Biden clamps down on US investment in Chinese technology

While the powers of the Committee on Foreign Investment in the US (CFIUS) have been strengthened in large part to exert more control over inbound investments from China, the executive order is described as “reverse CFIUS.” It applies to transactions where neither party is based in the US.

“The outbound investment regime is intended to address gaps in US trade and national security regulations that are not accounted for by CFIUS or by the US export controls regime,” law firm Linklaters said in an explanatory note.

“Greater attention to US investment in dual-use technologies in China, particularly by private equity and venture capital funds, as well as concerns related to US-China competition in these areas have burgeoned on a bipartisan basis in Washington.”

It added that the US government is working with other countries to ensure that the rules are implemented on a multilateral basis, with similar mechanisms under consideration among G7 countries. The EU, for example, is said to be “only beginning what looks like a long path toward establishing its own potential process for handling outbound investments.”

The executive order observes that countries of concern are supporting advancements in technologies critical to military, intelligence, surveillance, and cyber-enabled capabilities. Moreover, the barriers between civilian and commercial sectors and military and defence industrial sectors are being eliminated. China is the only identified country of concern.

The objective of the executive order is to prevent the exploitation of certain US outbound investments, including the intangible benefits that come with US capital. These include enhanced standing, managerial assistance, investment and talent networks, market access, and access to additional financing.

The US Department of Treasury said in a fact sheet that US persons – individuals as well as entities organised under US law or in US jurisdictions – will be responsible for adhering to the prohibition and notification requirement. The same obligation may apply to US persons with respect to foreign entities under their control and to situations where US persons knowingly direct transactions by non-US persons.

It covers transactions involving the acquisition of equity interests - including by PE and VC investors - greenfield investments, joint ventures, and debt financing that converts to equity. Exceptions are being considered for a range of investments seen as more passive in nature, such as “certain investments made as a limited partner,” publicly traded securities, index funds, mutual funds, and exchange-traded funds.

The executive order doesn't give further detail on target sectors, but the fact sheet offers insights into the Department of Treasury's thinking. Semiconductors and microelectronics may capture the design, fabrication, and packaging of integrated circuits as well as the development of electronic design automation software and semiconductor manufacturing equipment, and the installation or sale of supercomputers.

Quantum information technologies may cover the production of quantum computers and certain components, and the development of certain quantum sensors, networking, and communication systems. For AI, it is AI-enabled software with military or intelligence applications.

Law firm Ropes & Gray said in an alert that the order “marks an unprecedented expansion of US regulation of investment activity,” although the full effects will not be ascertained until the publication of final regulations. Interested parties “may feel constrained to delay key decision-making around fundraising and investment activities” pending that development.

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• Topics
• Greater China
• North America
• Technology
• Regulation
• Expansion
• Early-stage
• China
• USA
• TMT
• artificial intelligence
• quantum computing
• semiconductor