Industry News

Executive Order Limits Some U.S. Outbound Investment

Aug. 14, 2023
By: Marvin E. McPherson

The United States continues full steam ahead in dealings with controls of advanced technology and products, that in the wrong hands, may decrease the country’s technological and national security advantages. The President issued Executive Order (E.O.) Addressing United States Investments in Certain National Security Technologies and Products in Countries of Concern. This Order and forthcoming regulations will impact the technology industry but will likely grow as the newly established program studies more items that are or may become vital for national security.

Executive Order Overview

The E.O., as issued by the President, lays out a comprehensive framework to address U.S. investments in specific national security technologies and products originating from countries of concern. It delineates two primary directives:

1. Prohibited Transactions and Reporting Requirements: The E.O. mandates the establishment of new industry regulations that prohibit certain transactions involving covered foreign entities engaged in activities related to distinct areas of advanced technology. These technology areas encompass Semiconductors and Microelectronics, Quantum Information Technologies, and Certain Artificial Intelligence Systems.

2.     Implementation and Establishment of U.S. Outbound Investment Program: The E.O. directs the Department of the Treasury to enact regulations and create a working group responsible for executing the President's directives. The working group is tasked with overseeing the implementation of the E.O. and formulating regulations accordingly.

Impact on Industry and Reporting Obligations

The E.O. introduces several compliance implications for industries engaging in transactions involving the above three advanced technology areas and products. Key aspects include:

1.     Prohibited Transactions: U.S. persons are prohibited from participating in transactions with covered foreign persons that pertain to the identified advanced technology areas.

2.     Notifiable Transactions: The E.O. introduces reporting requirements for “notifiable transactions,” requiring U.S. persons to provide information concerning transactions involving covered foreign entities. This encompasses entities located in or subject to the jurisdiction of countries of concern, as well as entities owned by individuals or entities from such countries, engaged in activities pertaining to the specified technologies and products.

The current list of countries of concern include The People’s Republic of China. (The Special Administrative Region of Hong Kong and The Special Administrative Region of Macau)

Department of Treasury's Role and Advance Notice of Proposed Rulemaking (ANPR)

As a companion to the E.O, the Treasury issued an Advance Notice of Proposed Rulemaking (ANPR) to outline the proposed regulatory framework. The ANPR notes that it is not a regulatory text and does not in itself implement the E.O.

The ANPR outlines the program which is going to focus on “Specific categories of covered transactions” that convey intangible benefits. Treasury provided examples such as: acquisition of equity interests (e.g., via mergers and acquisitions, private equity, venture capital, and other arrangements); greenfield investments; joint ventures; and certain debt financing transactions that are convertible to equity.

The restrictions are anticipated to apply to investments in entities that are engaged in activities related to defined sub-sets of technologies and products, and that are organized under the laws of a country of concern, have a principal place of business in a country of concern, or are majority-owned by country of concern individuals or entities. Presently the E.O. lists the PRC as a country of concern.

Agencies responsible for the E.O. implementation have a year to refine or elucidate the E.O.'s provisions. Public comments are due to Treasury by September 28, 2023

As the legal landscape evolves, we will continue to provide updates on further developments related to the E.O. and its implications. For any inquiries or assistance, please do not hesitate to contact any attorney at Barnes Richardson and Colburn.