Clifford Chance

On June 21, 2024, the U.S. Department of the Treasury ("Treasury") issued a Notice of Proposed Rulemaking (the "Proposed Rule" or "NPRM") to implement the August 9, 2023 Executive Order ("EO") and address "the national emergency declared by the President with respect to the national security threat posed by countries of concern developing technologies that are critical to the next generation of military, intelligence, surveillance, or cyber-enabled capabilities."¹ As the Treasury Press release and Fact Sheet describe, the Proposed Rule lays out draft regulations to establish a national security program. This program would either prohibit or require notification of certain types of outbound investments by "U.S. persons" into certain industries in so-called "countries of concern," currently defined as the People's Republic of China ("PRC"), Hong Kong, and Macau or otherwise involving "Covered Foreign Persons." Comments on the Proposed Rule are due by August 4, 2024.²

I. WHO DOES THE PROPOSED RULE APPLY TO?

The Proposed Rule applies to all "U.S. persons," which includes "any United States citizen or lawful permanent resident, as well as any entity organized under the laws of the United States or any jurisdiction within the United States, including any foreign branch of any such entity, and any person in the United States."³

II. WHAT DOES THE PROPOSED RULE REQUIRE?

Under the Proposed Rule, U.S. persons are prohibited from engaging in certain "Covered Transactions" involving specified national security technologies and products in three sectors—(i) semiconductors and microelectronics, (ii) quantum information technologies, and (iii) artificial intelligence—with "Covered Foreign Persons" and are required to notify Treasury of certain other transactions.

"Covered Transactions" include certain acquisitions of equity interests, greenfield investments, and joint ventures by U.S. persons but not "excepted transactions," such as investments in publicly traded securities; a "U.S. person" would include any entity organized under the laws of the United States, including any foreign branch of any such entity; and a "covered foreign person" would include a person from a country of concern who is engaged in defined activities involving one or more of the covered national security technologies and products.⁴

"Covered Foreign Persons" include a person of the PRC, Hong Kong, or Macau that is engaged in a covered activity. Under the Proposed Rule, such persons would include: (i) an individual who is a citizen or permanent resident of the PRC, Hong Kong, or Macau (and not a U.S. citizen or permanent resident of the United States); (ii) an entity that is organized under the laws of the PRC, Hong Kong, or Macau, headquartered in, incorporated in, or with a principal place of business in the PRC, Hong Kong, or Macau; (iii) the government of the PRC, Hong Kong, or Macau; or (iv) an entity that is directly or indirectly majority-owned by any persons or entities in any of the aforementioned categories, regardless of location.⁵
Additionally, the Proposed Rule would include certain transactions involving an entity that has a voting interest, board seat, equity interest, or holds any power to direct or cause the direction of the management or policies in a covered foreign person where more than 50 percent of one of several key financial metrics of the entity is attributable to such covered foreign person.⁶

As currently drafted, the Proposed Rule does not include a filing fee.

III. WHO WILL ADMINISTER THE PROGRAM?

The U.S. Department of the Treasury will administer this new national security program. According to the Proposed Rule, Treasury will use a portal on its website to collect electronic filings from U.S. persons.⁷ In making national interest exemption determinations and taking actions such as divestment, the Proposed Rule notes that the Secretary of the Treasury will consult with the Secretary of Commerce, the Secretary of State, and the heads of relevant agencies, including the heads of the Departments of Defense, Justice, Energy, Homeland Security, the Office of the Director of National Intelligence, and the Office of the National Cyber Director, among others.⁸

IV. WHAT ARE THE POSSIBLE PENALTIES?

Under the Proposed Rule, Treasury will have powers similar to those already held by CFIUS. Treasury would have the power to, among other things: (1) investigate and make requests for information from parties related to a notifiable or prohibited transaction "at any time," including through holding hearings, examining witnesses, receiving evidence, taking depositions, and requiring by subpoena the attendance and testimony of witnesses and production of documents; (2) nullify, void, or compel the divestment of a prohibited transaction entered into after the regulations issued under the EO take effect; and (3) refer potential criminal violations of the EO or the accompanying regulations to the U.S. Department of Justice for prosecution.⁹ Given that the EO was issued under the authority provided by the International Emergency Economic Powers Act ("IEEPA"), penalties as set by IEEPA apply.¹⁰

V. ARE THERE ANY EXCEPTIONS?

The Proposed Rule includes exceptions for certain types of transactions, provided that such transactions "do not afford a U.S. person certain rights that are not standard minority shareholder protections." These transactions include: publicly traded securities; certain LP investments; buyouts of country of concern ownership; intracompany transactions; outbound Order binding commitments; syndicated debt financings; and third country measures.¹¹ The Proposed Rule also allows U.S. persons to seek an exemption from the application of the prohibition or notification requirement on the basis that a transaction is in the national interest of the United States, which Treasury will determine in consultation with other relevant agencies on a case-by-case basis.¹² Treasury anticipates that it will grant exemptions of a covered transaction only in rare circumstances.¹³

VI. NEXT STEPS

As mentioned above, the Proposed Rule is currently a draft for public review and does not implement the EO requirements. That said, we anticipate significant engagement between the U.S. government and stakeholders as Treasury works to draft a final rule, and the public has until August 4, 2024 to submit any comments on this draft. A timeline for implementation of a final rule had not been made public, but it is reasonable to expect that the new program will be effective by the end of 2024 or in Q1 of 2025.

CONCLUSION

The Proposed Rule is part of the U.S. Government's wider strategy to limit U.S. investments into China. This includes recent actions by the U.S. Senate to incorporate outbound screening mechanisms into the 2024 National Defense Authorization Act, which we previously discussed here. While the Proposed Rule is not yet in force, the NPRM represents significant progress in the establishment of an outbound investment regime. Accordingly, it is critical for those affected – and potentially affected - to consider how a final rule might influence their investment plans, as U.S. persons undertaking certain transactions in countries of concern may soon need to determine if a transaction is prohibited or requires notification.

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1. Provisions Pertaining to U.S. Investments in Certain National Security Technologies and Products in Countries of Concern (NPRM), at 79.
2. Fact Sheet and FAQs (Fact Sheet), U.S. DEPARTMENT OF THE TREASURY (June 21, 2024), https://home.treasury.gov/system/files/206/Treasury%20Outbound%20NPRM%20Fact%20Sheet%20FAQ%20-%206.21.2024.pdf.
3. Id.
4. NPRM, at 124 (§ 850.210).
5. NPRM, at 123 (§ 850.209).
6. Id.
7. NPRM, at 106.
8. NPRM, at 154, 159 (§ 850.502 and § 850.703).
9. NPRM, at 159, 164 (§§ 850.702, 850.703, 850.904).
10.NPRM, at 158 (§ 850.701).
11. Fact Sheet, at 3; NPRM, at 148-54 (§ 850.501)
12. NPRM, at 68.
13. Id.