On August 9, President Biden issued an Executive Order on Addressing United States Investments in Certain National Security Technologies and Products in Countries of Concern (EO). The “Countries of Concern,” listed in an Annex to the EO, are the People's Republic of China, the Special Administrative Region of Hong Kong, and the Special Administrative Region of Macau. In conjunction with the EO, the U.S. Department of the Treasury (Treasury) issued a five-page Fact Sheet, along with a detailed, 28-page Advance Notice of Proposed Rulemaking (ANPRM) that requests public input on 83 questions, in advance of the issuance of implementing regulations. The White House and Treasury also issued separate press releases.

The principal thrust of the EO is that “countries of concern” have been benefiting from U.S. investment to develop sensitive technologies and products critical to those countries’ military, intelligence, surveillance, and cyber-enabled capabilities, to the detriment of U.S. national security. The three areas of greatest concern are (i) semiconductors and microelectronics; (ii) quantum information technologies; and (iii) certain artificial intelligence systems. Advancement in these areas will accelerate development of advanced computational capabilities that are expected to lead to more sophisticated weapons systems, breaking of cryptographic codes, and other applications that could provide these countries with military advantages.

The EO orders the Secretary of the Treasury, in consultation with the Secretary of Commerce and, as appropriate, the heads of other executive departments and agencies, to issue, subject to public notice and comment, regulations that require U.S. persons (a standard term that includes U.S. entities and persons in the United States) to provide notification of information relative to certain (as yet unspecified) transactions involving “covered foreign persons” and that prohibit U.S. persons from engaging in certain other (as yet unspecified) transactions involving “covered foreign persons.”  

The EO provisionally defines certain key terms. “Covered foreign person” is defined to mean “a person of a country of concern who or that is engaged in activities, as identified in the regulations issued under this order, involving one or more covered national security technologies and products.” “Covered national security technologies and products” is defined to mean “sensitive technologies and products in the semiconductors and microelectronics, quantum information technologies, and artificial intelligence sectors that are critical for the military, intelligence, surveillance, or cyber-enabled capabilities of a country of concern[.]” The ANPRM seeks public comment on the proposed definitions.

 The EO calls for regulations that include:

• Provisions that identify categories of notifiable transactions that involve covered national security technologies and products that the Secretary of the Treasury, in consultation with the Secretary of Commerce and, as appropriate, the heads of other relevant agencies, determines “may contribute to the threat” to the national security of the United States.  The regulations will require U.S. persons to notify the Department of the Treasury of each such transaction, and to include relevant information on the transaction in each such notification.
• Provisions that identify categories of prohibited transactions that involve covered national security technologies and products that the Secretary of the Treasury, in consultation with the Secretary of Commerce and, as appropriate, the heads of other relevant agencies, determines pose a “particularly acute national security threat because of their potential to significantly advance the military, intelligence, surveillance, or cyber-enabled capabilities of countries of concern.” The regulations will prohibit U.S. persons from engaging, directly or indirectly, in such transactions. 

In addition, under the EO, the regulations may contain the following:

• Provisions that prohibit U.S. persons from knowingly directing transactions if such transactions would be prohibited transactions pursuant to the EO if engaged in by a U.S. person.  
• Provisions that require U.S. persons (i) To provide notification to the Department of the Treasury of any transaction by a foreign entity controlled by such U.S. person that would be a notifiable transaction if engaged in by a U.S. person; and (ii) to take all reasonable steps to prohibit and prevent any transaction by a foreign entity controlled by such U.S. person that would be a prohibited transaction if engaged in by a U.S. person.

After noting that the United States benefits from an “open investment climate,” the Treasury emphasizes that the new program is “narrowly targeted at investments in highly sensitive technologies and products[.]” To that end, the ANPRM seeks public input into the subsets of national security technologies and products related to semiconductors, quantum information technology, and artificial intelligence systems, with a view toward targeting these sectors in a manner that safeguards national security while maintaining this country’s longstanding commitment to open investment.

Significantly, the Treasury “anticipates excepting certain transactions, including potentially those in publicly-traded instruments and intracompany transfers from U.S. parents to subsidiaries.” The ANPRM elaborates that Treasury is considering exceptions for investments (i) in publicly-traded securities; (ii) in index funds, mutual funds, exchange-traded funds and similar instruments; (iii) made as a limited partner in a venture capital fund, private equity fund, fund of funds, or other pooled investment fund where the limited partner’s contribution is solely capital into a limited partnership structure, and the limited partner cannot make managerial decisions, is not responsible for debt beyond the investment, and lacks the ability (formally or informally) to influence or participate in decision making or operations of the fund or of a covered foreign person, and the investment is below a threshold to be set by the Secretary of the Treasury. Any investment that affords a U.S. person “rights beyond those reasonably considered to be standard minority shareholder protections” will not be excepted from the restrictions.  Also contemplated for exception are acquisition by a U.S. person of all of the equity or other interest owned or held by a covered foreign person in an entity or assets located outside of a country of concern; an intracompany transfer of funds from a U.S. parent to a subsidiary located in a country of concern; and a transaction made pursuant to a binding, uncalled capital commitment entered into before issuance of the EO.

The deadline for submitting comments in response to the ANPRM is September 28. Given the complexity of the political, technological, and economic issues implicated by the EO, as reflected in the nearly seven dozen questions listed in the ANPRM, it could be quite some time before Treasury, in consultation with other agencies, processes the information received and issues implementing regulations. For the moment, there are no specific compliance obligations, but U.S. businesses are on notice of coming regulations, and should try to plan accordingly.