Biden's Executive Order on Outbound Investments to China Offers Industry Input Opportunity

President Joe Biden's recent executive order offers companies a chance to actively shape a program concerning restricted outbound investments to China.

The August 9 order aims to curb the flow of U.S. dollars into nations of concern with military or surveillance activities that could benefit from the funds. The goal is to maintain an open investment environment in the United States while implementing necessary restrictions. Currently, China, including Hong Kong and Macau, is the sole nation designated as a concern within the order's annex.

Describing the executive order as "narrowly targeted," the White House explained that it empowers the Treasury Department to oversee investments by U.S. entities or individuals in sectors such as semiconductors, microelectronics, and quantum information technologies. Additionally, the order mandates disclosure of U.S. investments in specific artificial intelligence (AI) technologies and prohibits investments in other AI applications.

China is already subject to U.S. restrictions on the export of various technologies in these sectors. The prohibition on investments in these areas aims to prevent China from utilizing U.S. funds to develop military applications.

The Treasury Department is inviting comments on an advanced notice of proposed rulemaking for these regulations, with the deadline for submissions set for September 28. The proposed rules encompass a range of investment scenarios, including equity interest acquisition, greenfield investments, joint ventures, and certain debt financing transactions convertible to equity. The regulations are intended for businesses organized under the laws of a country of concern, with a principal place of business in such a country, or majority ownership by entities from a country of concern.

Certain exceptions are expected for "passive" U.S. investments, including publicly traded securities, index funds, mutual funds, and limited partner investments.

Regarding AI, the Treasury is contemplating the requirement of notification for U.S. investments in Chinese entities that utilize AI in software with potential military or intelligence applications. The agency is also seeking input on creating a targeted prohibition on investments in Chinese entities using AI in software for end uses that pose national security risks, such as military surveillance.

Legal experts emphasize the uniqueness of public input in shaping these regulations compared to past sanctions. Melissa Goldstein, a partner at law firm Schulte Roth & Zabel, highlighted the administration's emphasis on soliciting perspectives to refine the program. The Biden administration aims to target private equity investments in specific industries while safeguarding passive investments.

While these regulations share similarities with anti-money laundering (AML) requirements, they extend beyond identifying beneficial ownership. The rules require a deep dive into the financials and operations of the target company. Entities not subject to AML rules may still be bound by these outbound investment regulations.

Industry stakeholders are closely observing these developments. The U.S.-China Business Council stressed the importance of evolving definitions of "covered national security technologies and products." The U.S. Chamber of Commerce, while refraining from commenting on the advanced rulemaking notice, previously emphasized the need for a balanced approach to China-related policies.

As businesses prepare for the final rules, comprehensive due diligence on investments in China becomes crucial. Companies are required to evaluate whether the revenues of their investment targets are derived from designated technology sectors, both directly and indirectly. This process delves beyond conventional AML practices into scrutinizing the fundamental nature of business operations.

The evolving regulations and the Treasury's responsiveness to public input signal a nuanced approach to U.S.-China relations and the protection of national security interests within the realm of international investments.

By fLEXI tEAM