On Aug. 9, President Biden issued an Executive Order (EO or Order) titled Executive Order on Addressing United States Investments in Certain National Security Technologies and Products in Countries of Concern. This EO authorizes the Secretary of the Treasury to ban or restrict American investments in certain Chinese entities. In the national security community, this issue has been hotly debated for some time now.
This Order pertains to businesses in three sectors: semiconductors and microelectronics; quantum information technologies; and some artificial intelligence systems. That same day, the Treasury Department issued an advance notice of proposed rulemaking (the ANPRM) to launch this EO's implementation.
In some quarters, this EO is being called a "reverse-CFIUS" move, thereby referring to the now-familiar Committee on Foreign Investment in the U.S. CFIUS, as has been recounted by Taft numerous times, concerns the U.S. government's review of foreign entities' transactions seeking to acquire U.S. assets in a way that risks the national security of the U.S.
This EO claims to stop U.S. capital and subject-matter expertise from assisting China and Chinese entities that develop technologies that could compromise U.S. national security, principally by aiding China's military overhaul. This Order focuses on private equity, greenfield investments, venture capital, and joint ventures.
In a separate letter addressed to the Speaker of the U.S. House of Representatives, President Biden asserted that he was trying to stymie meteoric Chinese advancement pertaining to "sensitive technologies and products critical to the military, intelligence, surveillance or cyber-enabled capabilities." These advancements, the President maintains, "constitute[] an unusual and extraordinary threat to the national security of the United States."
Highlights of This Order and the Ensuing ANPRM:
- Capacious Scope of "U.S. Persons":
Regardless of their location, "U.S. persons" will be
expected to follow the prohibition and notification strictures.
Moreover, a U.S. person refers to any U.S. citizen, lawful
permanent resident, entity organized under U.S. federal or state
laws, and any person in the U.S. Furthermore, this EO empowers the
Treasury Secretary to obligate U.S. persons: (1) to comport
themselves in certain ways with respect to foreign entities over
which they exercise control; as well as (2) in particular
circumstances where U.S. persons "knowingly direct[]
transactions" by non-U.S. persons.
- Kinds of Covered Transactions: This EO
pertains only to these types of transactions that might convey
"intangible benefits": joint ventures; acquiring equity
such as through private equity, mergers and acquisitions, and
venture capital; greenfield investments; and specific debt
financing transactions such as those that may be converted to
equity.
- Outright Bans: U.S. persons may not invest in
these Chinese markets:
- Semiconductors and Microelectronics.
The ANPRM expresses concerns about "(i) specific technology,
equipment, and capabilities that enable the design and production
of advanced integrated circuits or enhance their performance; (ii)
advanced integrated circuit design, fabrication, and packaging
capabilities; and (iii) the installation or sale to third-party
customers of certain supercomputers, which are enabled by advanced
integrated circuits."
- Quantum Information Technologies.
Chinese companies involved with (i) quantum computers and
components — specifically, in the ANPRM's words,
"the production of a quantum computer, dilution refrigerator,
or two-stage pulse tube cryocooler"; (ii) quantum sensors
— "quantum sensing platforms designed to be exclusively
used for military end uses, government intelligence, or mass
surveillance end uses"; and (iii) quantum networking and
quantum communication systems — "a quantum network or
quantum communication system designed to be exclusively used for
secure communications, such as quantum key
distribution".
- Artificial Intelligence (AI). In the
ANPRM's diction, "[i]f the Treasury Department were to
pursue a prohibition in this category, a potential approach is to
focus on U.S. investments into [Chinese companies] engaged in the
development of software that incorporates an AI system and is
designed to be exclusively used for military, government
intelligence, or mass-surveillance end uses." Otherwise,
"'primarily used' could [supplant] 'exclusively
used.'"
- Semiconductors and Microelectronics.
The ANPRM expresses concerns about "(i) specific technology,
equipment, and capabilities that enable the design and production
of advanced integrated circuits or enhance their performance; (ii)
advanced integrated circuit design, fabrication, and packaging
capabilities; and (iii) the installation or sale to third-party
customers of certain supercomputers, which are enabled by advanced
integrated circuits."
- Prospects for Heightened Notification: The
Treasury Department might require notification for a more expansive
cadre of investments in the Chinese semiconductor and
microelectronics market as well as the AI space.
- Countries of Concern: Although the EO, at this
time, names only the People's Republic of China —
including Hong Kong and Macau —as a "country of
concern," that terminology might one day go on to encompass
other countries. This Order or its successors might then be
applicable to specific sectors in those countries of concern as
well.
- Submitting Comments to Treasury and Monitoring Future
Developments in This Space: U.S. fund managers and those
interested in investing in the aforementioned sectors of the
Chinese economy should consider submitting comments to the Treasury
during the currently running 45-day comment period before the
Treasury comes back with a Notice of Proposed Rulemaking (NPRM).
They should also watch this space for shifting and evolving
developments here. Notably, Treasury has declared that it might
— but not necessarily will — exclude from this outbound
investment review scheme some index funds, exchange-traded funds,
publicly-traded securities, mutual funds, certain types of
investments a limited partner makes, "intracompany transfers
of funds from a U.S. parent company to its [Chinese]
subsidiary," and more.
- Macro Trend: In addition to the Section 301 tariffs, imposed under the Trade Act of 1974, that remain in partial effect, this EO's prohibitive and notification-requiring strictures further restrict U.S.-China trade. This Order and the related ANPRM signal a new era in the U.S. government's regulation of outbound investments.
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.