The U.S. Department of the Treasury (Treasury) on October 28, 2024, issued a Final Rule to implement Executive Order (E.O.) 14105 of August 9, 2023, "Addressing United States Investments in Certain National Security Technologies and Products in Countries of Concern." In that Executive Order, President Biden directed Treasury to regulate outbound investment by U.S. persons or entities relating to the development of sensitive technologies and products in countries of concern that pose a threat to the national security of the United States.
The Final Rule, which is set to take effect January 2, 2025, largely mirrors a July 2024 Proposed Rule and applies to all covered transactions involving covered foreign persons in any countries of concern, currently China (including Hong Kong and Macau). In particular, the Final Rule prohibits U.S. persons from engaging in certain covered transactions involving specific technologies and covered foreign persons in countries of concern. The Final Rule also requires U.S. persons to notify Treasury of certain other covered transactions involving specific technologies and covered foreign persons in countries of concern.
Key elements of the Final Rule are briefly summarized below.
Obligations of U.S. Persons
The Final Rule places new restrictions on outbound investments made by U.S. persons, a term broadly defined to include any U.S. citizen or lawful permanent resident, as well as any entity organized under the laws of the United States or any jurisdiction within the United States, including any foreign branch of any such entity, and any person in the United States. Under the Final Rule, U.S. persons are also required to take all reasonable steps to ensure compliance by controlled foreign entities, defined as entities incorporated in, or otherwise organized under the laws of, a country other than the United States of which a U.S. person is a parent.
Knowledge Standard
The obligations of the Final Rule apply whenever a U.S. person has knowledge of relevant facts or circumstances related to a transaction. The Final Rule makes clear that a U.S. person is considered to have knowledge if a U.S. person has actual knowledge that a fact or circumstance exists, is aware that a fact or circumstance is highly probable to occur in the future, or where the U.S. person could have possessed such knowledge through "reasonable and diligent inquiry." Whether a U.S. person has engaged in a "reasonable and diligent inquiry" is a case specific inquiry that "will be made based on a consideration of the totality of relevant facts and circumstances."
Covered Transactions
The Final Rule applies to certain covered transactions made by U.S. persons, including the direct or indirect acquisition of an equity interest or contingent equity interest; certain debt financing that affords certain rights to the lender; the conversion of a contingent equity interest; a greenfield investment or other corporate expansion; entrance into a joint venture; and certain investments as a limited partner or equivalent (LP) in a non-U.S. person pooled investment fund.
Covered Foreign Persons
A "covered foreign person" is defined as: (a) person of a country of concern that is engaged in a covered activity, (b) a person engaged in a joint venture with a U.S. person, if the joint venture is engaged in a covered activity, or (c) a person that has a significant relationship with a person in a county of concern engaged in a covered activity. A "person of a country of concern" is an individual who is a citizen or permanent resident of a country of concern (and not a U.S. citizen or permanent resident of the United States); an entity that is organized under the laws of, headquartered in, incorporated in, or with a principal place of business in a country of concern; the government of a country of concern or a person acting for or on behalf of the government of a country of concern; or an entity that is directly or indirectly at least 50 percent-owned by any persons or entities in any of the aforementioned categories.
Covered Activities
The Final Rule applies to three sub-sets of national security technologies and products identified in E.O. 14105: (a) semiconductors and microelectronics, (b) quantum information technologies, and (c) certain artificial intelligence (AI) systems. Whether a transaction is prohibited or subject to notification requirements depends on the specific technology and activity at issue:
- Semiconductors and microelectronics
- Prohibited transactions: U.S. persons are prohibited from engaging in covered transactions related to certain electronic design automation software; certain fabrication or advanced packaging tools; the design or fabrication of certain advanced integrated circuits; advanced packaging techniques for integrated circuits; and supercomputers.
- Notifiable transactions: U.S. persons must notify Treasury within 30 days of completing or acquiring knowledge of a covered transactions related to the design, fabrication, or packaging of integrated circuits not otherwise prohibited.
- Quantum information technologies
- Prohibited transactions: U.S. persons are prohibited from engaging in covered transactions related to the development of quantum computers or production of any critical components required to produce a quantum computer; the development or production of certain quantum sensing platforms; and the development or production of certain quantum networks or quantum communication systems.
- Notifiable transactions: None
- Certain AI systems
- Prohibited transactions: U.S. persons are prohibited from engaging in covered transactions related to the development of any AI system designed to be exclusively used for, or intended to be used for, certain end uses are prohibited. In addition, covered transactions related to the development of any AI system that is trained using a quantity of computing power greater than 10Æ25 computational operations, or trained using primarily biological sequence data and a quantity of computing power greater than 10Æ24 computational operations.
- Notifiable transactions: U.S. persons must notify Treasury within 30 days of completing or acquiring knowledge of a covered transactions related to the development of any AI system not otherwise prohibited, where such AI system is: designed or intended to be used for certain end uses or applications; or trained using a quantity of computing power greater than 10Æ23 computational operation.
Excepted Transactions and Exemptions
The Final Rule exempts certain types of transactions from coverage, provided that such transactions do not afford a U.S. person with rights beyond those of a standard minority shareholder. These include investments in publicly traded securities, certain LP investments, investments is certain derivative securities, buyouts of country of concern ownership, intracompany transactions, investments made pursuant to pre-Executive Order binding commitments, certain syndicated debt financings, and certain transactions that Treasury determines are adequately addressed by third-country measures. The Final Rule permits a U.S. person to seek an exemption where a transaction is in the national interest of the United States; however, the Final Rule makes clear that such exemptions will only be granted in "exceptional circumstances."
Conclusion
The Final Rule has significant implications for U.S. companies, who must both comply with the Final Rule in their own outbound investment decisions and take reasonable steps to ensure compliance by any foreign subsidiaries. Prior to making outbound investments, U.S. companies and individuals are expected to conduct a "reasonable and diligent inquiry" to determine whether or not the investment is a covered transactions subject to prohibition or notification requirements. Violations are subject to civil and criminal penalties set forth in the International Emergency Economic Powers Act (IEEPA), which can include significant monetary penalties, mandatory divestment, or referral to the Attorney General for criminal prosecution.
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.