what happened:
June 21, 2024, U.S. Treasury Department (Ministry of Finance) The Investment Security Bureau issued a notice of proposed rulemaking (Outbound Investment NPRM) Presidential Decree No. 14105 ( Overseas Investment Orderwhich instructed the Treasury Department to regulate certain U.S. investments in China’s semiconductor, microelectronics, quantum information technology, and artificial intelligence sectors.ANPRM) will be issued by the Treasury Department in August 2023, providing the complete proposed regulations and an explanation of the intent of the proposal, and inviting public comment.
Conclusion:
The Foreign Investment NPRM further fleshes out the new national security program that the Treasury Department will implement and administer to regulate foreign investment in the U.S. Companies that have invested or are planning to invest in China, particularly in the technology sector, should review the Foreign Investment NPRM to understand the changes to their compliance obligations regarding U.S. foreign investment and consider submitting comments to the Treasury Department regarding the implementation of the Foreign Investment Order.
The whole story:
On August 9, 2023, President Biden issued the Foreign Investment Order, directing the Department of the Treasury, in consultation with other federal agencies, to regulate certain U.S. investments in China’s semiconductor and microelectronics, quantum information technology, and artificial intelligence sectors. The Department of the Treasury simultaneously issued the ANPRM, seeking comments related to the implementation of the Foreign Investment Order. Our coverage of the Foreign Investment Order and the ANPRM, as well as a summary of the proposed rulemaking, can be found here.
On June 21, 2024, the Department of the Treasury issued the Foreign Investment NPRM, setting out proposed regulations to implement the Foreign Investment Mandate. In a press release accompanying the NPRM, the Department of the Treasury stated that the NPRM provides further detail on key concepts and aspects of the program’s implementation, including:
- Obligations of U.S. Persons with Respect to “Covered Transactions.”
- Covered transactions and categories of “excluded transactions.”
- Technical specifications to inform the scope of covered transactions based on certain technologies and products in the fields of semiconductors, microelectronics, quantum information technology and artificial intelligence.
- Information that U.S. persons are required to provide to the Treasury as part of their notification.
- The knowledge standard and expectation that Americans will conduct reasonable and diligent investigation before entering into a transaction.
- The actions that would be considered violations of the proposed rules and the penalties that would be applicable for such actions.
As noted in our previous posts on the new foreign investment regime, the Foreign Investment Order directs the Treasury to regulate two types of covered transactions: (1) “notifiable transactions,” which U.S. persons must notify the Treasury, and (2) “prohibited transactions,” which U.S. persons are prohibited from engaging in. The regulations proposed in the Foreign Investment NPRM do not require prior individual review by the Treasury of covered transactions or any other transactions, or establish a licensing or approval process through which U.S. persons would seek prior authorization for covered transactions. Rather, the U.S. person involved in the transaction is burdened with determining whether a particular transaction is prohibited, permitted but subject to notification, or not subject to the regulations because it is an excepted transaction or does not fall within the scope of the authority set forth in the proposed regulations.
The main differences between the Outbound Investment NPRM and the previous outline of the ANPRM are as follows:
- Knowledge Standards: In the ANPRM, the Treasury Department indicated it was considering adopting a knowledge standard across the Foreign Investment program, meaning that for a transaction to be a covered transaction, a U.S. person must know, or reasonably should know, based on publicly available information or information available through reasonable and appropriate due diligence, that the transaction involves a covered foreign person and that the transaction is a covered transaction. The Foreign Investment NPRM provides that for a transaction to be a covered transaction, a U.S. person must be aware of relevant facts or circumstances at the time of the transaction, including actual knowledge that a fact or circumstance exists or is substantially certain to occur, knowledge that a fact or circumstance exists or is likely to occur in the future, or reason to know that a fact or circumstance exists, any of which establishes that the transaction involves a covered foreign person (i.e., a person from a country of concern who is engaged in activities involving one or more of the covered national security technologies and products identified in the Foreign Investment NPRM).
- Definition: Many of the defined terms have been adjusted from the definitions originally proposed in the ANPRM, including the definition of “AI system,” which the Foreign Investment NPRM proposes to follow the definition in Executive Order 14110 (on artificial intelligence) but seeks comment on certain calculation thresholds, and “covered transaction,” which the Foreign Investment NPRM proposes to include investments of U.S. persons made as limited partners in certain pooled funds that are not U.S. persons if the U.S. investor knows at the time of the investment that the pooled fund is likely to invest in persons from countries of concern who are involved in one or more of the three sectors of covered national security technologies and products identified in the Foreign Investment Order.
- Controlled foreign corporationsThe proposed regulations would specify the obligations regarding “controlled foreign corporations” and would require U.S. persons to apply the foreign investment rules to non-U.S. corporations that they control. The proposed regulations also provide guidance on what constitutes “control.”
- Interactions with other regimes: Foreign Investment The NPRM proposed that any covered transaction would be prohibited if the covered foreign person is included on any of several U.S. government lists, such as the Entity List maintained by the U.S. Department of Commerce’s Bureau of Industry and Security, if the covered foreign person is engaged in a covered activity (whether a prohibited or notifiable transaction), or if the covered foreign person involves such an activity.
- exceptionForeign Investments: The NPRM proposes and seeks comment on alternative exceptions to define the threshold at which an investment by a U.S. limited partner in a pooled fund that invests in covered foreign persons constitutes an excluded transaction. It also proposes to exclude certain transactions with or involving persons from a country or territory outside the United States designated by the Treasury Department pursuant to criteria (to be developed by the Treasury Department) related to that country’s or territory’s specific measures to address national security risks associated with certain foreign investments.
The Treasury Department is soliciting public comment on the Foreign Investment NPRM by August 4, 2024.
