US Tightens Grip on Outbound Investments to China Tech Sector

The US has introduced new rules to regulate outbound investments in certain technologies, particularly those involving China. The Outbound Investment Security Program focuses on three key areas: semiconductors and microelectronics, quantum information technologies, and artificial intelligence. A recent article in jdsupra highlights some of the challenges.

Covered transactions related to these technologies may be prohibited or subject to notification requirements within 30 days of closing. For instance, developing advanced integrated circuits, quantum computers, and AI systems designed for military or surveillance use are prohibited. The rules apply to US persons investing in or collaborating with Chinese entities, including those organized and headquartered in third countries but with significant activities in China.

Companies must conduct diligent inquiries to determine if a transaction is covered, considering public and non-public information, diligence requests, and representations from counterparties. Failure to comply may result in penalties. As the US tightens its grip on tech exports to China, companies like Intel, Qualcomm, and NVIDIA must navigate these new rules to ensure their investments conform to the evolving legal landscape.

The rules are designed to capture transactions that could potentially compromise national security or transfer critical technology to China. The scope is broad, covering not only Chinese companies but also entities with ties to PRC persons, agencies, or government.

The three key technology areas targeted by the program are:

1. Semiconductors and Microelectronics: Prohibited transactions include those related to electronic design automation software, advanced fabrication equipment, and high-performance supercomputers. Notifiable transactions involve the design, fabrication, or packaging of integrated circuits.
2. Quantum Information Technologies: All transactions related to quantum computers, sensing platforms, and communication systems are prohibited.
3. Artificial Intelligence: Prohibited transactions include those related to AI systems designed for military, intelligence, or mass surveillance end use, as well as those trained using significant computational power. Notifiable transactions involve AI systems intended for cybersecurity applications or robotic systems control.

To ensure compliance, U.S. persons must conduct reasonable and diligent inquiries to determine if a transaction involves a covered foreign person or activity. This includes obtaining and considering available information, requesting representations and warranties from counterparties, and being vigilant about evasive or incomplete responses.

The program’s implications are far-reaching, and companies must carefully evaluate their investments and collaborations with Chinese entities to ensure they conform to the evolving legal landscape. Compliance protocols for foreign subsidiaries and guardrails for U.S. persons’ involvement in foreign companies will become increasingly important.