Washington, D.C. (August 18, 2023) – On August 9, 2023, President Biden issued Executive Order 14105 (E.O.), an outbound investment regulation limiting United States persons' investment in certain "countries of concern." The E.O. specifically addresses the administration's concerns over China's advancing technology industry, including semiconductors and microelectronics, quantum information technologies, and artificial intelligence, and the effects it could have on the national security of the United States.
The text of the E.O. makes clear that the United States intends to curtail efforts by a "country of concern" to "eliminate barriers between civilian and commercial sectors and military and defense industrial sectors, not just through research and development, but also by acquiring and diverting the world's cutting-edge technologies, for the purposes of achieving military dominance."
Companies and individuals in the United States need to take note. This E.O. follows the trade restrictions put in place last October by the Department of Commerce's Bureau of Industry and Security (BIS). On October 7, 2022, BIS implanted broad restrictions on the exportation of chip-making materials from the United States to China as part of efforts to protect national security and foreign policy interests. A previous alert by Lewis Brisbois provides further information on these restrictions.
The new E.O. targets the military, intelligence, surveillance, and cyber capabilities of any "country of concern;" although, to date, only the People's Republic of China, including the Special Administrative Regions of Hong Kong and Macau, has been classified as such. Pursuant to the E.O., the Secretary of the Treasury, in consultation with the Secretary of Commerce and, as appropriate, the heads of other relevant executive departments and agencies, shall issue regulations that will restrict United States persons from investing in various industries, including, as noted above, semiconductors and microelectronics, quantum information technologies, and artificial intelligence.
These regulations will identify categories of transactions that are either "notifiable transactions," requiring notification to the Department of the Treasury, or "prohibited transactions," in which United States persons are prohibited from engaging, directly or indirectly.
"Notifiable transactions" include transactions that "may contribute to the threat to the national security of the United States." "Prohibited transactions" include transactions posing "a particularly acute national security threat because of their potential to significantly advance the military, intelligence, surveillance, or cyber-enabled capabilities of countries of concern."
The Department of Treasury sought public comments in advance of implementing relevant regulations and stated that it anticipates exempting "certain transactions, including potentially those in publicly traded instruments and intracompany transfers from U.S. parents to subsidiaries." Those with interests in the targeted Chinese industries should pay close attention to the regulations to be issued by the Department of the Treasury in coming months.
As mentioned above, although the E.O. ratchets up United States trade pressure on China, members of Congress have expressed an interest to further curtail United States investment in China. For example, Senator Marco Rubio (R-FL) indicated he would introduce legislation in September to provide additional oversight over outbound investment to China. European Commission President Ursula von der Leyen has recently stated that the EU is considering the development of "a targeted instrument on outbound investments" to address China's policies regarding critical technology.
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