On August 9, 2023, President Biden issued his much anticipated executive order on outbound U.S. investment in China, Hong Kong, and Macau (dubbed “reverse CFIUS”). The Treasury Department simultaneously released an advance notice of proposed rulemaking (ANPRM) related to the order. Public comments on the ANPRM will be accepted until September 28. The final rule Treasury issues may also be substantively different from what is contemplated in the ANPRM.
The executive order
The new executive order targets U.S. investment in “sensitive technologies and products in the semiconductors and microelectronics, quantum information technologies, and artificial intelligence sectors that are critical for [China, Hong Kong, or Macau’s] military, intelligence, surveillance, or cyber-enabled capabilities.” The order directs the Treasury Secretary, in consultation with the Commerce Secretary and the heads of other relevant agencies like the State, Defense, Energy, and Homeland Security Departments, to issue regulations subject to public comment to implement the new restrictions. The regulations will define:
- “Sensitive technologies and products,” which may include a definition limited to only certain end-uses;
- The scope of transactions that require notice to the Treasury Department; and
- Transactions that pose an acute national security threat and are prohibited.
The regulations will apply to all U.S. persons, which includes U.S. citizens; lawful permanent residents; entities organized under U.S. or state law, including foreign branches; and persons in the U.S. The regulations may also expand the scope to transactions by foreign entities controlled by U.S. persons.
Advance notice of proposed rulemaking
According to the ANPRM, the Treasury Department does not contemplate a case-by-case review of U.S. outbound investment. Instead, the transaction parties will have the obligation to determine whether a transaction is prohibited, subject to notification, or permitted without notification. The ANPRM also indicates the regulations would apply to U.S. persons wherever they are located.
Under the program proposed in the ANPRM:
- U.S. Persons. The definition of “U.S. person” would remain the same as in the executive order without being expanded to include foreign entities controlled by U.S. persons.
- Forward-Looking. The program would not be intended to cover transactions entered into prior to August 9. The Treasury Department may, however, request information about transactions completed or agreed to after August 9 to better inform the development and implementation of the program.
- Prohibited Transactions. U.S. persons would be prohibited from engaging in “covered transactions” with “covered foreign persons” involving:
- The development or production of electronic design automation software designed to be exclusively used for integrated circuit design;
- The development or production of front-end semiconductor fabrication equipment designed to be exclusively used for the volume fabrication of integrated circuits;
- The design of integrated circuits that exceed the thresholds in Export Control Classification Number (ECCN) 3A090 in Supplement No. 1 to 15 C.F.R. Part 774 of the Export Administration Regulations (EAR), or integrated circuits designed for operation at or below 4.5 Kelvin;
- The fabrication of integrated circuits that meet any of the following criteria: (1) logic integrated circuits using a nonplanar transistor architecture or with a technology node of 16/14 nanometers or less, including but not limited to fully depleted silicon-on-insulator (FDSOI) integrated circuits; (2) NOT-AND (NAND) memory integrated circuits with 128 layers or more; (3) dynamic random-access memory (DRAM) integrated circuits using a technology node of 18 nanometer half-pitch or less; (4) integrated circuits manufactured from a gallium-based compound semiconductor; (5) integrated circuits using graphene transistors or carbon nanotubes; or (6) integrated circuits designed for operation at or below 4.5 Kelvin;
- The packaging of integrated circuits that support the three-dimensional integration of integrated circuits, using silicon vias or through mold vias;
- The production of a quantum computer, dilution refrigerator, or two-stage pulse tube cryocooler;
- The development of a quantum sensing platform designed to be exclusively used for military end uses, government intelligence, or mass-surveillance end uses; and
- The development of a quantum network or quantum communication system designed to be exclusively used for secure communications, such as quantum key distribution.
- Notifiable Transactions. U.S. persons would be required to notify the Treasury Department about covered transactions with covered foreign persons involving the following (that are not otherwise prohibited under the restrictions outlined above):
- The design of integrated circuits;
- The fabrication of integrated circuits;
- The packaging of integrated circuits; and
- The development of software that incorporates an “artificial intelligence system” and is designed to be exclusively used for: cybersecurity applications, digital forensics tools, and penetration testing tools; the control of robotic systems; surreptitious listening devices that can intercept live conversations without the consent of the parties involved; non-cooperative location tracking (including international mobile subscriber identity (IMSI) Catchers and automatic license plate readers); or facial recognition.
- Excepted Transactions. To minimize unintended consequences and focus on transactions that present a higher risk, the following categories of transactions would be excluded from the definition of “covered transaction”:
- An investment in a publicly traded security;
- An investment in an index fund, mutual fund or exchange-traded fund or similar instrument;
- An investment as a limited partner in a fund;
- The acquisition by the U.S. persons of all interests in the entity or assets in a third country from a Chinese, Hong Kong, or Macau seller;
- An intracompany transfer of funds from the U.S. parent company to a subsidiary located in China, Hong Kong, or Macau;
- A transaction under a binding, uncalled capital commitment entered into before August 9, the date of the executive order.
The excepted transactions would not apply to investments that afford U.S. persons rights beyond those reasonably considered to be standard minority shareholder protections.
- Additional Exclusions. The Treasury Department also intends to carve out the following activities from the covered transaction definition: university-to-university research collaboration; contractual arrangements or the procurement of material inputs for any of the covered national security technologies or products; intellectual property licensing arrangements; bank lending; the processing, clearing, or sending of payments by a bank; underwriting services; debt rating services; prime brokerage; global custody; and equity research or analysis.
- Knowledge Requirement. The Treasury Department is considering conditioning U.S. persons’ obligations under the regulations on their knowledge of the covered foreign person’s activities. Actual or constructive knowledge would be sufficient, consistent with the current standard under the EAR.
- Notification Timing. Unlike the current CFIUS review process, notifications would be due through a portal hosted on the Treasury Department’s website no later than 30 days after a covered transaction closes.
- Penalties. Civil penalties would be up to the maximum allowed under the International Emergency Economic Powers Act, which are currently the greater of $356,579 or twice the amount of the underlying transaction per violation. Penalties could be imposed for (1) material misstatements or omissions in materials filed with the Treasury Department; (2) engaging in a prohibited transaction; or (3) failure to file a timely notification. The executive order also authorizes the Treasury Department to refer potential criminal violations to the Attorney General.
Reaction from China
China issued a strong response just hours after President Biden signed the executive order. In a statement on August 10, the Ministry of Commerce and the Ministry of Foreign Affairs of the People’s Republic of China issued a statement calling the U.S.’s restrictions on investment in China, Hong Kong, and Macau “naked economic coercion and technological bullying.” The Chinese government warned against further “unintentional decoupling’” with China “[u]nder the guise of national security.”
The new executive order comes as the latest move in a strained U.S.-China relationship. On August 1, China implemented export restrictions on gallium- and germanium-related products. The new restrictions were in response to U.S. export controls implemented last fall to restrict China’s access to high-performance chips and semiconductor manufacturing items.
Companies should continue monitoring China’s response to see if any new U.S.-specific restrictions are imposed as a countermeasure to the latest executive order.
 “Covered transactions” would include “(1) acquisition of an equity interest or contingent equity interest in a covered foreign person; (2) provision of debt financing to a covered foreign person where such debt financing is convertible to an equity interest; (3) greenfield investment that could result in the establishment of a covered foreign person; or (4) establishment of a joint venture, wherever located, that is formed with a covered foreign person or could result in the establishment of a covered foreign person.”
 “Covered foreign persons” would mean (1) persons who are citizens or lawful permanent residents of China, Hong Kong, or Macau (each a “Country of Concern”); (2) entities that have their principal place of business in a Country of Concern; (3) entities owned, controlled, directed by, or acting on behalf of the government of a Country of Concern; or (4) entities directly or indirectly owned 50% or more, individually or in aggregate, by people or entities in (1)-(3).
 “Artificial intelligence system” would mean “an engineered or machine-based system that can, for a given set of objectives, generate outputs such as predictions, recommendations, or decisions influencing real or virtual environments. AI systems are designed to operate with varying levels of autonomy.”