WTL...? WHAT'S THAT LAWYER SAYING? INVESTORS: HOW WILL YOU AND YOUR ADVISERS AVOID "GOTCHA" RISKS FOR INVESTMENT IN CHINESE TECHNOLOGY?

At a time when the Chinese government is rolling out programs favorable for non-China investors to fast-track investment in Chinese technology, the US government is putting the brakes on US investors’ participation, due to national security concerns. This may have legal implications for your investment management strategies and approval procedures, whether you think you are investing in Chinese tech or not. See the helpful Wilmer Hale article linked to this post, below.

SUMMARY

Treasury Department restrictions are to be effective January 2, 2025, that will prohibit US investors from certain “covered transactions” that are investments in Chinese businesses performing “covered activities” like:

1) artificial intelligence;

2) semiconductors and microelectronics; and

3) quantum information technologies.

THE "GOTCHA"

How will you know whether your newest portfolio investment violates the new regulations? Is it a “covered transaction?”  Is the business engaged in a “covered activity?”  Your actual knowledge, or lack of it, will not be the standard. Mere ignorance is not a sufficient defense. There are no safe harbors. You must work for any rational sense of safety. The US investor will have to exercise "diligent and reasonable inquiry" when making an investment.  If you are wrong in your conclusion, the Treasury Department will look at whether you "had or could have had" any information to tell you whether the investment is prohibited or not.

So, how hard do you need to inquire? There is a list of 7 possible diligence guideline examples that the Treasury Department might look at, to determine whether you “had or could have had” such information.

What is clear, though, is that the guidelines are not clear. The Treasury Department will have a lot of prosecutorial discretion to determine whether you behaved reasonably and diligently, whether you “had or could have had” information that would lead to a violation. You should follow up to see if and when additional guidance comes out. For now, check out this good article for more detail:

https://www.wilmerhale.com/en/insights/client-alerts/20241104-biden-administration-finalizes-controls-on-us-investment-in-china