The U.S. Treasury Department has recently unveiled draft regulations to implement President Joe Biden’s executive order targeting U.S. investments in certain national security technologies and products in countries of concern, such as China. Although these regulations, often described as an “outbound Committee on Foreign Investment in the United States (CFIUS)”, affect a narrow subset of outbound U.S. investments, their implications are expected to be significant for transactions in the semiconductor, quantum computing, and artificial intelligence sectors.
The regulations do not establish a case-by-case review process akin to CFIUS. Instead, they prohibit U.S. persons from engaging in, or require them to submit notifications for, specific “covered transactions.” These transactions involve companies identified as “covered foreign persons”—a designation that necessitates a technical, fact-specific analysis for its determination. The scope is broad, encompassing virtually all types of transactions within the aforementioned sectors, including direct and indirect investments, joint ventures, and certain limited partner roles.
For U.S. businesses and individuals, the rules prescribe thorough due diligence to ensure compliance. The Treasury expects U.S. persons to conduct and diligently retain comprehensive due diligence on any potential transactions and to obtain contractual representations and warranties from their counterparties concerning their covered foreign person status. Moreover, U.S. investors with controlled foreign entities are obligated to prevent their entities from engaging in prohibited transactions, which may include training their personnel on compliance requirements.
The rules also impose strict notification requirements. U.S. persons must notify the Treasury within 30 days of the closing of any notifiable transaction. Moreover, the regulations set a low bar for the knowledge standard, which includes both actual and constructive knowledge. Therefore, U.S. nationals holding senior positions at foreign entities must avoid involvement in prohibited transactions and likely preclude themselves from relevant discussions.
Given the ongoing concern over national security vis-à-vis China, scrutiny over business ties with Chinese companies is anticipated to intensify. Consequently, U.S. businesses, especially those in semiconductors, quantum computing, and AI sectors, should diligently assess their connections to China and prepare for compliance with the final regulations. According to the Treasury’s guidance, these draft rules are unlikely to see significant changes despite forthcoming public comments, signaling a firm direction rooted in extensive preparatory work over the years.
To read more about the Treasury Department’s proposed regulations and the detailed analysis by Kirkland & Ellis attorneys, visit the full article here.