New EO Restricts Investment in "Sensitive Technologies and Products" in Countries of Concern
Commentary by Nick Allen
President Joseph R. Biden issued an Executive Order ("EO") restricting certain U.S. investments in "covered national security technologies and products" in "countries of concern."
In the EO, President Biden identified the People’s Republic of China, Hong Kong and Macau as the "countries of concern" (hereafter China) and declared a national emergency. President Biden stated that China seeks to (i) achieve military dominance by "acquiring and diverting the world’s cutting-edge technologies" and (ii) advance their capabilities in semiconductors and microelectronics, quantum information technologies and artificial intelligence that "significantly enhances" their ability to conduct activities that threaten national security.
The EO indicated that additional countries or territories may be added if found to be engaging in a "comprehensive, long-term strategy" that threatens U.S. national security.
The EO directed the U.S. Department of the Treasury, in consultation with the U.S. Department of Commerce and other relevant agencies as appropriate, to (i) develop regulations creating classes of notifiable transactions and prohibited transactions involving China and (ii) consider any adjustments to the definition of "covered national security technologies and products."
Treasury ANPR
In conjunction with the EO, Treasury issued an advance notice of proposed rulemaking ("ANPR"). Under the ANPR, the final regulations would:
- prohibit U.S. persons from engaging in certain transactions involving covered foreign persons that "pose a particularly acute national security threat";
- require U.S. persons to notify the Treasury upon entering into certain other transactions involving covered foreign persons;
- define "covered foreign person" to mean any entity (i) organized under Chinese law or having a principal place of business in China or (ii) majority-owned by Chinese individuals or entities that, in either case, is or will be engaged in an identified activity with respect to a covered national security technology or product; and
- clearly define "covered national security technologies and products" including, where applicable, limits to certain end uses of those technologies and products.
Treasury stated it anticipates covered transactions by U.S. persons to include certain acquisitions of equity interests, greenfield, joint ventures and certain debt financing, with expected carveouts for other types of transactions such as certain investments into publicly-traded securities and exchange-traded funds. Further, Treasury is not proposing that the program apply retroactively, provided that, following the effective date of the regulations, it may request information about transactions completed or agreed to after the date of issuance of the EO to inform the development and implementation of the program.
In a Fact Sheet, the Treasury highlighted that this program builds on existing efforts, such as export prohibitions and restrictions, saying that the program would prevent U.S. investments from accelerating the "indigenization of these technologies in" China.
Comments on the ANPR must be submitted by September 28, 2023.
Commentary
The proposed regulations take a more nuanced approach, particularly as to prohibited transactions, than may have been expected given (1) prior executive orders regarding investments in Chinese companies and (2) legislative efforts towards creating an outbound investment review process. That being said, the impact cannot be known until the final rules are published.