5 minute read | August.14.2023
The Biden administration has issued a long-awaited executive order authorizing regulation of U.S. investments in Chinese semiconductor, quantum computing and AI companies. The Treasury Department published a corresponding advance notice of proposed rulemaking describing its proposed approach to implementing the order.
The executive order does not impose any immediate restrictions or obligations relating to U.S. investments in China. Rather, it instructs the Treasury Department to formulate regulations to administer “a new and targeted national security program” affecting U.S. investments in certain Chinese companies. The administration therefore retains broad discretion as it resolves the scope of new legal requirements.
The executive order does not impose a deadline on the Treasury Department to issue final regulations or initiate the program.
Although the Treasury Department indicates it may inquire about certain transactions completed or agreed to after the date of the order, it has not proposed retroactive application of the program requirements.
The program will apply to “United States persons,” which includes U.S. citizens, lawful permanent residents, U.S. organized entities (including their foreign branches) and any person in the United States.
The order also authorizes the Treasury Department to require U.S. persons to notify it of transactions by foreign entities they control if those transactions would trigger the notification requirement if a U.S. person engaged in them and to take “all reasonable steps” to prohibit and prevent foreign entities they control from engaging in transactions prohibited for U.S. persons.
The order also authorizes the Treasury Department to prohibit U.S. persons from “knowingly directing” transactions that would be prohibited by the order if engaged in by a U.S. person.
The Treasury Department is contemplating regulating transactions in or with companies that are organized in China, have a principal place of business in China or are 50 percent or more owned by Chinese individuals or entities.
The regulations would apply if those companies engage in an “identified activity” (to be defined) relating to specified technologies or products (or, in some cases, if the companies’ subsidiaries engage in an identified activity).
The regulations would apply to:
The Treasury Department is considering excluding U.S. companies’ investments in their own Chinese subsidiaries as well as passive LP investments and investments in publicly traded securities.
The Treasury Department does not intend to cover university-to-university research collaborations, intellectual property licensing arrangements, bank lending, underwriting services, prime brokerage, equity research or analysis or other services secondary to a transaction.
However, the scope of covered and exempted transactions may change significantly subject to industry, congressional and other input. The list of transactions the administration proposes regulating goes beyond PE/VC-related investment restrictions and may garner industry pushback. On the other hand, others may consider the proposed scope to be inadequate to achieve the intended policy objectives.
The executive order and the rulemaking notice contemplate:
The rulemaking notice does not describe a case-by-case review of U.S. outbound investments. Rather, the parties to a transaction would determine whether they are subject to the program requirements.
The executive order instructs the Treasury Department to target technologies in three sectors:
This list excludes biotechnology and clean energy, which, along with the sectors identified above, the administration has characterized as “foundational technologies” of particular importance in the coming decade.
The notice includes potential defined terms that are complicated and could create uncertainty for companies trying to comply. It also raises questions about what diligence the U.S. government will expect of U.S. persons contemplating investments in Chinese companies and how they can verify compliance should the Treasury Department investigate a potential violation.
The Treasury Department requests public comment on more than 80 issues regarding the new program. Written comments may be submitted until September 28, 2023.