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situationOn June 21, 2024, the U.S. Department of the Treasury (“Treasury”) issued a notice of proposed rulemaking to implement President Biden’s Executive Order requiring national security review of certain U.S. investments in China.
resultThe proposed regulations would outright ban or require government notification of certain investments in the semiconductor and microelectronics, quantum information technology, or artificial intelligence (“AI”) sectors in “countries of concern,” currently defined as China and its administrative territories, Hong Kong and Macau.
Future outlook: The Treasury Department is seeking industry feedback on the proposed regulations until August 4, 2024. U.S. investors and businesses that operate in affected sectors and leverage advanced technology generally should consider this rule, its limitations, and the illustrative due diligence standards, and consider submitting comments.
On June 21, 2024, the Treasury Department issued a notice of proposed rulemaking to implement President Biden’s Executive Order requiring national security review of certain U.S. investments in China. The Treasury Department’s notice includes a full proposed regulation (the “Proposed Rule”) that would either outright prohibit or require government notification of certain investments in the semiconductor and microelectronics, quantum information technology, or AI sectors in “countries of concern,” currently defined as China and its administrative territories, Hong Kong and Macau.
The Treasury Department is seeking industry feedback on all aspects of the proposed rule until August 4, 2024. The proposed rule follows President Biden’s August 2023 executive order that directed the Treasury Department to develop a new program to address national security threats posed by U.S. foreign investments that may be used to develop sensitive technologies or products essential to military, intelligence, surveillance, or cyber-enabled capabilities. (Currently, the Treasury-led Committee on Foreign Investment in the United States (“CFIUS”) Inbound While restricting investment, sanctions and export controls restrict activities involving certain third parties, geographies or industry sectors.
As currently drafted, the requirements of the proposed regulations apply when a U.S. person knows (defined as including actual knowledge or reason to know) that a transaction is a covered transaction or when a U.S. person intends to engage in a covered transaction. The proposed regulations clarify that Treasury would “ordinarily” not consider a transaction subject to the foreign investment restrictions if a U.S. person has conducted “reasonable and diligent investigation” and has not yet discovered that the transaction is prohibited or requires notice. The proposed regulations include illustrative factors that Treasury would consider indicative of reasonable and diligent investigation, such as “efforts to obtain information and contractual assurances that could have been obtained through a reasonable transaction due diligence process.”
If notice is required, it generally must be given within 30 days of the closing date. However, if a U.S. person who did not have knowledge or reason to know at the time of the investment later actually learns that the transaction was a “covered transaction,” notice must be given within 30 days of the U.S. person gaining that knowledge. This signals the end of potential regulatory coverage for some transactions and could provide a springboard for soliciting submissions if the government contacts parties who inquire about the transaction, effectively bringing them to knowledge and imposing notification obligations.
The proposed rules would exempt certain categories of transactions, including investments in publicly traded securities, certain investments made as limited partner investors, intracompany transactions, and acquisitions of ownership interests of investors from countries of concern. The proposed rules also contemplate providing U.S. investors the right to seek a “national interest” exemption from the application of the foreign investment restriction requirements.
Although this effort was initially referred to as a “reverse CFIUS” regime, the proposed rule and accompanying Treasury fact sheet clarify that the foreign investment program is not intended to establish case-by-case review or pre-approval requirements at this time. That said, violations of foreign investment prohibitions or notification requirements could result in civil and criminal penalties under the International Emergency Economic Powers Act (the primary legal basis for the Executive Order), and in prohibited transaction situations, the Treasury Department could take action to void or invalidate the transaction or require divestment. The proposed rule also contemplates a process for U.S. persons to voluntarily self-disclose apparent violations, which could mitigate potential penalties.
Three key points
- The Treasury Department has proposed a new regulatory regime that would either outright ban or require government notification of certain investments in advanced technology areas, including semiconductors, microelectronics and quantum information technology (AI), in China and its administrative territories, Hong Kong and Macau.
- Industry is invited to provide feedback on all aspects of the proposed regulations, providing an opportunity to refine or clarify aspects of how the regulations apply to affected U.S. stakeholders.
- U.S. investors and companies operating in affected advanced technology sectors should continue to monitor the final implementation of the regulations by the Treasury Department to determine what legal restrictions, requirements, exceptions and due diligence obligations may apply to their future business activities.
