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August 11, 2023

Biden Administration Limits U.S. Investment in Chinese Semiconductors, Microelectronics, Quantum Computing, and AI Sectors


On August 9, President Biden signed a highly anticipated Executive Order (E.O.) limiting outbound investment in certain industries that may threaten U.S. national security. The E.O., titled “Addressing United States Investment in Certain National Security Technologies and Products in Countries of Concern,” aims to curb China-based military, intelligence, surveillance, and cyber-enabled advancements by targeting U.S. investment in the semiconductors and microelectronics, quantum computing, and artificial intelligence (AI) sectors in China, Hong Kong, and Macao. Pursuant to the E.O., the U.S. Department of the Treasury that same day issued an advance notice of proposed rulemaking (ANPRM), its first step in establishing the program introduced in the E.O., which is not immediately effective until implemented by the Treasury Department.

The E.O. is the Biden Administration’s latest measure to limit and assess U.S. investments contributing to China’s development of certain technologies with military and intelligence capabilities. President Biden simultaneously declared a national emergency due to the “unusual and extraordinary threat” posed by national security technologies and products. President Biden emphasized that, while the United States supports cross-border investment “where not inconsistent with the protection of United States national security interests,” certain U.S. outbound investments, including equity interests and managerial or technological expertise, may “accelerate and increase the success of the development of sensitive technologies and products in countries that develop them to counter United States and allied capabilities.”

The E.O.’s Directives to the Treasury Department: Prohibited and Notifiable Transactions

The E.O. tasks the Secretary of the Treasury (Secretary), in consultation with the Secretary of Commerce and other agency heads as needed, with regulating U.S. investment in so-called “national security technologies and products,” namely semiconductors and microelectronics, quantum computing, and AI with military, intelligence, surveillance, or other cyber-enabled capabilities that threaten U.S. national security. Specifically, the E.O. gives the Secretary of the Treasury two primary directives:

  • Prohibited Transactions: Issue regulations prohibiting U.S. persons from engaging in certain transactions involving covered foreign persons.
  • Notifiable Transactions: Issue regulations requiring U.S. persons to notify the Treasury Department of certain transactions involving covered foreign persons.

While the E.O. narrowly targets U.S. investment in the covered technologies and products in China, Hong Kong, and Macao, the specific “investments” to be prohibited or notifiable under the E.O. have yet to be articulated. The E.O. identifies certain “intangible benefits” associated with U.S. outbound investments in these sectors, including enhanced standing and prominence, managerial assistance, investment and talent networks, market access, and enhanced access to additional financing. However, the transactions that offer such benefits and thus will be prohibited or notifiable is a determination delegated by President Biden to the Treasury Department.

To that end, the E.O. instructs the Secretary of the Treasury to identify transactions that will fall within the two categories above. For notifiable transactions, the Secretary must identify categories of transactions involving the three covered technologies that “may contribute to the threat to the national security identified in [the] order.” U.S. persons will be required to notify the Treasury Department of each such transaction. For prohibited transactions, the Secretary must identify categories of transactions involving the three covered technologies that “pose a particularly acute national security threat because of their potential to significantly advance the military, intelligence, surveillance, or cyber-enabled capabilities” of China. U.S. persons will be prohibited from engaging in such transactions, directly or indirectly. The E.O. gives the Secretary authority to investigate and penalize violations of the regulations promulgated under the E.O.

The E.O. also allows the Secretary to further define the covered technologies to add or remove technologies and products in the semiconductors, quantum computing, and artificial intelligence sectors.

The Treasury Department’s Concurrent ANPRM

Consistent with the directives of the E.O., the Treasury Department concurrently issued an ANPRM, which clarifies the intended scope of the program (deemed the Outbound Investment Program) and provides an opportunity for industry stakeholders to participate in the rulemaking process. The Treasury Department encouraged stakeholders to submit written comments on the ANPRM within the 45-day comment period. Draft regulations will follow the comment period. The Treasury Department’s press release announcing the Outbound Investment Program cautioned that “[t]he United States benefits from an open investment climate and this new program will not change that. It is narrowly targeted at investments in highly sensitive technologies and products for the purposes of protecting U.S. national security.”

The Treasury Department published a fact sheet alongside the ANPRM, which provides important clarification regarding the bounds of the program and the expected regulations implementing the E.O. The fact sheet sets forth the anticipated framework for the Outbound Investment Program, including:

  • Requirements for U.S. Persons: The program will require U.S. persons, wherever they are located, to adhere to the prohibitions and notification requirements outlined in the E.O. Pursuant to the E.O., the Secretary of the Treasury may place certain obligations on U.S. persons regarding foreign entities involved in the identified sectors that they control and in certain situations where U.S. persons knowingly direct transactions by non-U.S. persons.
  • Categories of Covered Transactions: The program will target certain transactions that could convey intangible benefits to Chinese entities involved in the identified sectors, including acquisition of equity interests (e.g., via mergers and acquisitions, private equity, venture capital, and other arrangements); greenfield investments; joint ventures; and certain debt financing transactions that are convertible to equity.1
  • Covered Foreign Persons: The program will apply to investments in entities engaged in the identified sectors and that are organized under the laws of a country of concern; have a principal place of business in a country of concern; or are majority-owned by country of concern individuals or entities.
  • Exemptions: The program will afford exemptions for certain types of investments that pose a lower likelihood of conveying intangible benefits, specifically U.S. investments into publicly traded securities, index funds, mutual funds, and exchange-traded funds.

The fact sheet also provides preliminary details on the three categories of national security technologies and products identified in the E.O. Namely, the Treasury Department notes that it is considering prohibiting or requiring notification for U.S. investments in Chinese entities engaged in: (1) the design, fabrication, or packaging of advanced semiconductors, as well as certain related software development and manufacturing equipment, and the installation or sale of supercomputers;2 (2) the production and development of quantum computers, quantum sensors, and quantum networking; and (3) the development of AI systems and software for military or intelligence end-uses. The Treasury Department notes in its fact sheet that it is particularly interested in receiving public comments regarding how to define the scope of AI that should be restricted.


The Biden Administration’s latest E.O. represents its commitment to slowing the advancement of Chinese technologies with military, intelligence, surveillance, or other cyber-enabled capabilities that threaten U.S. national security. Notably, the E.O. does not presently limit investment in certain emerging technologies such as biotech and electric vehicles, but the scope of the program could be expanded to include additional technologies in the future. Some U.S. leaders have already criticized the E.O. as overly narrow and have encouraged President Biden to take a more aggressive approach to U.S. investment in China.

This is not the administration’s first measure targeting these specific industries — in October 2022, the U.S. Department of Commerce introduced sweeping changes to export controls for semiconductor and advanced computing items destined for China, to which China responded with restrictive export control measures of its own. It is likely that China will counter this new E.O. with parallel restrictions, although it remains unclear what impact the E.O. will have on these industries given the E.O.’s limited nature. It is important that U.S. entities and individuals engaged in the semiconductors, quantum computing, and artificial intelligence sectors anticipate the effects that the expected regulations will have on their businesses. Interested parties may wish to submit comments on the ANPRM during the 45-day comment period.

We will continue to monitor the rulemaking stemming from the new E.O. and any additional measures targeting these sectors. Please contact any author of this Advisory for more information.

© Arnold & Porter Kaye Scholer LLP 2023 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.

  1. According to the ANPRM, the Treasury Department does not intend the definition of “covered transaction” to include the following activities, so long as the activities do not involve any of the definitional elements of a “covered transaction” and are not undertaken to evade the rules: university-to-university research collaborations; contractual arrangements or the procurement of material inputs for any of the covered national security technologies or products (such as raw materials); intellectual property licensing arrangements; bank lending; the processing, clearing, or sending of payments by a bank; underwriting services; debt rating services; prime brokerage; global custody; equity research or analysis; or other services secondary to a transaction.

  2. The fact sheet also notes that the Treasury Department is considering including entities engaged in the design, fabrication, and packaging of less advanced integrated circuits within the scope of investment notification requirements.