Decoupling: A Closer Look at the Executive Order on U.S. Outbound Investments Into the Chinese Technology Sector

By Brett W. Johnson, Adam J. Greenup, and T. Troy Galan

The much anticipated Executive Order (the “E.O.”) on outbound investments directed at the Chinese technology sector was finally released on August 9, 2023. Citing the “unusual and extraordinary threat to national security” presented by countries of concern, the E.O. directs the U.S. Department of the Treasury (the “Treasury Department”) to establish an Outbound Investment Program of targeted prohibitions and mandatory notifications of certain investments by U.S. persons into entities located in, or subject to the jurisdiction of countries of concern.¹ The E.O. targets U.S. outgoing investments in cutting-edge technologies for the purpose of achieving military dominance. 

Notably, the E.O. outlines a future regulatory scheme rather than creating one. Concurrently with the E.O., the Treasury Department issued an Advance Notice of Proposed Rulemaking (the “ANPRM”) outlining the intended scope of the future regulations and seeking written comments. The ANPRM does not implement the E.O. and does not reflect draft regulations. The draft regulations will be published in the future and the Outbound Investment Program is expected to go into effect sometime in 2024. At this stage of the rulemaking process, interested parties should submit written comments to the Treasury Department before the September 28, 2023, deadline. 

I.    Background & Targeted Sectors 

At the outset, the E.O and the ANPRM identify the People’s Republic of China, including the Special Administrative Regions of Hong Kong and Macau as countries of concern. The Outbound Investment Program would involve two components: 1) a prohibition on certain types of outbound investments and 2) notification requirements regarding a separate category of investments. The ANPRM does not contemplate a case-by-case review. Instead, parties to a proposed transaction would be responsible for determining whether the proposed transaction is prohibited, subject to notification requirements, or permissible without notification (similar to Committee on Foreign Investment in the United States due diligence reviews). 

The ANPRM also notes that the Treasury Department does not intend to impede all outbound investments into countries of concern or impose sector-wide investment prohibitions. The focus of the Outbound Investment Program would be investments that could enhance a country of concern’s military, intelligence, surveillance, or cyber-enabled capabilities through the advancement of technologies and products in sensitive areas. Although the specific scope of these categories has not been determined, the ANPRM provides the following initial details on the targeted sectors: 

• Semiconductors and Microelectronics: 
  • Prohibition on investments in entities engaged in the development of electronic design automation software or semiconductor manufacturing equipment; the design, fabrication, or packaging of advanced integrated circuits; and the installation or sale of supercomputers. 
  • Notification of investments in entities engaged in the design, fabrication, and packaging of less advanced integrated circuits.
• Quantum Information Technologies: 
  • Prohibition on investments in entities engaged in the production of quantum computers and certain components; the development of certain quantum sensors; and the development of quantum networking and quantum communication systems.
• Artificial Intelligence (“AI”) Systems: 
  • Notification of investments in entities engaged in activities related to software that incorporates an artificial intelligence system and is designed for certain end-uses that may have military or intelligence applications and pose a national security risk to the United States.

II.    Covered Activities

The Outbound Investment Program would address the U.S. government’s concern on the “intangible benefits that often accompany U.S. investments and help companies succeed [including] enhanced standing and prominence, managerial assistance, access to investment and talent networks, market access, and enhanced access to additional financing.” Among the anticipated transactions that would be subject to prohibitions or notification requirements are mergers and acquisitions, venture capital, private equity, greenfield investments, joint ventures, and certain debt financing (convertible equity). The inclusion of greenfield investments is particularly notable because this could prohibit U.S. persons from establishing certain subsidiaries in countries of concern. 

However, the ANPRM anticipates excluding some transactions from the prohibitions and notification requirements. Investments into publicly traded securities (as defined under U.S. law), such as index funds, mutual funds, or made as a limited partner would be excluded.² Routine intracompany funds transfers from a U.S. parent company to a subsidiary in a country of concern would be excluded too. Finally, transactions pursuant to a binding, uncalled capital commitment entered into before August 9, 2023, (the date of the E.O.), would also not be subject to the prohibitions or notification requirements. 

III.    Additional Considerations 

The E.O. and ANPRM are the U.S. government's initial responses to the national security concern of outgoing investments into cutting-edge technologies into countries of concern. In addition to these Executive Branch actions, interested parties should be aware of further regulatory actions being considered by the United States Congress. For example, the Restricting the Emergence of Security Threats that Risk Information and Communications Technology Act in the Senate, and the National Critical Capabilities Defense Act in the House of Representatives. If enacted, these laws would further restrict outbound investments into countries of concern.  

IV.    Next Steps 

At this early stage of the rulemaking process, the ultimate impact of the Outbound Investment Program on the technology sector remains unclear. The E.O. and ANPRM purposely left many unanswered questions as to the details of the final regulatory scheme. Accordingly, interested parties should submit written comments to the Treasury Department before the September 28, 2023, deadline. When submitting written comments, interested parties should consult with experienced counsel to ensure the Treasure Department appropriately considers the impacts of this novel regulatory scheme. 

Finally, interested parties should carefully review the ANPRM and the additional information released by the Treasury Department. In particular, parties involved in potential or future outbound investments into countries of concern involving the targeted sectors should consult with international trade counsel to understand and mitigate any upcoming risks due to the final implementation of the Outbound Investment Program.