On August 9, 2023, the White House issued a long-awaited Executive Order, entitled Addressing United States Investments in Certain National Security Technologies and Products in Countries of Concern (“EO 14105”). The EO establishes a new national security regulatory regime, implemented principally by the US Department of the Treasury (“Treasury”), in consultation with other federal agencies including the US Department of Commerce, that will require the notification of, as well as prohibit, certain investment activity by US persons in named “countries of concern,” currently China.

EO 14105 does not restrict all US person investment activity regarding China, and is tailored to focus on specific products, technologies, and capabilities involving: (1) semiconductors and microelectronics (including advanced integrated circuits and supercomputers); (2) quantum information technologies (e.g., computers, sensors, networking, and systems); and (3) certain artificial intelligence systems (e.g., with certain military, intelligence, or surveillance end uses).

As outlined in a Treasury Fact Sheet, EO 14105 is intended to address “the national security threat to the United States posed by countries of concern that seek to develop and exploit sensitive or advanced technologies and products critical for military, intelligence, surveillance, or cyber-enabled capabilities.” 

President Biden issued EO 14105 under the authority of the International Emergency Economic Powers Act (“IEEPA”).  The EO applies to covered US investments in “countries of concern” named in an Annex to the EO.  Listed countries currently include only China (as well as Hong Kong and Macau), but could be expanded in the future to cover other countries. 

The EO will need to be implemented by Treasury via regulation.  In this regard, Treasury published an advance notice of proposed rulemaking (ANPRM), describing how the agency is considering crafting the rules and seeking public comments from industry until September 28, 2023 about specific enumerated issues in the ANPRM.  Treasury will then publish a proposed rule soliciting additional comments before publishing a final rule.  Therefore, the prohibitions and notification requirements under EO 14105 are unlikely to go into effect for at least several months.

The new regime, which has sometimes been colloquially referred to as “reverse CFIUS” (in reference to the US national security regime for inbound foreign investment known as the Committee on Foreign Investment in the United States or “CFIUS”) is much narrower than the current CFIUS regime, though several legislative proposals have been introduced by Members of Congress that may expand upon the regime set forth in EO 14105.  With that said, the ANPRM was issued by Treasury’s Office of Investment Security, which is also responsible for CFIUS, and the ANPRM uses some of the same terminology as the CFIUS rules.

The ultimate impact of the new outbound investment regime on the private sector will rest largely on the scope of the forthcoming regulations and critical policy decisions about the types of investment activities that will be included and excluded.  As discussed below, Treasury is still considering how to define key regulatory terms, including what constitutes a “covered transaction.”  Based on the scope of that definition, Treasury could leave undisturbed, at least initially, many US investment activities connected to China.  Notably, however, because Treasury is not contemplating a case-by-case review of outbound US investments, it will likely be incumbent upon the transaction parties to assess whether a given transaction is prohibited, subject to notification, or permissible without notification.  Treasury has indicated in the ANPRM that potential penalties for non-compliance, which could be significant and are similar to those found within the CFIUS regime, are being considered as part of the regulations.

The Executive Order

EO 14105 directs the Secretary of the Treasury (the “Secretary”), in consultation with the Secretary of Commerce and other relevant agencies, to issue regulations requiring US persons to notify Treasury regarding certain transactions and prohibiting US persons from engaging in certain other transactions, where those transactions involve “persons of a country of concern” engaged in certain activities involving “covered national security technologies and products.”  Such persons are considered “covered foreign persons.” Section 9 of EO 14105 sets forth important definitions of those terms.

The term “covered national security technologies and products” includes “sensitive technologies and products in the semiconductors and microelectronics, quantum information technologies, and artificial intelligence sectors that are critical for the military, intelligence, surveillance, or cyber-enabled capabilities of a country of concern,” as determined by the Secretary.  This description provides Treasury with considerable leeway in determining what constitutes a “covered national security technology or product” in that it must be “sensitive” (undefined) and “critical” (undefined) to the specified capabilities of a country of concern.

Because China (including Hong Kong and Macau) is the only “country of concern” named in EO 14105 as issued, a “person of a country of concern” currently includes: individuals who are not US persons and are citizens or permanent residents of China; entities domiciled or headquartered in China; the Chinese government, including its agencies and state-owned entities; and any entities owned or controlled by the foregoing persons, wherever organized or domiciled.

The EO authorizes (but does not require) the Secretary to extend the implementing regulations to prohibit US persons “from knowingly directing transactions if such transactions would be prohibited transactions pursuant to this order if engaged in by a United States person.”  This concept is similar to that of prohibited facilitation in the economic sanctions context, but the ANPRM (discussed further below) indicates that Treasury is likely to interpret “directing” differently than “facilitating” under its economic sanctions rules.  It also authorizes (but does not require) the Secretary to require US persons to notify Treasury “of any transaction by a foreign entity controlled by such United States person that would be a notifiable transaction if engaged in by a United States person” and to require US persons to “take all reasonable steps to prohibit and prevent any transaction by a foreign entity controlled by such US person that would be a prohibited transaction if engaged in by a US person.”

EO 14105 also prohibits “any action that evades or avoids, has the purpose of evading or avoiding, causes a violation of, or attempts to violate,” or any conspiracy formed to violate, any of the prohibitions set forth in the EO or in its implementing regulations (i.e., the regulatory regime described in the ANPRM).

Advance Notice of Proposed Rulemaking (ANPRM)

The ANPRM explains how Treasury is likely to approach the regulations, including the technologies and products likely to be covered and a number of key definitions.  The ANPRM contains 83 distinct questions on which Treasury is seeking industry feedback for consideration by the agency, although comments are not limited to these specific questions. 

Below we highlight a number of key provisions in the ANPRM.

Covered Transaction

The ANPRM indicates that Treasury is considering using a single term, “covered transaction,” that would apply to both prohibited and notifiable transactions.  Specifically, Treasury is considering defining the term “covered transaction” to mean:

a US person’s direct or indirect (1) acquisition of an equity interest or contingent equity interest in a covered foreign person; (2) provision of debt financing to a covered foreign person where such debt financing is convertible to an equity interest; (3) greenfield investment that could result in the establishment of a covered foreign person; or (4) establishment of a joint venture, wherever located, that is formed with a covered foreign person or could result in the establishment of a covered foreign person.

Treasury indicated that the following activities will not be considered “covered transactions” so long as they do not involve any of the definitional elements of a “covered transaction” and are not undertaken as part of an effort to evade these 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.

Notably, Treasury indicated that it intends this definition to be forward-looking, and not to cover prior transactions or the fulfillment of uncalled, binding capital commitments with cancellation consequences made prior to the issuance of the EO.

Treasury is also considering creating an exception for certain types of passive investment and other investments that may pose a lower likelihood of conveying intangible benefits to a “covered foreign person.”  It also anticipates these exceptions will help ameliorate any unintended consequences created by the rules.  Specifically, Treasury is considering excepting the following investments from the rule’s coverage (to the extent they would otherwise be “covered transactions”):

  • certain US investments into publicly-traded securities, index funds, mutual funds, and exchange-traded funds;
  • certain investments made as a limited partner;
  • committed but uncalled capital investments; and
  • intracompany transfers of funds from a US parent company to its subsidiary.

Covered Foreign Person

The ANPRM further elaborates on the meaning of “covered foreign person,” noting it may include:

(1) a person of a country of concern that is engaged in, or a person of a country of concern that a US person knows or should know will be engaged in, an identified activity with respect to a covered national security technology or product; or

(2) a person whose direct or indirect subsidiaries or branches are referenced in item (1) and which, individually or in the aggregate, comprise more than 50 percent of that person’s consolidated revenue, net income, capital expenditure, or operating expenses.

Interestingly, this definition would rely on a knowledge standard, rather than the strict liability approach taken in other national security regulatory regimes.  The ANPRM explains that, under the currently contemplated approach, a US person would “need to know, or reasonably should know based on publicly available information and other information available through a reasonable and appropriate amount of due diligence, that it is undertaking a transaction involving a covered foreign person and that the transaction is a covered transaction.” This knowledge-based approach has recently been seen in the October 7, 2022 interim final rule that the Bureau of Industry and Security (“BIS”) released regarding enhanced export control restrictions on semiconductors and advanced computing.

The ANPRM does not elaborate on what would constitute a “reasonable and appropriate amount of due diligence,” which may be an area where commenters request additional guidance on the proposed rule.

Treasury is considering adopting the definition of “knowledge” included in the Export Administration Regulations (EAR) where “knowledge” includes:

… knowledge of a circumstance (including variations such as “know,” “reason to know,” or “reason to believe”) including not only positive knowledge that the circumstance exists or is substantially certain to occur, but also an awareness of a high probability of its existence or future occurrence. Such awareness is inferred from evidence of a person’s conscious disregard of facts known to that person and is also inferred from a person’s willful avoidance of facts.

Covered National Security Technologies and Products

The ANPRM outlines Treasury’s thinking with respect to the three main categories of “covered national security technologies and products,” indicating:

  • Semiconductors and microelectronics:
    • Treasury is considering prohibiting US investments in PRC entities engaged in the development of electronic design automation software or semiconductor manufacturing equipment; the design, fabrication, or packaging of advanced integrated circuits; and the installation or sale of supercomputers.
    • Treasury is also considering requiring notification for US investments in PRC entities engaged in the design, fabrication, and packaging of less advanced integrated circuits.
  • Quantum information technologies
    • Treasury is considering prohibiting US investments in PRC entities engaged in the production of quantum computers and certain components; the development of certain quantum sensors; and the development of quantum networking and quantum communication systems.
    • Treasury is not currently considering a separate notification requirement for quantum information technologies.
  • Certain artificial intelligence systems
    • Treasury is considering requiring notification for US investments in PRC entities engaged in activities related to software that incorporates an AI system and is designed for certain end-uses that may have military or intelligence applications and pose a national security risk.
    • Treasury is also requesting comments on how to shape a prohibition on US investments in PRC entities engaged in a narrow set of activities related to software that incorporates an AI system and is designed for particular end uses with national security implications, e.g., military and surveillance end uses.

The ANPRM provides additional technical parameters and considerations for each of the above categories.  To provide just one example, with respect to advanced integrated circuit design and production, Treasury is considering prohibiting covered transactions with aperson of a country of concern engaged in:

The fabrication of integrated circuits that meet any of the following criteria: (i) logic integrated circuits using a nonplanar transistor architecture or with a technology node of 16/14 nanometers or less, including but not limited to fully depleted silicon-on-insulator (FDSOI) integrated circuits; (ii) NOT-AND (NAND) memory integrated circuits with 128 layers or more; (iii) dynamic random-access memory (DRAM) integrated circuits using a technology node of 18 nanometer half-pitch or less; (iv) integrated circuits manufactured from a gallium-based compound semiconductor; (v) integrated circuits using graphene transistors or carbon nanotubes; or (vi) integrated circuits designed for operation at or below 4.5 Kelvin.

Companies whose activities may be impacted by the rules should carefully review the relevant technical parameters in the ANPRM.

Notification Requirements

An important consideration with respect to notifications will be the timeframe in which they must be filed.  The ANPRM contemplates that the regulations will require notifications to be filed “no later than 30 days following the closing of a covered transaction.”  Allowing for a post-closing notification is likely to prevent delays in deals due to the notification requirements.  This is a departure from the CFIUS regime in which certain mandatory filings must be made to the Committee 30 days prior to closing, thereby causing delays in closing certain deals.

The ANPRM suggests the notifications will require a significant amount of information, potentially including “detailed information about the covered foreign person, which could include products, services, research and development, business plans, and commercial and government relationships with a country of concern” and “a description of due diligence conducted regarding the investment,” among other requirements.

While the ANPRM does not contemplate that the US government would impose restrictions or conditions on notifiable transactions, Treasury will monitor the specific investment and could ask additional questions to evaluate the outbound investment program. Additionally, the notification requirement and the amount of information required could have a chilling effect on other notifiable transactions.

US Person Directed Transactions

Consistent with EO 14105, as discussed above, the ANPRM indicates Treasury is likely to prohibit US persons from knowingly directing transactions if such transactions would be prohibited under EO 14105, or its implementing rules, if engaged in by a US person.  Treasury is considering defining “knowingly” to mean “the US person had actual knowledge, or should have known, about the conduct, the circumstance, or the result.”  It is considering defining “directing” to mean “that a US person orders, decides, approves, or otherwise causes to be performed a transaction that would be prohibited under these regulations if engaged in by a US person.”  The ANPRM indicates that a variety of individuals could be seen as “directing” a company, including general partners; officers, senior managers, or other senior-level employees; and venture partners, among others.  It suggests that US persons may be expected or required to recuse themselves from decision-making processes in certain instances.

However, the ANPRM explains that this provision would not reach certain attenuated conduct, including “the provision of a secondary, wraparound, or intermediary service or services such as third-party investment advisory services, underwriting, debt rating, prime brokerage, global custody, or the processing, clearing, or sending of payments by a bank, or legal, investigatory, or insurance services.”

Foreign Entities Controlled by US Persons

The ANPRM also suggests Treasury is likely to require US persons to (1) notify Treasury of “any transaction by a foreign entity controlled by such United States person that would be a notifiable transaction if engaged in by a United States person” and (2) “take all reasonable steps to prohibit and prevent any transaction by a foreign entity controlled by such United States person that would be a prohibited transaction if engaged in by a United States person.”

Treasury is considering defining a “controlled foreign entity” to mean “a foreign entity in which a US person owns, directly or indirectly, a 50 percent or greater interest.”  Notably, this would seemingly not include situations in which a US person has minority ownership (e.g., less than 50 percent interest) or other indicia of control such as serving as an officer or director. 

The ANPRM does not include a potential definition of “all reasonable steps” but offers a number of potential “factors” including:

(i) relevant binding agreements between a US person and the relevant controlled foreign entity or entities;

(ii) relevant internal policies, procedures, or guidelines that are periodically reviewed internally;

(iii) implementation of periodic training and internal reporting requirements;

(iv) implementation of effective internal controls;

(v) a testing and auditing function; and

(vi) the exercise of governance or shareholder rights, where applicable.

No Case-By-Case Review

Treasury does not contemplate that the program will entail a case-by-case review of outbound investments by US persons. Instead, the onus will likely fall on the transaction parties themselves, as they will be obligated to determine whether a given transaction is prohibited, subject to notification, or permissible without notification.

Penalty Framework

According to the ANPRM, the regulations are likely to provide for civil penalties up to the maximum allowed by IEEPA for “(i) material misstatements made in or material omissions from information or documentary material submitted or filed with the Treasury Department; (ii) the undertaking of a prohibited transaction; or (iii) the failure to timely notify a transaction for which notification is required.”  EO 14105 also contemplates that Treasury will refer potential criminal violations of the EO or its implementing regulations to the Department of Justice.  Given the recent emphasis that CFIUS has placed on enforcement and penalties, it would be reasonable to expect a similar approach by Treasury with regard to this new program.

No Retroactive Applicability

Treasury is not planning to apply the rules in a retroactive manner.  However, the ANPRM adds “the Treasury Department may, after the effective date of the regulations, request information about transactions by United States persons that were completed or agreed to after the date of the issuance of the Order to better inform the development and implementation of the program.”


EO 14105 and its implementing rules may have a significant impact on a range of entities, including private equity, venture capital, and lending firms, companies engaged in joint ventures or similar arrangements in China, and companies looking to engage in strategic merger and acquisition activity in China.  The impact will be felt by those involved in the semiconductors and microelectronics, quantum information technologies, and artificial intelligence sectors, including US companies that have or are about to invest in China through greenfield investments or through joint ventures.  However, the rules may also have spillover effects well beyond those sectors.  

Due to challenges in conducting due diligence on Chinese entities, it may be difficult to determine whether a company is a covered foreign person (e.g., whether it is engaged in any of the enumerated activities involving covered national security technologies and products).  Under the ANPRM, due diligence would need to address not only whether the Chinese entity is currently engaged in such activities, but also whether it will be engaged in those activities in the future – compounding the complexity of the diligence exercise.  This could have a chilling effect on certain investment in China by US persons, even though the preamble of EO 14105 discusses how open investment and capital flows are important economic policy objectives to increase the competitiveness, innovation, and productivity of the United States.

In addition, investors across a wide range of industries could be entangled in the rules if they engage in transactions with covered foreign persons, even if those transactions are largely unrelated to any covered national security technologies and products.  For example, a US television company might consider investing in a Chinese supplier of television components (an activity seemingly unrelated to any of the targeted sectors), but if that Chinese company, or its subsidiaries, is also involved in any enumerated activities related to covered national security technologies and products then the transaction could be subject to the new rules, even though the intent of the transaction is entirely unrelated to that conduct.  

Potential for Additional Congressional Action

Reception of the EO in Congress has been mixed.  Some lawmakers, such as House Financial Services Committee Chairman Patrick McHenry (R-NC), praised the Administration’s efforts, stating, “The White House listened to our concerns about the risks of undermining bedrock American principles, including the free flow of capital. This is confirmation that we can confront the Chinese Communist Party with a smart approach rather than harmful policy.”

However, other members of Congress have criticized EO 14105 for not going far enough.  For example, House Foreign Affairs Committee Chairman Michael McCaul (R-TX) criticized the limited sectors included in the EO, stating, “While I’m pleased to see the Biden administration restrict new outbound investments in China, the failure to include existing technology investments as well as sectors like biotechnology and energy is concerning.  The administration scaling back — at a time where aggressive action is needed more than ever — continues the trend of appeasing industry at the cost of national security.”

The Senate recently approved an amendment to the National Defense Authorization Act (NDAA) adding the Outbound Investment Transparency Act (OITA) to the NDAA.  OITA would require US persons to notify Treasury (typically prior to closing) about transactions in a broader range of sectors than are included in the EO, but does not authorize Treasury to prohibit transactions (as EO 14105 does).  It would also apply to Russia, Iran, and North Korea, in addition to China.  The House version of the NDAA does not include a similar amendment, meaning it remains unclear if OITA will become law and, if so, how Treasury might adjust its rulemaking process to account for the new law. 

As such, the ultimate shape of the new regulatory regime is likely to evolve over time, taking into account reactions from Congress, as well as industry.


For additional information on this topic or assistance in preparing a comment in response to the ANPRM please contact a member of Steptoe’s National Security Practice or International Regulatory Practice.