High Walls and Small Gardens: Biden Administration Unveils Outbound Investment Screening

On August 9, 2023, President Biden issued a long-anticipated executive order (EO) to address investments by U.S. persons in companies that engage with certain categories of technology and products located in the People’s Republic of China, including in the Hong Kong and Macau Special Administrative Regions (“PRC Entities”).

The administration rolled out the screening mechanism in two parts, a high-level EO that lays out the broad contours of the screening program and an Advance Notice of Proposed Rulemaking (ANPRM, and together with the EO, “the Proposed Rules”) that outlines additional details of the proposed outbound investment screening program. The Proposed Rules do not have immediate effect and will not be effective until the rulemaking process is complete. Importantly, the ANPRM solicits public comments, including specific questions on some of the most difficult scoping and definitional questions, and will be followed by draft regulations at a later stage of the process.

The new outbound investment program, referred to colloquially as “reverse CFIUS,” will screen and monitor certain investments by U.S. persons in companies that deal in certain advanced technologies. And much like CFIUS, the jurisdictional framework of the outbound investment program can be thought of as requiring three elements: (i) a U.S. person making an investment; (ii) a transaction; and (iii) an entity located in, subject to the jurisdiction of, or under the control of PRC Entities and engaged in activities related to defined subsets of technologies and products. The EO defines U.S. person broadly to include any United States citizen, any lawful permanent resident, any entity organized under the laws of the United States or any jurisdiction within the United States, including any foreign branches of any such entity, and any person in the United States.

Many of the key terms and rules that will implement the screening mechanisms are not final. But at a high level, the Proposed Rules seek to cover investments in three technology sectors: (i) semiconductors and microelectronics, (ii) quantum information technologies, and (iii) certain artificial intelligence systems.

Specifically, the Proposed Rules seek to prohibit U.S. investments in PRC Entities engaged:

• in the development of electronic design automation software or semiconductor manufacturing equipment; the design, fabrication, or packaging of advanced integrated circuits; or the installation or sale of supercomputers; or
• in the production of quantum computers and certain components; the development of certain quantum sensors; or the development of quantum networking and quantum communication systems.

The Proposed Rules do not detail a prohibition related to AI, but specifically request comments on how to shape a prohibition on U.S. investments in PRC Entities engaged in a narrow set of activities related to software that incorporates an AI system and is designed for national security end-uses, such as military surveillance.

The Proposed Rules also seek to require notifications of U.S. investments in PRC Entities engaged:

• in the design, fabrication, and packaging of less advanced integrated circuits; or
• in activities related to software that incorporates an artificial intelligence (AI) system and is designed for certain end-uses that may have military or intelligence applications and pose a national security risk.

The agencies are also considering carving out certain types of passive investments by U.S. persons, including potentially investments in publicly traded securities, mutual funds, indirect investments by limited partners, and intra-company transfers. Ensuring these carveouts are clear and meaningful will be an important of the rulemaking process.

The new outbound investment program does not appear to cover past transactions and does not take effect immediately, instead focusing exclusively on future transactions that will be more clearly defined in the rulemaking process. But U.S. persons who fail to comply with these rules once they become effective could face civil penalties and may be forced to divest specific interests.

The Proposed Rules are a material development in the investment and technology sectors, and they merit close attention and comment in the rulemaking process. MoFo will be developing more detailed alerts addressing key components and open questions in the near future. Please do not hesitate to contact our team of attorneys and advisors should you have any questions about this important new regulatory regime.

Christie M. Lawrence, a summer associate in Morrison Foerster’s D.C. office, contributed to this alert.