On August 9, 2023, President Biden issued an Executive Order ("E.O.") on outbound investment regulation. This long-anticipated action marks the first time the U.S. government has sought to regulate investments made abroad by U.S. firms.
The E.O. directs the Department of the Treasury ("Treasury"), in consultation with the Department of Commerce and other relevant agencies, to establish new rules that limit certain investments in "countries of concern" and impose notification requirements on investments involving certain sensitive technologies. While details on the implementation of these new rules are still forthcoming, the E.O. is clear on what their focus will be: critical technology in China.
Covered National Security Technologies & Countries of Concern
The new restrictions on outbound investment will focus on "covered national security technologies," defined as products in "the semiconductors and microelectronics, quantum information technologies, and artificial intelligence ("AI") sectors that are critical for the military, intelligence, surveillance, or cyber-enabled capabilities of a country of concern." As expected, China and its Special Administrative Regions of Hong Kong and Macau are the listed "countries of concern." However, no other countries or territories are currently listed as a focus of the new restrictions.
Prohibitions & Notification Requirements
The rules will prohibit certain categories of investments in firms in China, including Hong Kong and Macau, that involve the covered national security technologies described above. These investments will have to "pose a particularly acute national security threat" to be included in a prohibited category. In addition, the regulations will identify categories of "notifiable transactions," which will require investors to provide notification to Treasury when engaging in a transaction that involves covered national security technologies deemed "a threat to the national security of the United States." The exact scope of the categories for prohibited and notifiable transactions are still to be determined by Treasury and other relevant agencies. However, as stated above, the rules will focus on technology sectors that are of interest to the U.S. for their national security implications.
Forthcoming Implementing Regulations and Public Comment Period
On August 14, Treasury will publish an advance notice of proposed rulemaking ("ANPRM") and initiate a public comment period lasting 45 days regarding the new regulations. (Find the unpublished ANPRM here.) Treasury seeks public input regarding all aspects of how the E.O. should be implemented, including the definitions of "U.S. person," "covered foreign person," "covered transaction," and "excepted transaction," and asks detailed questions regarding all these topics. Additionally, the ANPRM provides some detail as to specific "covered national security technologies and products" to potentially be controlled under the forthcoming regulations, either as prohibited transactions or notifiable transactions. These technologies and products may include:
Prohibited Transactions
- Technologies that Enable Advanced Integrated Circuits
- Software for Electronic Design Automation
- Integrated Circuit Manufacturing Equipment
- Advanced Integrated Circuit Design and Production
- Advanced Integrated Circuit Design
- Advanced Integrated Circuit Fabrication
- Advanced Integrated Circuit Packaging
- Supercomputers
- Quantum Information Technologies
- Quantum Computers and Components
- Quantum Sensors
- Quantum Networking and Quantum Communication Systems
- Military, Government Intelligence, or Mass Surveillance AI Systems
Notifiable Transactions
- Integrated Circuit Design, Fabrication, or packaging that do not meet the requirements of prohibited transactions involving such products or technologies.
- AI Systems for Cybersecurity, Robotics Control, Surreptitious Listening, Location Tracking, and Facial Recognition
The ANPRM provides additional details and seeks public comment regarding each of the above categories of products and technologies. After the regulations have gone into effect, Treasury will have one year to decide whether the regulations should be adjusted and to provide the President with a report on the effectiveness of the measures and any recommendations for adjustment.
Although the new restrictions may garner backlash from China, U.S. officials such as Treasury Secretary Janet Yellen have indicated that protecting U.S. national security interests in the critical technology context is a top priority. Meanwhile, other countries may be following the U.S.'s lead in restricting certain outbound investment in China. For example, European Commission President Ursula von der Leyen has recently stated that the EU is considering the development of "a targeted instrument on outbound investment," citing concerns over China's policies related to critical technology and military advancement.
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