On Aug. 9, President Biden issued Executive Order 14105 directing the Secretary of the Treasury to establish a new program to address U.S. investments in certain national security technologies in “Countries of Concern.” The Order identifies the following three categories of such technologies: semiconductors and microelectronics, quantum information technologies, and artificial intelligence. In an Annex to the Order, the People’s Republic of China, the Special Administrative Region of Hong Kong, and the Special Administrative Region of Macau are listed as Countries of Concern.
To implement this program, the Order directs the Secretary to issue new regulations intended to identify categories of prohibited transactions. Such transactions involve national security technologies and products that the Secretary, in consultation with other relevant agencies, determines to pose a particularly acute national security threat because of their potential to significantly advance the military, intelligence, surveillance, or cyber-enabled capabilities of Countries of Concern. Examples of the types of investment transactions to be considered are acquisition of equity interests, greenfield investments, joint ventures, and debt-to-equity transactions. In addition to the prohibition of certain investments, the new regulations will require U.S. persons to notify the Secretary regarding particular transactions involving certain entries located in or subject to the jurisdiction of a Country of Concern. More details can be found in the Department of Treasury’s Fact Sheet.
In coordination with the issuance of the new regulations, the Department of the Treasury issued an Advance Notice of Proposed Rulemaking. For purposes of the new regulations, this Notice seeks public comment on such issues as to what constitutes a “U.S. Person,” what constitutes a “Covered Foreign Person” or a “Person of a Country of Concern,” what type of transactions should be considered a “Covered Transaction,” and what types of technologies should be included as “Covered National Security Technologies and Products.” The deadline for such comments is September 28, 2023, and should be submitted electronically through the Federal Government eRulemaking portal or by mail to the 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.
Investors should note that the identified categories of technologies under the Order are different from those already controlled under existing U.S. export controls pertaining to China and those governed under the CHIPS Act. Therefore, it is advisable that affected investors review the three legal frameworks separately to ensure compliance. It is also important to note that the Department of Treasury is considering a number of exceptions to be included in the proposed new regulation, including investments in publicly-traded securities, index funds, mutual funds, exchange-traded funds, passive investments in venture capital or private equity funds, and intracompany transfers of funds from a U.S. parent to a subsidiary in a Country of Concern, among others. There is similarly a range of transactions that may be exempt in the final draft of the regulation, such as university research, contracts, intellectual property licensing, and bank lending.
Therefore, there are many technicalities that the Department of Treasury will need to finalize and consider in the public comment period before a final regulation is issued.
