On April 1, 2024, on the production line of a semiconductor manufacturer in Binzhou, Shandong Province, a worker was producing semiconductor products for export to Europe and the United States.
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The United States on Friday released draft rules that would prohibit or require notifications of certain Chinese investments in artificial intelligence and other technologies that could threaten U.S. national security.
U.S. Treasury Department Published Proposed Rules After President Joe Biden signed the executive order last August, a series of exceptions emerged after an initial comment period. These rules place the onus on U.S. individuals and companies to decide which transactions will be restricted or prohibited.
Biden’s executive order directs regulation of certain U.S. investments in semiconductors and microelectronics, quantum computing and artificial intelligence, part of a broader effort to block U.S. technology from helping China develop cutting-edge technologies and dominate global markets.
The U.S. is expected to implement regulations by the end of this year. Public comments on the proposed rule will be accepted until August 4.
Paul, Treasury Assistant Secretary for Investment Security, said: “This proposed rule would help by preventing the many benefits, not just capital, provided by certain U.S. investments from supporting the development of sensitive technologies in countries that could exploit them to threaten our national security. Promote our national security.
The Treasury Department said the new rules are intended to implement “a narrow and targeted national security program” that focuses on certain foreign investments from countries of concern.
The Treasury Department laid out the outlines of the proposed rule in August. The Treasury Department on Friday included additional exceptions, such as transactions deemed to be in the U.S. national interest.
The proposed rule would prohibit transactions in artificial intelligence for certain end uses and involving systems trained to use specific computing power, but would also require notification of transactions related to the development of artificial intelligence systems or semiconductors that are not otherwise prohibited.
Focus on China, Macau and Hong Kong
Other exceptions apply to publicly traded securities, such as index funds or mutual funds; certain limited partnership investments; buyouts of ownership in related countries; transactions between a U.S. parent company and a majority-controlled subsidiary; binding commitments prior to the order ; and certain syndicated debt financings.
Certain third-country transactions that are determined to address national security concerns, or where the third country adequately addresses national security concerns, may also be exempt, the Treasury Department said.
The order initially focused on China, Macau and Hong Kong, but U.S. officials said it could be expanded later.
Laura Black, an attorney at the Akin Gump law firm in Washington and a former Treasury official, said the Treasury Department is trying to narrow the scope of the rule as much as possible, but that will require greater vigilance by companies seeking to invest in China.
“U.S. investors need to conduct more extensive due diligence when investing in China or involving Chinese companies operating in the industries involved,” she said.
Black said the Treasury Department’s proposed rules would include investments in foreign-managed funds and convertible bonds by U.S.-managed private equity and venture capital funds, as well as some U.S. limited partners.
She added that certain Chinese subsidiaries and parent companies would be protected by the rule, which would also prohibit U.S. companies from making some investments in third countries.
In addition to equity investments, joint ventures and greenfield projects, defaulted debt can also be captured when converted into equity.
The regulations track restrictions on the export of certain technologies to China, such as restrictions prohibiting the shipment of certain advanced semiconductors.
The goal is to prevent U.S. funding from helping China develop its capabilities in these areas and modernize its military.
Violators may be subject to criminal and civil penalties, and investments may be cancelled.
The Treasury said it had engaged with U.S. allies and partners on the objectives of investment restrictions, noting that the European Commission and the United Kingdom had begun considering whether and how to address the risks of foreign investment.
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