In the News: Sensitive Technologies Targeted in US Outbound Investment to China; New Rules Kill Small Investment Funds; and Medical IPOs under Close Scrutiny

science factory china production LED technology. Credit: Artwell/Adobe Stock

U.S. Specifies Industries to be Screened for Outbound Investment to China

According to a Reuters report, President Biden signed an executive order on August 9, 2023 that will restrict outbound U.S. investment in China (including Hong Kong and Macau) in some sensitive technologies. The order aims to prevent U.S. capital and expertise from assisting China's development of technologies that could support its military modernization. The focus is on specific technology sectors within the semiconductors and microelectronics, artificial intelligence, and quantum computer industries. The order imposes prohibitions and notification requirements for private equity, venture capital, joint ventures and greenfield investments in these industries.

The order directs the U.S. Department of Treasury to work with the U.S. Department of Commerce and other agencies in establishing a program to prohibit these investments in China and to require U.S. persons to notify the Treasury of their investments in these industries under specific circumstances. While the regulations will only affect future investments, and not existing ones, the Treasury may ask for disclosure of prior transactions. U.S. officials insisted the prohibitions were intended to address the most serious national security risks, while avoiding separation of the U.S. and China's highly interdependent economies.

Nathan Bush, Head of International Trade (Asia) at DLA Piper told CLP that the order narrows and simplifies the mechanism in past proposals for a comprehensive "Reverse CFIUS" process done on a case-by-case review of outbound investments to China. The text of the order specifically targets the flow of funding and collateral soft support from U.S. investors to China's AI, quantum computing, and advanced semiconductor and microelectronic capabilities, and does not cover other potentially sensitive technologies. Upcoming regulations should clarify the required nexus between a specific transaction and a counterparty's involvement in China's AI, quantum computing, and semiconductor sectors. Exemptions for transactions unlikely to advance China's capabilities in the targeted sectors are expected. Significantly, the Executive Order also includes restrictions on U.S. persons directing and authorizing investments of non-American funds where American funds would be prohibited. Beyond the development of regulations from the new order, future Congressional action on houtbound investments remains possible.