The U.S. Department of the Treasury is set to implement a significant regulation on January 2, 2025, which will restrict outbound investments made by U.S. persons in advanced technology sectors within China. This regulation, referred to as the Final Rule, aims to limit U.S. investment in key technologies that could enhance the military capabilities of the People’s Republic of China, Hong Kong, and Macau.
The White House has articulated that these measures are designed to "keep America safe by preventing countries of concern—namely the People’s Republic of China—from advancing in key technologies that are critical to their military modernization." Under the new regulations, certain advanced semiconductors, microelectronics, quantum computing, and artificial intelligence (AI) technologies will either be prohibited or will require notification to the Treasury within a 30-day window post-transaction completion.
Under the Final Rule, U.S. persons—including citizens, permanent residents, and entities organised in accordance with U.S. law—will need to navigate their investments carefully. The regulation imposes a strict "knowledge" standard, compelling them to perform extensive due diligence in determining if their transactions fall under the new requirements. Unlike existing export controls and regulations governing inbound foreign investment through the Committee on Foreign Investment in the United States (CFIUS), this new framework does not envisage a licensing process or individual case reviews.
The implications extend beyond the Final Rule, as additional legislation is currently pending in Congress aimed at broadening these restrictions. This includes the proposed Comprehensive Outbound Investment National Security Act of 2024 (COINS Act), which seeks to ban American investments in 15 “prohibited technologies,” notably including AI, quantum computing, and advanced semiconductors. Initial legislative efforts to incorporate the COINS Act into the annual National Defense Authorization Act did not succeed, prompting lawmakers to explore alternative routes for expedited enactment.
The Final Rule establishes clear responsibilities for U.S. persons to ensure compliance across their cross-border investments. U.S. persons are obliged to take “reasonable steps” to prevent their controlled foreign entities—those over which they hold at least a 50% voting interest—from engaging in any disallowed transactions. Factors for consideration include governance agreements, internal compliance training, and mechanisms for internal controls.
A detailed classification of "covered transactions" encompasses various forms of investments including equity acquisitions, debt financing akin to equity interests, and certain developments related to land or property. However, exceptions exist for specific transactions such as investments in publicly traded securities that do not provide greater rights beyond standard minority protections.
The Final Rule further delineates two categories of "covered foreign persons,” chiefly focusing on entities operating within countries of concern, specifically targeting China. It explicitly identifies individuals and entities associated with those jurisdictions that either directly or indirectly affect U.S. interests through their engagements in sensitive technologies.
The regulation’s unveiling highlights three technology sectors of significant concern — semiconductors and microelectronics, quantum information technologies, and AI systems. Prohibited transactions in these sectors include several high-stakes areas of development and production deemed critical to national security. Notifiable transactions encompass a broader range of AI systems that do not fall under the prohibited transactions but still warrant governmental awareness.
Penalties for non-compliance can be severe, including civil fines reaching $368,137 per violation or criminal sanctions escalating to $1 million or 20 years of imprisonment for willful violations. In response to potential breaches, the U.S. government reserves the authority to annul transactions classified as prohibited, thereby reinforcing the stringent nature of the new regulations.
As U.S. businesses position themselves for potential investments in China, especially in technology domains sensitive to this regulation, they are advised to carry out thorough due diligence to ascertain whether their planned operations would trigger any prohibitions or obligations to notify the Treasury. The absence of a pre-emptive review system under the Final Rule makes it essential for businesses to maintain rigorous compliance and adjust their operational strategies accordingly.
As discussions regarding new legislative measures continue, U.S. companies are encouraged to remain informed about ongoing developments and adjustments to the regulatory landscape pertaining to outbound investments impacting national security interests. For further clarification on navigating these regulations, businesses are advised to seek guidance from legal counsel experienced in this domain.
Source: Noah Wire Services