WASHINGTON/NEW YORK – The United States released draft rules on Friday that propose bans or require notifications for certain investments in China’s technology sectors, including artificial intelligence, due to potential threats to U.S. national security.
The U.S. Treasury Department outlined these proposed rules, which include a range of exceptions, following an executive order signed by President Joe Biden in August. These regulations place the responsibility on U.S. individuals and companies to identify transactions that will be restricted or banned.
Biden’s executive order targets U.S. investments in semiconductors, microelectronics, quantum computing, and artificial intelligence. This initiative is part of a broader strategy to prevent U.S. technological expertise from aiding China in developing advanced technologies and dominating global markets. The regulations are expected to be finalized by the end of the year, with public comments on the draft rules being accepted until August 4.
“This proposed rule advances our national security by preventing the many benefits certain U.S. investments provide – beyond just capital – from supporting the development of sensitive technologies in countries that may use them to threaten our national security,” stated Treasury Assistant Secretary for Investment Security Paul Rosen.
The Treasury Department emphasized that the new rules are designed to implement a “narrow and targeted national security program” focused on specific outbound investments in countries of concern.
Focus on China, Macau, and Hong Kong
The proposed rules would ban transactions involving AI for certain end uses and systems trained with specified levels of computing power. Additionally, transactions related to the development of AI systems or semiconductors not otherwise prohibited would require notification.
Exceptions include publicly traded securities, such as index funds or mutual funds, certain limited partnership investments, buyouts of ownership in countries of concern, transactions between a U.S. parent company and a majority-controlled subsidiary, binding commitments made before the executive order, and some syndicated debt financings. Third-country transactions addressing national security concerns or adequately mitigating these concerns could also be exempted.
While the initial focus is on China, Macau, and Hong Kong, U.S. officials have indicated the scope could expand in the future. Laura Black, a former Treasury official and current lawyer at Akin Gump in Washington, noted that the Treasury aims to define the rules narrowly but will necessitate increased diligence from U.S. companies investing in China.
“U.S. investors will need to engage in more extensive due diligence when making investments in China or investments involving Chinese companies operating in the covered sectors,” Black explained.
The proposed rules target U.S.-managed private equity and venture capital funds, U.S. limited partners’ investments in foreign-managed funds, and convertible debt. Certain Chinese subsidiaries and parent companies will be subject to these regulations, which may also restrict some investments by U.S. companies in third countries.
The regulations align with existing export restrictions on certain technologies to China, such as advanced semiconductors, aiming to prevent U.S. funds from assisting China in modernizing its military capabilities. Violators of these rules could face criminal and civil penalties, and investments might be reversed.
The Treasury has engaged with U.S. allies and partners regarding the investment restrictions’ goals, noting that the European Commission and the United Kingdom are considering addressing outbound investment risks similarly.
