Key Takeaways:
- President Biden has issued an Executive Order (E.O.) requiring the U.S. Department of Treasury to create a new program that will prohibit and require notification of certain investments by U.S. persons into entities located in, subject to the jurisdiction of, or owned by persons from, China, Hong Kong and Macau, if those entities are engaged in activities involving one of three industries - (1) semiconductors and microelectronics, (2) quantum information technologies, and (3) artificial intelligence.
- Concurrent with the issuance of the E.O., the Department of the Treasury issued an Advance Notice of Proposed Rulemaking (ANPRM) to share with the public initial considerations and views with respect to definitions and other elements of the program, and to solicit public comment on various topics related to the implementation of the program.
- The E.O. was issued after the U.S. Senate approved adding a measure to the 2024 National Defense Authorization Act (NDAA) in July 2023 that would require mandatory notifications of certain investments in China, Russia, Iran, and North Korea. The E.O. and the NDAA provision contain certain key differences that will likely impact the conference on the NDAA between the Senate and the House of Representatives in the coming months.
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Overview of the Executive Order
On August 9, 2023, President Biden issued an Executive Order (E.O.)
addressing certain outbound investments by U.S. persons in certain
sensitive or advanced technologies or products involving certain
"countries of concern." The term "countries of
concern" is defined to include the People's Republic of
China and the Special Administrative Regions of Hong Kong and
Macau, but this could be expanded in the future. The E.O. targets
three categories of "national security technologies and
products": (1) semiconductors and microelectronics, (2)
quantum information technologies, and (3) artificial
intelligence.
The E.O. provides for the establishment of a new outbound
investment program to be implemented and administered by the
Department of Treasury, in consultation with other relevant
executive departments and agencies, including the Department of
Commerce. To implement this program, the E.O. directs the Secretary
of the Treasury to issue regulations that will either: (1) require
U.S. persons to notify Treasury of certain transactions, or (2)
prohibit U.S. persons from undertaking certain other transactions,
in either case involving certain entities located in, subject to
the jurisdiction of, or owned by, persons of a "country of
concern," engaged in activities related to the three
technology and product areas identified in the E.O.
The E.O. requires the Treasury Department to investigate violations
of the order or any implementing regulations, which can result in
civil and criminal penalties. In addition, under the E.O., the
Treasury Department has the power to nullify, void, or otherwise
compel the divestment of any prohibited transaction entered into
after the effective date of the implementing regulations.
Concurrent with the issuance of the E.O., the Department of the
Treasury issued an Advance Notice of Proposed Rulemaking (ANPRM) in
the Federal Register to provide clarity about the intended scope of
the program, and to solicit public comment on various topics
related to the implementation of the program. Written comments on
the ANPRM can be submitted within 45 days, i.e., by September 28,
2023.
The E.O. will come into effect following the issuance of
implementing regulations by the Department of Treasury. The E.O.
does not set a deadline for the regulations to be issued. Given the
45-day comment period and the time it will take Treasury to develop
implementing regulations, the new outbound investment program will
likely not come into effect until 2024.
Anticipated Framework for the Program to be Implemented by
the Treasury Department Under the E.O.
The ANPRM reflects the framework that Treasury anticipates
proposing for implementation of the program, which will include the
following:
The program will be applicable to U.S.
persons
The program anticipates that U.S. persons, wherever they are
located, will be responsible for adhering to the prohibition and
the notification requirements under the program. A U.S. person
includes:
- U.S. citizens;
- Lawful permanent residents;
- Any entity organized under the laws of the United States or any jurisdiction within the United States, including any foreign branches of any such entity; and
- Any person in the United States.
Under the E.O., the Treasury Department may also place certain
obligations on U.S. persons with respect to foreign entities that
they control and in certain situations where U.S. persons knowingly
direct transactions by non-U.S. persons.
The program is anticipated to target only certain types of
investment transactions
The program is anticipated to focus on:
- Equity transactions (e.g., via mergers and acquisitions, private equity, venture capital, and other arrangements);
- Greenfield investments;
- Joint ventures; and
- Certain debt financing transactions that are convertible to equity.
The Treasury Department has stated that the program is not intended to apply to:
- University-to-university research collaborations;
- Contractual arrangements or the procurement of material inputs for any of the covered national security technologies or products (such as raw materials);
- Intellectual property licensing arrangements;
- Bank lending;
- The processing, clearing, or sending of payments by a bank;
- Underwriting services;
- Debt rating services;
- Prime brokerage;
- Global custody;
- Equity research or analysis; or
- Other services secondary to a transaction.
The program is anticipated to only target investment in
certain foreign persons
The restrictions are anticipated to apply to investments in
entities that are engaged in activities related to the three
defined subsets of technologies and products, and that are
organized under the laws of a country of concern, have a principal
place of business in a country of concern, or are majority-owned by
country of concern individuals or entities.
The program is expected to include certain excepted
transactions
Treasury is considering creating an exception for certain types of
passive and other investments to minimize unintended consequences.
For example, Treasury is considering excepting from the
program's coverage certain U.S. investments into
publicly-traded securities, index funds, mutual funds,
exchange-traded funds, certain investments made as a limited
partner, committed but uncalled capital investments, and
intracompany transfers of funds from a U.S. parent company to its
subsidiary.
The program is expected to target "indirect
transactions"
The program is anticipated to target transactions entered into to
evade the prohibitions under the program. For example, a U.S.
person will not be able to knowingly invest in a third-country
entity that will use the investment to undertake a transaction with
a foreign person that would be subject to the program if engaged in
by a U.S. person directly.
Overview of the Outbound Investment Transparency
Act
The E.O. was issued shortly after the U.S. Senate approved adding a
measure to the 2024 National Defense Authorization Act (NDAA)
addressing U.S. outbound investments, called the Outbound
Investment Transparency Act. The measure would require U.S. persons
to notify the Treasury Department regarding certain transactions
involving specified industries in certain countries of concern
within 14 days of the completion of the transaction.
Unlike the E.O., the measure would only impose a notification
requirement and would not prohibit any transactions. In addition,
the measure targets a wider range of "covered sectors"
than the E.O., 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. In addition, the measure
defines "country of concern," as any country specified in
10 U.S.C. ยง 4872(d)(2), which includes China, North Korea,
Russia, and Iran. The measure would impose a notification
requirement in connection with:
Like the E.O., the NDAA measure requires the Treasury Department to
adopt implementing regulations.
Next steps
While both target outbound investments by U.S. persons in certain
sectors and in certain countries, the E.O. and the proposed NDAA
measure contain some key differences. The E.O. will likely impact
the conference on the NDAA by the Senate and the House of
Representatives in the coming months and could lead to
modifications of the NDAA provision to ensure that it is aligned
with the E.O. and does not require the adoption of competing and
differing regulations by the Department of Treasury.
Regardless of what the regulations will ultimately look like, the
writing is on the wall: restrictions on, and reporting of,
investments by U.S. persons are coming. In anticipation of these
regulations, U.S. persons should carefully evaluate their
investment strategies in foreign countries, especially China.
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.
