On 9 August 2023, US President Joe Biden issued an executive order to regulate US corporate or individual investments to China in what the US regards as sensitive technologies.
President Biden directed the Department of the Treasury to prohibit investments to China, including Hong Kong and Macau, in certain categories of sensitive technologies. In certain other technological categories, US enterprises and individuals will have to notify the treasury of investments involving China.
The treasury has issued an advance notice of proposed rulemaking, setting out how it intends to implement the executive order’s key elements and determining the issues that will be subject to public consultation – the deadline of which is 28 September 2023. While many finer points await clarification
from the treasury, the regulations are expected to profoundly affect the Chinese investment prospects of US entities.
Prohibition and notification
The treasury plans to prohibit US entities (US citizens and permanent residents, wherever located, entities organised under US federal or state law and their foreign branch offices, and people located in the US) from investing in Chinese entities in the following categories:
- Certain advanced semiconductors and microelectronics;
- Quantum information technologies; and
- Artificial intelligence systems with specific end uses.
The treasury also requires US entities to notify it on certain other Chinese investments. The scope of technologies subject to notification is currently uncertain, but certain semiconductor/microelectronic and AI technologies that are not prohibited will instead be covered by notification.
As contemplated, any notifications will be due within 30 days post-closing. While notification will not necessarily trigger an approval process, the treasury may have inquiries over the transaction. Notably, the treasury is also soliciting public opinion on whether to require US entities to notify immediately prior to closing.
According to available information, notification may include:
- The identities and details on the parties, including substantive beneficiaries;
- The nature of the transaction, its value, business rationale, expected timing and other information like transaction documents;
- Relevant basis for transactions to be covered by the notification mechanism;
- Due diligence for the exchange; and
- Information on historical and planned future transactions between the parties.
Application categories
Outside the prohibition and notification mechanisms, the treasury is considering whether to act on the following types of transactions:
- Equity acquisitions such as M&A, private equity, venture capital;
- Certain debt financings;
- Greenfield investments; and
- Establishment of joint ventures, no matter the site.
The treasury is also contemplating extending the above categories to “indirect” transactions to ensure the prohibition applies in specific scenarios. For example, where a US entity invests in a third country entity, which then invests in a Chinese entity using the proceeds, the transaction would be covered by the prohibition and notification rules.
To minimise the potential negative impact to economic development, the treasury is proposing that prohibitions and notifications do not cover transactions with limited national security risks such as acquisitions of publicly traded securities or investments in index funds, mutual funds or exchange-traded funds.
Knowing direction
The treasury is further contemplating features to extend the prohibitions and notification requirements to transactions “knowingly directed” by US entities, under which a US entity does not participate in the transaction but knowingly “orders, decides, approves or otherwise causes” it to be performed, and the transaction would otherwise be prohibited if engaged in by a US person.
To prevent overreaching, the treasury does not plan to include secondary or intermediary services into the prohibitive scope of “knowing direction”. Such services include third-party investment consultancy, underwriting, debt rating, prime brokerage, global custody or bank processing, clearing or sending payments, or legal, investigative or insurance services.
Business Law Digest is compiled with the assistance of Baker McKenzie. Readers should not act on this information without seeking professional legal advice. You can contact Baker McKenzie by e-mailing Howard Wu (Shanghai) at howard.wu@bakermckenzie.com
