This article originally appeared in Risk & Compliance magazine in the UK, a publication of Financier Worldwide. The piece includes UK spelling and grammar.
A wave is coming. An enormous wave of regulation will soon crash on Silicon Valley, Boston and other tech centres around the United States, and very few people have their surfboards ready.
Major technologies in exciting emerging fields (among them, biomedicines, virtual reality, and robotics) will soon be subject to strict export controls that will limit who can receive the technologies, who can use them, and even who can research them.
Forthcoming export controls will disrupt logistics planning, information sharing, R&D, and acquisition strategies for companies in the United States and all around the world.
A swell on the horizon: the coming controls
In the past, export controls and other regulations have tended to lag a step or two behind the times. That trend has accelerated with the pace of technological advancement. As a result, for many years, commercial technical innovations in fields like data analytics, microprocessors and navigation could be freely exported without significant restrictions because they had simply gone beyond what regulators could think to name in their regulations. As long as the items were not designed for military applications, and no significant encryption technology was involved, new ideas developed in the United States were simply unaccounted for by the export controls in the US Export Administration Regulations (EAR).
However, the US Department of Commerce, Bureau of Industry and Security (BIS) is about to make up a lot of ground in a single, large leap. The tsunami it will unleash in its regulatory overhaul will splash down on sectors like biotech, computing, artificial intelligence, positioning and navigation, data analytics, additive manufacturing, robotics, brain-machine interface, advanced materials, and surveillance.
Controlling the break: commenting on the rules before they take effect
BIS is in the process of writing the regulations. Since the regulations are not yet set in stone, you may formulate and submit the arguments to BIS that may help limit the impact of these regulations on your business.
On 19 November 2018, BIS published an invitation to comment on the criteria for establishing new export controls on what it calls "emerging and foundational technologies". The new controls are authorised under the Export Control Reform Act of 2018 and the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA).
The list of technology fields targeted for review is as follows:
(ii) artificial intelligence (AI) and machine learning technology;
(iii) position, navigation and timing (PNT) technology;
(iv) microprocessor technology;
(v) advanced computing technology;
(vi) data analytics technology;
(vii) quantum information and sensing technology;
(viii) logistics technology;
(ix) additive manufacturing;
(xi) brain-computer interfaces;
(xiii) advanced materials; and
(xiv) advanced surveillance technologies.
Interested parties submitted public comments on the proposed rule before 10 January 2019 deadline.
This rule was an Advance Notice of Proposed Rulemaking (ANPRM), so before finalising the regulations, BIS will likely publish a Notice of Proposed Rulemaking, again inviting interested parties to comment on the proposed regulations. In addition, BIS will issue a separate ANPRM regarding identification of foundational technologies that may be important to US national security.
These rulemakings represent your opportunities to be heard. There is no guarantee that public comment will alter the course of the new restrictions, but it may be worth a try to argue for changes that may help preserve your options for the future.
Feeling the curl: understanding the coming controls
The controls are not yet in final form so we cannot predict in detail the implications of those controls. However, we have seen and ridden waves before. Based upon our experience and the information BIS provided in its request for comments and industry chatter, we can provide the following information.
General implications. If your company creates technology or products in an emerging technology sector, new export restrictions will not only limit who can receive your exports, but will also restrict the disclosure of technology to foreign nationals even within the United States. If the controls follow the pattern of most EAR controls, the export of products and the disclosure of related technology and know-how will require licences, depending on the destination, end-user and end-use of the product or information. Where technologies are already widely available outside the United States, BIS may not be able to restrict that technology.
Implications for collaboration. Depending on the criteria BIS develops for these controls, persons who are not US citizens or green-card holders may need licences to participate in researching and developing some of these emerging technologies.
Implications for exports. As the new regulations are developed, exports of your products, parts and components in these sectors may require export controls. This may be true for final shipments as well as for movements throughout your manufacturing supply chain. For example, if your logistics chain includes fabrication in Mexico, or assembly, testing and packaging in China, you may need to plan for the potential impacts on your manufacturing process.
Implications for mergers, acquisitions and investments. The emerging technology sector continues to see historic volumes of investment and M&A activity in a vibrant US economy. The new regulations will also affect US national security review of foreign investments in these sectors. Specifically, when the list of technologies is finalised, many types of foreign investments in these sectors (including not only outright acquisitions of US companies, but also certain minority investments) will be subject to review by the Committee on Foreign Investment in the United States (CFIUS). CFIUS has the power to halt or unwind a deal, and the power to impose restrictions on a foreign acquirer's access to technology. This development has the potential to radically alter the structuring, timing and valuation of foreign investments in these sectors.
Getting ready to ride: planning for the controls
Recently, we have seen companies caught off guard by the rapid pace of regulatory change in the Trump administration. This has been the case even when the president and the administration have clearly signalled policy changes in advance (as in the case of the immigration ban, tariffs on China and changes to NAFTA).
BIS's announcement of these forthcoming rules signals a real and substantive movement toward limiting foreign access to leading-edge technologies. Companies in the affected sectors could gain an advantage over their competition if they act early. They can paddle a bit ahead and ride this coming wave, rather than tumbling in its wash.
Your company may wish to consider adjustments to your research, manufacturing, export and investment strategies to handle the forthcoming changes. In our view, this wave of regulation will have a big impact on US advanced technology sectors. Companies should continue to monitor and consider submitting comments and implementing internal controls to account for the upcoming changes.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.