On August 9, 2023, President Biden issued an Executive Order (the “Order”) establishing an outbound investment review program that regulates certain U.S.-origin investments into foreign countries of concern, notably China. A White House statement accompanying the Order provided that the objective of the Order is to prevent U.S. capital and expertise from accelerating the development of sensitive technologies and products in countries that develop them to counter U.S. national security interests. The Biden administration further noted that the Order is a “narrowly targeted action” that seeks to maintain the United States’ “longstanding commitment to open investment.”

The Order directs the Secretary of the Treasury to issue regulations implementing a program that (1) prohibits U.S. persons from undertaking transactions involving certain technologies and products that pose a particularly acute national security threat to the United States, and (2) requires U.S. persons to notify the Treasury Department of transactions involving other technologies and products that may contribute to the threat to U.S. national security. The Order itself does not directly mandate any prohibitions on, or notifications of, U.S.-origin foreign investment at this time.

For the restrictions to apply, the foreign entities receiving the U.S. investment must be engaged in one of the following three sectors: semiconductors and microelectronics, quantum information technologies, and certain artificial intelligence systems. In each case, the transactions must involve entities located in or subject to the jurisdiction of a country of concern. At this time, the Order identifies only China, along with the Special Administrative Region of Hong Kong and the Special Administrative Region of Macau, as a country of concern, though the President may modify this list in the future.

Concurrent with the issuance of the Order, the Treasury Department issued an Advance Notice of Proposed Rulemaking (“ANPRM”) to provide guidance on the intended scope of the program and solicit input from the public on the implementation of the program before it goes into effect. Importantly, the ANPRM does not itself implement the Order and is not draft regulatory text. The Treasury Department will issue draft regulations at a later stage in the process. Nevertheless, the ANPRM provides preliminary guidance that indicates what the rules are likely to be with respect to key elements of the program.

1. U.S. Persons
As a threshold matter, the program will apply to instances where a “U.S. person,” wherever they are located, engages in a covered transaction. The Order defines a U.S. person to include 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.

In addition, the ANPRM provides that obligations may be placed on U.S. persons with respect to foreign entities that they control and in certain situations in which U.S. persons knowingly direct transactions by non-U.S. persons. For example, the ANPRM contemplates requiring U.S. persons to take appropriate action to cause foreign-organized subsidiaries under their control to comply with the program’s restrictions.

2. Covered Transactions
The Treasury Department anticipates that the transactions covered by the program will be certain types of U.S. investments in a covered foreign entity that could convey “intangible benefits” to the entity, such as enhanced standing and prominence, managerial assistance by the U.S. investor, access to investment and talent networks, market access, and enhanced access to additional financing.

In particular, the program will likely cover the acquisition of equity interests (e.g., through mergers and acquisitions, private equity, venture capital, and other similar arrangements), greenfield investments, joint ventures, and certain debt financing transactions that are convertible to equity. As discussed below, the Treasury Department expects to create exceptions for specific types of transactions, such as investments into publicly traded securities or into exchange-traded funds.

3. Covered Foreign Entities
The program’s restrictions will apply to investments in foreign entities that are engaged in activities related to “covered national security technologies and products.” Such entities must be organized under the laws of a country of concern (i.e., China), have a principal place of business in a country of concern, or be majority-owned by individuals or entities from a country of concern. The ANPRM identifies the following three categories of technologies and products that qualify as covered national security technologies and products for purposes of the program: semiconductors and microelectronics, quantum information technologies, and certain artificial intelligence systems.

a. Semiconductors and microelectronics

The Treasury Department is considering prohibiting U.S. investments in covered foreign entities that are engaged in the following activities related to semiconductors and microelectronics: 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. Furthermore, the Treasury Department may require notification for U.S. investments in covered foreign entities that are engaged in the design, fabrication, and packaging of less advanced integrated circuits.

b. Quantum information technologies

Per the ANPRM, the program may prohibit U.S. investments in covered foreign entities that are engaged in the following activities related to quantum information technologies: the production of quantum computers and certain components; the development of certain quantum sensors; and the development of quantum networking and quantum communication systems. There are no anticipated separate notification requirements for quantum information technologies.

c. Certain artificial intelligence systems

The Treasury Department is requesting comments from the public on how to shape a prohibition on U.S. investments in covered foreign entities that are engaged in the development of software that incorporates an artificial intelligence (“AI”) system and is designed to be exclusively or primarily used for military, government intelligence, or mass-surveillance end uses. The Treasury Department is also considering requiring notification for U.S. investments in covered foreign entities that are engaged in activities related to other software that incorporates an AI system and is designed to be exclusively or primarily used for certain uses related to cybersecurity, digital forensics tools, penetration testing tools, robotic systems, surreptitious listening, non-cooperative location tracking, or facial recognition.

4. Excepted Transactions
The ANPRM states that the Treasury Department is considering a range of exceptions for investments that otherwise may qualify as covered transactions. For example, the Treasury Department is considering excepting from the program’s coverage U.S. investments into publicly traded securities, index funds, mutual funds, exchange-traded funds, certain investments made as a limited partner, committed but uncalled capital investments, and intracompany transfers of funds from a U.S. parent company to its subsidiary.

Conclusion
Although the implementing regulations are yet to be released, the Order and ANPRM represent a key first step in the creation of an outbound investment review program by the U.S. government. The Treasury Department is encouraging interested parties’ submissions of written comments on the program framework outlined in the ANPRM. In particular, the ANPRM contains 83 questions on which it is seeking comments from interested parties. Comments are due by September 28, 2023, and the Treasury Department is expected to release preliminary regulations after this date. Given the time required to prepare and publish final regulations, the Order’s requirements likely will not be effective for several months.

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