On August 9, 2023, President Biden issued an Executive Order (E.O.) ordering the issuance of outbound investment restrictions. This E.O. comes after nearly a year of anticipation (as we have documented on several occasions over the past year). This is the start of the reverse Committee on Foreign Investment in the United States (CFIUS) process that has been mostly speculation (and blog articles) until yesterday. In conjunction, the Treasury Department issued a press release, fact sheet, and Advance Notice of Proposed Rulemaking (ANPRM) seeking comments from the public on the proposed restrictions by September 28.

These restrictions will undoubtedly impact many U.S. companies and investors operating in the following spaces:

1. quantum computing,
2. artificial intelligence, and
3. semiconductors

though we expect the U.S. government to at least consider expanding the limitations to other industries.

The Order

To address U.S. outbound investments that may contribute to the threat of U.S. national security, the E.O. prohibits or requires notifications of certain investment activity involving certain countries of concern. While the E.O. could cover multiple countries of concern, presently, the E.O. only lists China which includes Hong Kong and Macau.

The E.O. also authorizes Treasury to prohibit U.S. persons from knowingly directing transactions if such transactions would be prohibited transactions if engaged in by a U.S. person (which our keen-eyed readers will recognize as the concept of a “facilitation” prohibition from U.S. sanctions regulations).

The Proposed Regulations

To implement the E.O., Treasury released an ANPRM (and press release and fact sheet) on the same day. The ANPRM details how Treasury plans on implementing the program. This framework has already been met with various levels of criticism from members of Congress, who, we noted, have been pursuing their own outbound investment regime legislation.

Treasury is allowing industry to comment and further help shape how the program is implemented. Interested parties are expected to have until September 28 to file comments (which is 45 days after the anticipated publication of the rulemaking). Draft regulations will follow after the ANPRM. No retroactive enforcement is contemplated, though Treasury is reserving the right to request information about past investments as part of its efforts to understand these sectors and investments. The key points of the rulemaking are as follows:

Covered National Security Technologies and Products

In brief summary, the program proposes to prohibit U.S. persons undertaking a transaction with a covered foreign person engaging in activities involving:

Semiconductors and Microelectronics

• The development or production of electronic design automation software or front-end semiconductor fabrication equipment designed to be exclusively used for the volume fabrication of integrated circuits
• The design, fabrication, or packaging of advanced integrated circuits that meet or exceed specified criteria
• The installation or sale to third party customers of a supercomputer

Quantum Information Technologies

• The production of quantum computer, dilution refrigerator, or two-stage pulse tub cryocooler
• The development of quantum sensing platform designed to be exclusively used for military end uses, government intelligence, or mass-surveillance end uses
• The development of quantum network or quantum communication system designed to be exclusively used for secure communications, such as quantum key distribution

Artificial Intelligence Systems

• The development of software that incorporates an AI system and is designed to be exclusively used (or primarily used) for military, government intelligence, or mass-surveillance end uses

The program anticipates requiring U.S. persons to notify Treasury if undertaking a transaction with a covered foreign person engaging in activities involving:

Semiconductors and Microelectronics

• The design, fabrication, or packaging of integrated circuits for which transactions involving U.S. persons are not otherwise prohibited

Artificial Intelligence Systems

• The development of software that incorporates an artificial intelligence system and is designed to be exclusively used (or primarily used) for: cybersecurity applications, digital forensics tools, and penetration testing tools; the control of robotic systems; surreptitious listening devices that can intercept live conversations without the consent of the parties involved; non-cooperative location tracking (including international mobile subscriber identity (IMSI) Catchers and automatic license plate readers); or facial recognition

Definitions

While we absolutely could drone on about pulse tub cryocoolers, we leave you with a few further breadcrumbs to help you wade through the proposed rulemaking:

U.S. Persons

The program proposes that U.S. persons, wherever located, will be responsible for adhering to the prohibition and notification requirement. That would mean any U.S. citizen, lawful permanent resident, entity organized under the laws of the U.S. including foreign branches, and any person in the United States.

Covered Transactions

The program proposes to focus on U.S. persons undertaking certain types of covered transactions that could convey intangible benefits. Specifically, the program aims to cover direct or indirect: (1) acquisitions of an equity interest or contingent equity interest; (2) provisions of debt financing where such debt financing is convertible to an equity interest; (3) greenfield investments; or (4) establishments of a joint ventures, wherever located.

Covered Foreign Persons

The program proposes to define a covered foreign person as: (1) a person or entity of a country of concern that is engaged in, or a person or entity of a country of concern that a U.S. person knows or should know will be engaged in, an outbound category; or (2) a person or entity whose direct or indirect subsidiaries or branches are referenced in item (1) and which, individually or in the aggregate, comprise more than 50 percent of that person’s consolidated revenue, net income, capital expenditure, or operating expenses.

Excepted Transactions

The program anticipates creating an exception for certain types of passive and other investments that pose a lower likelihood of conveying intangible benefits including certain U.S. investments into publicly-traded securities, index funds, mutual funds, exchange-traded funds, certain investment made as a limited partner, committed but uncalled capital investments, and intracompany transfers of funds from a U.S. parent company to its subsidiary.

Comments

Interested parties are encouraged to submit comments on the scope of the program as summarized above as well as:

• Notification requirements on form, content, and timing;
• Compliance and record-keeping;
• Penalties; and
• Defining certain terms of art such as “knowingly directing transactions”, “controlled foreign entity”, “all reasonable steps” and creating a knowledge standard

As we have noted before, the review of outbound investments represents a brave new world of government oversight. The proposed program is currently still in draft form and able to be further shaped. We would be surprised to see these restrictions enter into effect before the end of 2024. Nevertheless, the restrictions are coming, and this opening salvo gives investors and industry the opportunity to prepare to succeed.