New US Rules Target Investments in Chinese AI and Tech Industries

Key Insights

• US Treasury’s draft rules aim to restrict investments in China’s AI, tech sectors to protect national security.
• New regulations could ban transactions in AI and semiconductors, with several exceptions for specific cases.
• Increased due diligence required for US investors in China as new investment rules take effect by year’s end.

The United States has taken a step closer to curbing investments in China’s artificial intelligence and technology sectors with the issuance of draft rules by the U.S. Treasury Department. These rules are designed to ban or require notification of certain investments that could pose a threat to U.S. national security. 

Meanwhile, the proposed regulations were published following an executive order signed by President Joe Biden in August, which aimed to regulate U.S. investments in sectors such as semiconductors, microelectronics, quantum computing, and artificial intelligence.

The draft rules put the responsibility on U.S. individuals and companies to identify which transactions may be restricted or banned. The Treasury Department has announced a comment period for public feedback, which will remain open until August 4. The goal is to implement the regulations by the end of the year.

National Security Concerns

The primary objective of these proposed rules is to enhance national security by preventing U.S. investments from supporting the development of sensitive technologies in countries that may use them against U.S. interests. Paul Rosen, Treasury Assistant Secretary for Investment Security, stated, 

“This proposed rule advances our national security by preventing the many benefits certain U.S. investments provide—beyond just capital—from supporting the development of sensitive technologies in countries that may use them to threaten our national security.”

The rules are part of a broader strategy to ensure that U.S. know-how does not aid China’s efforts to develop advanced technologies and gain a competitive edge in global markets. The regulations specifically target outbound investments in countries of concern, with a focus initially on China, Macau, and Hong Kong.

Detailed Provisions and Exceptions

The draft rules detail several exceptions to the proposed investment restrictions. For example, transactions involving publicly traded securities, such as index funds or mutual funds, are exempt. Other exceptions include certain limited partnership investments, buyouts of country-of-concern ownership, transactions between a U.S. parent company and a majority-controlled subsidiary, binding commitments that predate the order, and certain syndicated debt financings.

Additionally, third-country transactions that address national security concerns, or where the third country adequately addresses these concerns, may also be exempt from the restrictions. Treasury aims to maintain a “narrow and targeted national security program” with these rules.

Increased Due Diligence Required

Former Treasury official Laura Black, now a lawyer at Akin Gump in Washington, noted that the rules would require increased vigilance from companies seeking to invest in China. She remarked, 

“U.S. investors will need to engage in more extensive due diligence when making investments in China or investments involving Chinese companies that operate in the covered sectors.”

Black also highlighted that the proposed rules would impact U.S.-managed private equity and venture capital funds, as well as some U.S. limited partners’ investments in foreign-managed funds and convertible debt. The rules would cover certain Chinese subsidiaries and parents and could prohibit some investments by U.S. companies in third countries.

Enforcement and International Cooperation

The regulations align with existing restrictions on exporting certain technologies to China, such as advanced semiconductors. The overarching goal is to prevent U.S. funds from aiding China in modernizing its military capabilities. Violations of the rules could lead to both criminal and civil penalties, and potentially unwinding of investments.

The Treasury Department has engaged with U.S. allies and partners regarding the objectives of these investment restrictions. Notably, the European Commission and the United Kingdom are also considering how to address outbound investment risks. This international cooperation is aimed at creating a unified approach to dealing with the potential national security threats posed by technological advancements in adversarial countries.

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