US to prohibit outbound investment in certain advanced technologies – a massive expansion of national security laws

On 9 August 2023, President Biden declared a US national emergency in relation to the national security threat posed by certain advanced technologies and issued an Executive Order directing that investment by US persons in such technologies be subject to prior notification or outright prohibition.

Background

Against the backdrop of the heightened geopolitical tensions between the US and China, the Executive Order refers to the growing threat to US national security posed by advances in certain "sensitive technologies" which can be used to enhance other countries' "military, intelligence, surveillance, or cyber-enabled capabilities".  The Executive Order specifically refers to China, Hong Kong and Macau as "countries of concern" that are "engaging in a comprehensive, long-term strategy" to develop sensitive technologies "in a way that threatens the national security of the United States".

For several decades, the US has applied the CFIUS regime which restricts inbound investment into certain US assets of national security importance by persons considered to pose a national security risk.  In recent years, other countries have adopted similar legislation such as the UK's National Security and Investment Act.

The new Executive Order introduces a massive expansion of intervention in transactions on national security grounds by prohibiting (or requiring prior approval for) outbound investments by US persons into certain advanced technologies in certain other countries.  

What technologies are affected?

The Executive Order refers to:

• semi-conductors and micro-electronics:  Western reliance on Taiwanese microchips has been well documented, as has the threat to that supply chain by a Chinese invasion of Taiwan;
• quantum information technologies: various organisations around the world are investing heavily in quantum computing, which has the potential to create computers so powerful that most security encryption systems could be broken in seconds;
• artificial intelligence: whilst ChatGPT is not yet the Terminator's Skynet, many are predicting that development of AI will bring about changes more profound than the industrial revolution.

What are the restrictions?

The Executive Order is relatively high level on potential restrictions, and orders that the US Treasury and other relevant US agencies shall produce detailed regulations.  These regulations will identify which transactions need to be notifed in advance and which transactions will be prohibited outright.  

Who is subject to the restrictions?

The restrictions will bind on all "United States persons", which includes:

• US citizens and residents
• any entities organised under the laws of the United States (or any jurisdictions within the United States)
• any overseas branches of such entities
• any person in the United States.

Such United States persons will also be obliged to ensure that foreign entities under their control will comply with the restrictions.  So this would capture foreign subsidiaries of US holding companies.

What this means

We await drafting of the detailed regulations that will provide more of the detail needed.  But once implemented, these regulations will have a significant extra-territorial effect beyond the borders of the United States.  They will need to be considered by a wide range of people on a wide range of transactions that might be considered to involve investment into the specified advanced technologies in or involving China, Hong Kong or Macau