction; (vi) additional transaction information, including transaction documents; (vii) additional prescribed detailed information about the Covered Foreign Person; (viii) description of the due diligence conducted; (ix) information about previous transactions made by the United States Person into the Covered Foreign Person, as well as planned or contemplated future investments into such Covered Foreign Person; and (x) additional details and information about the United States Person. The Treasury Department will, in the final regulations, include confidentiality restrictions, with certain exceptions.

Proposed Penalties

The Treasury Department indicates that it will consider civil money penalties for material misstatements or material omissions made in the notification filing, the failure to timely file a notification, and the undertaking of a prohibited transaction. The Treasury Department asks for public input on other sanctions, including the ability to unwind a transaction or required divestment.

Conclusion

The U.S. has traditionally maintained an open-door policy for foreign direct investment into the U.S., with the exception of the defense and arms industries. Now as the second-leading global economy, China has become a competitive threat to the U.S. and the rest of the Western countries, based in part on its acquisition of U.S. and Western technology and know-how obtained through acquisition and other means. FIRRMA is a reaction to this threat. The Biden administration has continued to ramp up its efforts to protect U.S. technology and to assure a functioning supply chain for U.S. companies through Executive Order 14083 and the recent issuance of Biden’s outbound FDI Executive Order regulating outbound foreign direct investment in Chinese enterprises.

The PRC has had measures already built into its laws and regulations governing foreign companies doing business in China that protected many of its domestic industries from foreign acquisition and control. Through its former Foreign Investment Catalogue and its replacement, the Negative List, a number of industry sectors impacting national security were already prohibited or restricted from foreign investment. Nonetheless, with the enactment of FIRRMA strengthening CFIUS and clearly primarily aimed at Chinese investment, the PRC adopted the Security Review Measures as a response to FIRRMA. While the prior measures gave the PRC some level of control over foreign investment for national security purposes, the Security Review Measures enhanced these controls and instituted a formal national security review mechanism modeled on CFIUS.

Through the 2018 ODI Measures, the PRC has in place a mechanism that encompasses overseas foreign direct investment, although national security concerns, while a statutory factor, was not the primary purpose of the 2018 ODI Measures. We now will have to see how the PRC reacts to President Biden’s recent outbound FDI Executive Order.

In this global economy, the worldwide business community needs to be able to invest in other countries. Foreign direct investment has been a key driver of the rapid growth of globalization and the global economy over the last few decades. The long-term impact of this FDI battle between the U.S. and China may result in a drop in FDI into China and between the U.S. and China and further the economic decoupling of these two countries. It also has the potential to contribute to a decline in the globalized economy.

Annex I

Semiconductors and Microelectronics

Prohibited Investments

Technologies that Enable Advanced Integrated Circuits

• Software for Electronic Design Automation: The development or production of electronic design automation software designed to be exclusively used for integrated circuit design.

Integrated Circuit Manufacturing Equipment: The development or production of front-end semiconductor fabrication equipment designed to be exclusively used for the volume fabrication of integrated circuits.

Advanced Integrated Circuit Design and Production

• Advanced Integrated Circuit Design: The design of integrated circuits that exceed the thresholds in Export Control Classification Number (ECCN) 3A090 in supplement No. 1 to 15 CFR part 774 (https://www.ecfr.gov/current/title-15/part-774) of the Export Administration Regulations (EAR), or integrated circuits designed for operation at or below 4.5 Kelvin.

• Advanced Integrated Circuit Fabrication: The fabrication of integrated circuits that meet any of the following criteria: (i) logic integrated circuits using a non-planar transistor architecture or with a technology node of 16/14 nanometers or less, including but not limited to fully depleted silicon-on-insulator (FDSOI) integrated circuits; (ii) NOT–AND (NAND) memory integrated circuits with 128 layers or more; (iii) dynamic random-access memory (DRAM) integrated circuits using a technology node of 18 nanometer half-pitch or less; (iv) integrated circuits manufactured from a gallium-based compound semiconductor; (v) integrated circuits using graphene transistors or carbon nanotubes; or (vi) integrated circuits designed for operation at or below 4.5 Kelvin.

○ “Fabrication of integrated circuits” is defined as the process of forming devices such as transistors, poly capacitors, non-metal resistors, and diodes, on a wafer of semiconductor material.

• Advanced Integrated Circuit Packaging: The packaging of integrated circuits that support the three-dimensional integration of integrated circuits, using silicon vias or through mold vias.

○ “Packaging of integrated circuits” is defined as the assembly of various components, such as the integrated circuit die, lead frames, interconnects, and substrate materials, to form a complete package that safeguards the semiconductor device and provides electrical connections between different parts of the die.

Supercomputers

• Supercomputers: The installation or sale to third-party customers of a supercomputer, which are enabled by advanced integrated circuits, that can provide a theoretical compute capacity of 100 or more double-precision (64-bit) petaflops or 200 or more single-precision (32-bit) petaflops of processing power within a 41,600 cubic foot or smaller envelope.

Notification Investments

• Integrated Circuit Design: The design of integrated circuits for which transactions involving United States Persons are not otherwise prohibited.

• Integrated Circuit Fabrication: The fabrication of integrated circuits for which transactions involving United States Persons are not otherwise prohibited.

• Integrated Circuit Packaging: The packaging of integrated circuits for which transactions involving United States Persons are not otherwise prohibited.

Annex II

Quantum Information Technologies

Prohibited Investments

• Quantum Computers and Components: The production of a quantum computer, dilution refrigerator, or two-stage pulse tube cryocooler.

○ “Quantum computer” is defined as a computer that performs computations that harness the collective properties of quantum states, such as superposition, interference, or entanglement.

• Quantum Sensors: The development of a quantum sensing platform designed to be exclusively used for military end uses, government intelligence, or mass- surveillance end uses.

• Quantum Networking and Quantum Communication Systems: The development of a quantum network or quantum communication system designed to be exclusively used for secure communications, such as quantum key distribution.

For more information, please contact Paul B. Edelberg at pedelberg@foxrothschild.com or 212.878.7911, or another member of Fox Rothschild’s China Practice Group.

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