On April 1, 2024, workers produce semiconductor products for export to Europe and the United States on a production line at a semiconductor manufacturer in Binzhou city, eastern China’s Shandong Province.
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Biden’s executive order, which directs restrictions on certain U.S. investments in semiconductors, microelectronics, quantum computing and artificial intelligence, is part of a broader effort to prevent American know-how from helping China develop advanced technologies and dominate global markets.
The US is expected to implement the regulations by the end of the year, and public comments on the proposed rules will be accepted until August 4th.
“The proposed rule will advance our national security by preventing the many benefits of certain U.S. investments – not just capital – from supporting the development of sensitive technologies in countries that could threaten our national security,” said Paul Rosen, Under Secretary of the Treasury for Investment Security.
The Treasury Department said the new rules are intended to implement a “narrow and targeted national security program” focused on specific foreign investments in countries of concern.
The Treasury Department outlined the proposed rules in August. On Friday, it included additional exceptions, including for transactions deemed to be in the U.S. national interest.
The proposed rules would prohibit AI transactions for certain end uses or involving systems trained to use certain amounts of computing power, but would also require notification for transactions related to the development of AI systems or semiconductors that are not otherwise prohibited.
Other exceptions apply to publicly traded securities such as index funds and mutual funds, certain limited partnership investments, acquisitions of ownership interests in countries of concern, transactions between a U.S. parent company and a majority-controlled subsidiary, pre-order binding commitments, and certain syndicated debt financings.
The Treasury Department said transactions with certain third countries that are determined to address national security concerns or where the third country has adequately addressed national security concerns may also be exempt.
The order initially covers China, Macau and Hong Kong, but U.S. officials have said they may later expand its scope.
Laura Black, a former senior Treasury official and attorney at Akin Gump LLP in Washington, said the Treasury Department is trying to define the rules as narrowly as possible, but that companies wanting to invest in China will need to exercise extra caution.
“US investors will need to conduct more thorough due diligence when investing in China and in Chinese companies operating in targeted sectors,” she said.
Black said the Treasury Department’s proposed rules target investments by U.S.-managed private equity funds and venture capital funds, as well as some U.S. limited partners in foreign managed funds and convertible bonds.
He added that the rules would also apply to some Chinese subsidiaries and parent companies and would also ban some investments by U.S. companies in third countries.
In addition to equity investments, joint ventures and greenfield projects, defaulted debt can also be captured when converted into equitization.
The restrictions follow existing restrictions on exports of certain technologies to China, including restrictions banning shipments of certain advanced semiconductors.
The aim is to prevent U.S. funds from helping China develop capabilities to modernize its military in those areas.
Those who violate the rules could be subject to both criminal and civil penalties and could have their investments cancelled.
The Treasury Department said it was consulting with U.S. allies and partners about the objectives of the investment restrictions, and noted that the European Commission and Britain had begun considering whether and how to address overseas investment risks.
