On August 9, 2023, President Biden signed Executive Order (E.O.) 14105, “Addressing United States Investments in Certain National Security Technologies and Products in Countries of Concern,” directing the Department of the Treasury to impose regulations on U.S. persons or entities engaged in transactions involving certain technologies and products that pose a threat to the national security of the United States.
This much-anticipated E.O. identifies three broad categories of technologies and products to be covered by a new outbound investment program: semiconductors and microelectronics; quantum information technologies; and certain artificial intelligence systems. E.O. 14105 further identifies China (including its Special Administrative Regions of Hong Kong and Macau) as a “country of concern” that is exploiting or possesses the ability to exploit U.S. investments in order to develop critical military, intelligence, surveillance, or cyber-enabled capabilities.
Following the announcement of E.O. 14105, Treasury issued an Advance Notice of Proposed Rulemaking (ANPRM), “Provisions Pertaining to U.S. Investments in Certain National Security Technologies and Products in Countries of Concern,” published in the Federal Register on August 14. Although the ANPRM provides guidance regarding the potential scope of the outbound investment program, it does not include draft regulatory language. Treasury has solicited comments from interested persons on how these regulations should be implemented.
We provide more detail about E.O. 14105 and the ANPRM below, along with potential implications for U.S. businesses and how to submit comments.
Executive Order 14105
E.O. 14105 declares a national emergency to deal with countries of concern advancing their military, intelligence, surveillance, and cyber-enabled capabilities through their exploitation of U.S. investment in foreign products and technologies. The E.O. directs Treasury to impose regulations
(1) Prohibiting U.S. persons from engaging in certain transactions involving certain technologies and products that serve as a national security threat to the United States (“prohibited transactions”); and
(2) Requiring U.S. persons to notify Treasury of certain transactions involving certain technologies and products that may threaten U.S. national security (“notifiable transactions”).
These regulations would pertain to transactions involving covered foreign persons, defined as persons or entities located in or subject to the jurisdiction of a country of concern. They specifically target three broad categories of high-level technologies and products, selected due to their critical role in developing advanced military, intelligence, surveillance, and cyber-enabled capabilities:
(1) Semiconductors and microelectronics
(2) Quantum information technologies
(3) Artificial intelligence (AI)
Currently, only China has been identified as a country of concern, although additional countries may be added in future.
Treasury’s Advance Notice of Proposed Rulemaking
The ANPRM outlines Treasury’s proposed implementation of the outbound investment program. Notably, Treasury has indicated that the program is not intended to result in case-by-case review of all U.S. outbound investments. Rather, outbound investment review is a component of a broader strategy towards China that will allow the United States to address the intangible benefits associated with investment that are not addressed by existing export controls and inbound investment tools. Treasury has been tasked with establishing the specifics of this program, which includes determining the transactions to be covered and identifying the specific technologies and products to be covered.
Treasury is soliciting public comment on numerous aspects of the outbound investment program, including, but not limited to, the scope of transactions covered by the programs and which transactions should be prohibited or subject to notification:
- Covered transactions
- The current proposed definition of “covered transactions” focuses on types of transactions that could convey intangible benefits, specifically “a U.S. person’s direct or indirect (1) acquisition of an equity interest or contingent equity interest in a covered foreign person; (2) provision of debt financing to a covered foreign person where such debt financing is convertible to an equity interest; (3) greenfield investment that could result in the establishment of a covered foreign person; or (4) establishment of a joint venture, wherever located, that is formed with a covered foreign person or could result in the establishment of a covered foreign person.”
- Semiconductors and microelectronics and products
- Prohibited: U.S. investments in Chinese entities engaged in the development of electronic design automation software or semiconductor manufacturing equipment; the design, fabrication, or packaging of advanced integrated circuits; and the installation or sale of supercomputers.
- Requiring notification: U.S. investments in Chinese entities engaged in the design, fabrication, and packaging of less advanced integrated circuits.
- Quantum information technologies
- Prohibited: U.S. investments in Chinese entities engaged in the production of quantum computers and certain components; the development of certain quantum sensors; and the development of quantum networking and quantum communication systems.
- Requiring notification: None.
- Certain artificial intelligence systems
- Prohibited: Treasury is requesting comments on how to shape a prohibition on U.S. investments in Chinese entities engaged in a narrow set of activities related to software that incorporates an AI system and is designed for particular end uses with national security implications, e.g., military surveillance end uses.
- Requiring notification: U.S. investments in Chinese entities engaged in activities related to software that incorporates an AI system and is designed for certain end-uses that may have military or intelligence applications and pose a national security risk.
Implications for U.S. companies
The implementation of the outbound investment program will have implications for U.S. companies, wherever located, and potentially for companies with any connection to the United States. It is expected that U.S. persons, wherever they are located, will be responsible for adhering to the prohibitions and the notification requirements established by the outbound investment program. This is not limited to investments that flow from the United States. “U.S. person” includes any U.S. citizen, lawful permanent resident, 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. Additionally, Treasury may 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. Any entity with a connection to the United States, whether through ownership, management, or employees, will need to review the program to determine the extent to which its activities may be covered.
U.S. companies must also be aware of any activities they engage in related to the above-mentioned categories. Because this program also reaches the activities of foreign branches and subsidiaries, a thorough understanding of activities relating to semiconductors and microelectronics, quantum information technologies, and AI, as well as potential investments in China related to these sectors, is required. Conducting such a review now will help U.S. companies and those subject to the outbound investment program to adapt more quickly to the regulations as they evolve.
Interested parties are encouraged to submit written comments regarding the outbound investment program at https://www.regulations.gov/ by September 28, 2023. Comments may address any or all of the 83 questions outlined in the ANPRM.
The outbound investment program complements existing U.S. export controls and inbound investment screening tools, focusing on the intangible benefits that accrue to countries such as China through U.S. investments. The program aims to target a narrow sector of investments in highly sensitive technologies and products in order to protect U.S. national security, while continuing to support a commitment to open investment across the globe. As the details of the program are being developed, interested parties are encouraged to provide comments on the ANPRM.
Contact us if you have questions about the development of the outbound investment program or its potential impact on your business.