On August 9, 2023, President Biden issued Executive Order 14105 “Addressing United States Investments in Certain National Security Technologies and Products in Countries of Concern.” The Executive Order targets certain U.S. outbound investments into Chinese, Hong Kong and Macau entities that are engaged in certain sensitive technologies or products within three sectors: (i) semiconductors and microelectronics; (ii) quantum information technologies; and (iii) artificial intelligence systems.

These regulations have not yet been implemented. Instead, the Executive Order triggers the beginning of a rulemaking process within the U.S. Department of the Treasury, and is anticipated to result in regulations controlling U.S. person outbound investments in certain identified transactions within the above-identified sectors.

These regulations are anticipated to impose outright prohibitions on certain U.S. person investments in certain Chinese, Hong Kong and Macau entities, and in other circumstances, to require U.S. persons to provide notification to Treasury of their investments in the designated technological sectors.

Simultaneous with the Executive Order, Treasury published a Fact Sheet, a Press Release, and an extensive Advanced Notice of Proposed Rulemaking (ANPRM), detailing 83 interpretive questions and soliciting comments from the public concerning key definitions, notification requirements, and the penalty process, with comments due by September 28, 2023.

The ANPRM represents the most preliminary stage of rulemaking, which provides stakeholders with the opportunity to comment on the proposed regulation, even before a formal proposed rule or notice of proposed rulemaking is issued, which typically triggers a further period for public comment prior to implementation of the regulations in their final form. Some of the key questions under consideration include:

• Prohibitions vs. Notifications of Certain Investments: Whether certain outbound investments will be prohibited or instead require notification varies both between and within the identified technological sectors.
  • For example, transactions related to identified quantum information technology (including quantum computers and components, quantum sensors, and quantum networking or communication systems) are anticipated to be entirely prohibited, and Treasury is not currently considering a separate notification requirement.
  • However, only certain transactions relating to artificial intelligence systems and semiconductors and microelectronics are prohibited, and Treasury is considering notification requirements for other investments in those sectors.
• Pre-Closing vs. Post-Closing Notification Requirements: The notice requirement timing for affected investments is yet to be defined, and the ANPRM seeks comments on whether Treasury should require prior notification of a covered transaction (i.e., pre-closing) or should permit post-closing notification within a specified period, such as 30 days.
  • Proposed legislation making its way through Congress may also affect the notification regime, given the Senate’s July 25, 2023 passage of the Outbound Investment Transparency Act, made as an amendment to the National Defense Authorization Act.
  • If passed into law in its current form, U.S. persons would be required to notify Treasury 14 days before investing in certain sensitive technologies in China if the activity is not a secured transaction, and within 14 days after the activity if it is a secured transaction, and it contemplates a broader set of “covered sectors” than in the Executive Order, including (a) advanced semiconductors and microelectronics; (b) artificial intelligence; (c) quantum information science and technology; (d) hypersonics; (e) satellite-based communications; and (f) networked laser scanning systems with dual-use applications.
• Scope of “Covered Transactions”: Treasury suggests that covered transactions could include certain acquisitions of equity interests (e.g., mergers and acquisitions, private equity, and venture capital), greenfield, joint ventures, and certain debt financing transactions by United States persons. Treasury expects to create a carveout or exception for specific types of transactions, such as certain investments into publicly traded securities or into exchange traded funds (ETFs).
• Scope of “Excepted Transactions”: In addition to the carveouts for investments into publicly traded securities and ETFs, the ANPRM also proposes excluding limited partner investments into venture capital funds, private equity funds, fund of funds, or other pooled investment funds, where the limited partner’s contribution is (i) purely capital; (ii) below a yet to be determined threshold; and where (iii) the limited partner cannot make managerial decisions, is not responsible for any debts beyond its investment, and does not have the ability (formally or informally) to influence or participate in the fund’s or a covered foreign person’s decision making or operations.
• Penalties: Contemplated penalties for violations of the anticipated regulations currently include civil monetary penalties for (i) engaging in a prohibited transaction, (ii) making material misstatements in or material omissions from information or documentary material submitted or filed with the Treasury Department; and (iii) failing to timely notify Treasury of required transactions. The Executive Order also explicitly prohibits “any conspiracy formed to violate” the Order or implementing regulations as well as “any action that evades, has the purpose of evading, causes a violation of, or attempts to violate” the Order or implementing regulations, and authorizes Treasury to “refer potential criminal violations of this order or the regulations issued under this order to the Attorney General.” Finally, the Executive Order also permits Treasury to nullify, void, or otherwise compel divestment of prohibited transactions.

We will continue to closely monitor developments in this space.