A. New Order
On January 2, 2025, The Biden administration’s regulations, Provisions Pertaining to US Investments in Certain National Security Technologies and Products in Countries of Concern (“Law”), 31 CFR Part 850, became effective [1].The new regulation aims to prevent a US citizen or US company including their foreign branches to invest in (a) a Chinese company and subsidiaries, or (b) Chinese government and government owned company, including subsidiaries (“Chinese Entities”), in the following 3 fields:
(1) semiconductors,
(2) quantum computing, and
(3) AI
Some of the transactions are strictly restricted, others require mandatory notification to the US Department of the Treasury.
The US government announced that the restrictions are necessary to prevent Beijing from advancing technologies critical to its military modernization campaign. The true purpose is to “prevent Beijing from obtaining the market access, talent networks and other "intangible benefits" that accompany capital investment”.
B. Subject Person the Law Targets
The Law forbids US persons, i.e. US citizens or US companies, including foreign branches (section 229), to invest in the concerned emerging technologies in China. It targets US citizens, lawful permanent residents, US companies, including any foreign branches, or any person in the US.
C. Prohibited Transactions
Investments in 3 fields: semiconduction, quantum compute and AI (section 217 and 224). In particular, to invest in the following transactions are prohibited:
1) Regarding semiconductor:
Develops or produces any electronic design automation software for the design of integrated circuits or advanced packaging; Volume advanced packing;
material, software, or technology designed for extreme ultraviolet lithography fabrication equipment；
supercomputer enabled by advanced integrated circuits that can provide a certain capacity
2) Quantum computer:
Develops a quantum computer or produces any of the critical components of a quantum computer;
quantum sensing platform designed for, any military, government intelligence, or mass-surveillance end use;
quantum network or quantum communication system.
3) AI system:
AI system exclusively designed for military use, government intelligence or mass0surveillance use (mining text, audio, video, image recognition, location tracking); or an AI system that is trained using a computing power greater than 10^25, or 10^24 using biological sequence data;
4) Invest in any Chinese Entity that is Included in security lists, of possess a special relationship.
D. The kind of investments that are prohibited
Six (6) kinds of transactions are prohibited (section 210):
1）Acquisition of an equity interest or contingent equity interest in a Chinese Entity;
2）Provision of a loan or a similar debt financing arrangement to a Chinese Entity;
3）Conversion of a contingent equity interest into an equity interest in a Chinese Entity;
4）Acquisition, leasing, or other development of operations, land, property, or other assets in a country of concern that will result in, or that the U.S. person plans to result in:
(i) The establishment, or
(ii) The engagement of a Chinese Entity in a prohibited activity.
5）Entrance into a joint venture, wherever located, that is formed with a a Chinese Entity that will engage, or plans to engage, in a prohibited activity; and
6）Acquisition of a limited partner or equivalent interest in a venture capital fund, private equity fund, fund of funds, or other pooled investment fund (in each case where the fund is not a U.S. person) that a U.S. person knows at the time of the acquisition likely will invest in a Chinese Entity that is in the semiconductors and microelectronics, quantum information technologies, or artificial intelligence sectors.
Moreover, even if the investment is made by a non-US entity, a US person is still prohibited from “knowingly directing” such a transaction, namely:
Participating in formal approval and decision-making processes related to the transaction, including making a recommendation;
Reviewing, editing, commenting on, approving, and signing relevant transaction documents; and
Engaging in negotiations with the investment target (or, as applicable, the relevant transaction counterparty, such as a joint venture partner)
In relation to a US company’s foreign branches, a US person has the obligation to implement internal training, policies and procedures to ensure compliance of the new Law.
E. Transactions that require mandatory notification (section 217)
The following transactions are required to be filed with a notification to the US Department of Treasury:
1) Design, fabricate or package any integrated circuit not mentioned in section 224;
2) AI system not exclusively for but be used for
a. military or government use;
b. cybersecurity application, digital forensics tools, penetration testing tools, control of robotic systems; and
c. trained by computing power greater than a certain quantity.
F. Excepted Transactions
Investments in publicly traded securities, certain LP investments, buyouts of country of concern ownership; intracompany transactions; investments made pursuant to pre-Outbound Order binding commitments; certain syndicated debt financings; and certain transactions involving a person of a country or territory outside of the United States based on a determination by the Secretary.
G. Penalties for non-compliance
Penalties for violation include substantial fines and potential divestment requirements, irrespective of the investment amount.
In summary, the Law aims to ban U.S. investors from funding emerging Chinese technology in a Chinese company, the Chinese government, any entity the Chinese government holds 50 percent or more interest or control, in semiconductor, quantum computer or AI industries.
This article is only for information sharing and it does not constitute legal advice. Should you need advice on your specific situation, please contact us at 617-682-7111 or staff@lionslawgroup.com.
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