On 28 October, US Treasury issued new rules that restrict investment in Chinese development of semiconductors, quantum computing and AI (Covered Activity). Taking effect on 2 January 2025 the new rules are based on findings that China’s support for those industries threatens US national security.

A Covered Activity is divided into core technologies for which investments by US persons (individuals and entities, including their controlled overseas affiliates) will either be prohibited or subject to notice requirements. Acquiring LP interests in a non-US private fund engaging in Covered Activity constitutes a covered transaction when the US person LP knows, at the time of the investment, that the fund will likely invest in a China, Hong Kong, or Macau person (individuals, entities, governments, and entities connected with any of the foregoing individually or in the aggregate) in semiconductors, quantum computing and AI sectors and the fund in fact undertakes the investment that would be a covered transaction.

LPs failing to conduct a “reasonable and diligent inquiry” prior to investing may be deemed to have requisite knowledge, thereby triggering potential penalties. In applying this standard, Treasury will assume LPs can determine the county and general sector in which the fund is likely to invest.
LPs will be exempted from the new requirements if:

• the LP’s committed capital is $2 million or less; or
• the investor secured a binding contractual assurance that its capital will not be used for a transaction that would be a covered transaction.

Otherwise, the investment will be prohibited or trigger the notice requirement.

Accordingly, US LPs should consider securing appropriate contractual protections for investments in China-related technology funds that are expected to close on or after 2 January. Investors should also be mindful that the new rules impose an on-going obligation to report changes to investments that involve Covered Activity outside the scope of the above-described limited exception.