U.S. Finalizes Investment Ban On Chinese Emerging Tech

In this article for Law360, Luci Hague discusses the Biden administration's new rule preventing U.S. money from funding emerging technology initiatives in China and other "countries of concern."

The Biden administration finalized plans to ban U.S. investors from funding emerging Chinese technology, saying the restrictions are necessary to prevent Beijing from advancing technologies critical to its military modernization campaign.

The U.S. Department of the Treasury's rule largely maintains a policy previewed in August 2024 banning or requiring U.S. citizens and nationals to report certain investments into Chinese artificial intelligence, quantum computing and semiconductors, a proposal that China has likened to economic coercion.

In finalizing the proposal on Monday, the Treasury Department explained that the new regime is meant to prevent "countries of concern" from obtaining the market access, talent networks and other "intangible benefits" that accompany capital investment.

"Certain United States outbound investments may accelerate and enhance the successful development of sensitive technologies and products by countries of concern that develop them to counter United States and allied capabilities," the Treasury Department said in a Monday fact sheet accompanying the final rule.

Going into effect Jan. 2, the rule creates the Outbound Investment Security Program that U.S. President Joe Biden had called for in an August 2023 executive order directing the Treasury Department to prevent U.S. money from funding emerging technology initiatives in China and other "countries of concern."

The Treasury Department had released a preliminary version of the implementing rule in August of this year, previewing its envisioned ban. That proposal had been met with various comments seeking clarification into the scope of the ban, with Luci Hague, a partner in Kirkland & Ellis LLP's International Trade and National Security Practice, telling Law360 that the proposal had included a broad definition of covered AI.

The final rule adopts a definition of covered AI investments that's a "little bit broader" than she was expecting, and she'll be looking to see how the department will enforce that section of the program, she said.

"It's not surprising that AI is a little bit trickier, because it has so many applications for commercial purposes," she said on Tuesday.

The proposed regulation noted that an investor must report any investments that they know to be restricted, that they believe could be restricted, or that they would have known to be restricted, had they conducted a "reasonable and diligent inquiry." In response to requests to clarify what it considers sufficient due diligence, the Treasury Department included new language stating it would consider the "totality of relevant facts and circumstances."

"This new language accounts for the circumstance where a U.S. person may face obstacles to conducting due diligence, while preserving the necessary flexibility to consider the individual facts and circumstances of a transaction when assessing whether a 'reasonable and diligent inquiry' has occurred," the rule said.

Commenters had also raised general concerns that the policy was too broad, would break with the U.S.' traditional support for open investment and would have unintended consequences for investment managers, to which the Treasury Department responded that its final rule sought to balance the U.S.' national security interests with its open investment goals.

"The Treasury Department also recognizes the potential for unintended consequences that may arise under the Final Rule and has sought to further minimize the impact of those consequences," the department said.