![Global rules on foreign direct investment](https://www.nortonrosefulbright.com/-/media/images/nrf/nrfweb/knowledge/publications/us_24355_legal-update--fdi-alert.jpeg?w=265&revision=a5124a65-abf9-40e4-8e96-9df39ffdb212&revision=5250068427347387904&hash=96B456347C3246E5649838DF281C5F5D)
Publication
Global rules on foreign direct investment (FDI)
Cross-border acquisitions and investments increasingly trigger foreign direct investment (FDI) screening requirements.
Global | Publication | octobre 2023
On Tuesday, October 17, 2023, the US Department of Commerce, Bureau of Industry Security (BIS) announced a new package of export control measures that update and expand existing restrictions on the export of advanced semiconductors and related manufacturing equipment to China and a number of other countries.
In particular, the new package of rules refines and significantly tightens controls put in place almost exactly a year prior, on October 7, 2022, which, as discussed in our prior briefing, were intended to restrict China's ability to obtain advanced computing chips, develop and maintain supercomputers or manufacture advanced semiconductors.
The new rules impose license or notification requirements on a broader scope of advanced computing chips and computers as well as the equipment used to manufacture certain advanced semiconductors. The rules are also explicitly meant to target efforts to circumvent the October 7, 2022 controls via export to or use in third countries for China's benefit.
As detailed below, the new package includes three rules that dramatically expand both the substantive and geographic scope of the original restrictions:
New additions to the Entity List became effective immediately on October 17, 2023. Both the AC/S rule and SME rule were released as interim final rules, and they will become effective on November 17, 2023 and are currently open for public comments.
These rules, alongside forthcoming outbound investment restrictions announced in August, will act as new tools in the Biden Administration's growing toolkit of national security-focused controls targeting China's key technology sectors. For companies operating in these sectors, the rules represent an expanded landscape of license and notification requirements, as well as US person restrictions, that companies will be forced to navigate.
The AC/S rule amends the Export Administration Regulations (the EAR) to impose license or notification requirements on a broader range of advanced and high-performance chips – in particular, AI-capable chips – and it makes existing and new restrictions applicable to a significantly broader range of countries.
In particular, the AC/S rule expands the performance criteria for integrated circuits (ICs) to be included in ECCN 3A090 (as well as computers and related equipment controlled under ECCN 4A090), by introducing a performance density parameter. BIS explains that the expanded criteria are intended to ensure that certain integrated circuits (ICs) used in the operation of powerful data centers or for artificial intelligence (AI) training are covered and controlled.
Thus, ICs that are now controlled under ECCN 3A090 include ICs with one or more digital processing units having either:
(1) a 'total processing performance' of 4800 or more, or (2) a 'total processing performance' of 1600 or more and a 'performance density' of 5.92 or more (3A090.a);
OR
(2) a 'total processing performance' of 2400 or more and less than 4800 and a 'performance density' of 1.6 or more and less than 5.92, or (2) a 'total processing performance' of 1600 or more and a 'performance density' of 3.2 or more and less than 5.92 (3A090.b).
Notwithstanding the above, the new rule specifically excludes from 3A090 ICs that: (1) are not designed or marketed for use in datacenters, and (2) do not have a 'total processing performance' of 4800 or more.
The AC/S rule also expands the geographic scope of export restrictions for items that fall under ECCN 3A090 from just China and Macau to all countries in Country Groups D:1, D:4 or D:5, unless the country is also included in Country Groups A:5 or A:6.1 License applications for items destined for Macau and Country Group D:5 countries will be reviewed under a presumption of denial policy. By contrast, license applications for items destined for places other than Macau and the Country Group D:5 counties will generally be reviewed under a presumption of approval policy, except where the items are intended for an entity headquartered in, or whose parent is headquartered in, Macau or a Country Group D:5 country.
BIS explains that increasing the scope of the license requirement is intended to curb circumvention efforts to route controlled chips to China through third countries or use such chips in third countries for the benefit of a headquarters or parent company in China.
Some of the additional key changes introduced by the AC/S rule are as follows:
The SME rule expands the 2022 restrictions and notification requirements on semiconductor manufacturing equipment to additional types of semiconductor manufacturing equipment and related technology and software, and, like the AC/S rule, makes existing and new restrictions applicable to a broader range of countries.
The SME rule also amends the 2022 rule's restrictions on certain activities of US persons related to SME. The SME rule reinforces and clarifies the requirement under the EAR for US persons to obtain a license in order to be involved in the movement of items not subject to the EAR (i.e. non-US items) in certain circumstances where such items may provide or support the manufacture of advanced chips for end users in China.
In particular, some of the key changes introduced by the SME rule include:
The AC/S and SME rules help clarify the US persons restrictions put in place by the October 7, 2022 regulations. However, the new rules also expand the geographic scope of the US persons restrictions to Macau and all D:5 countries.
As discussed in our prior briefing, the 2022 regulations created a requirement for US persons, with limited exceptions, to obtain a license in order to be involved in shipping, transmitting or transferring (in-country); facilitating the shipment, transmission or transfer (in-country); or servicing (including installation) activities for exports, re-exports or transfers (in-country) of specified items not subject to the EAR bound for certain end uses or end users in China and Macau.
The new rules clarify that these restrictions only apply where the person knows that the underlying export, reexport or in-country transfer is associated with any of the following:
BIS also added 13 entities who are involved in the development of advanced computing ICs to the Entity List. All added entities are also subject to a "footnote 4" designation. This means that, in addition to needing a license in order to export, reexport or transfer (in-country) US items controlled by the EAR to these newly listed entities, the "footnote 4" Entity List Foreign Direct Product Rule (FDPR) also applies, such that many non-US items that are the direct product of US-origin software and technology will also be considered controlled.
Our team will continue to monitor this space and provide additional updates as appropriate. Should you have any questions about how these expanded and revised rules impact you, please do not hesitate to reach out to our team.
1 This includes: Afghanistan, Armenia, Azerbaijan, Bahrain, Belarus, Burma, Cambodia, Central African Republic, China, Democratic Republic of Congo, Cuba, Egypt, Eritrea, Georgia, Haiti, Iran, Iraq, Jordan, Kazakhstan, North Korea, Kuwait, Kyrgyzstan, Laos, Lebanon, Libya, Macau, Moldova, Mongolia, Oman, Pakistan, Qatar, Russia, Saudi Arabia, Somalia, Republic of South Sudan, Sudan, Syria, Tajikistan, Turkmenistan, United Arab Emirates, Uzbekistan, Venezuela, Vietnam, Yemen and Zimbabwe.
2 The SME rule defines the term "advanced-node integrated circuits" to include ICs that meet any of the following criteria: (a) Logic ICs using a non-planar transistor architecture or with a production technology node of 16/14 nanometers or less; (b) NOT AND (NAND) memory integrated circuits with 128 layers or more; or (c) dynamic random-access memory (DRAM) integrated circuits using a "production" 'technology node' of 18 nanometer half-pitch or less.
Publication
Cross-border acquisitions and investments increasingly trigger foreign direct investment (FDI) screening requirements.
Publication
Artificial intelligence (AI) raises many intellectual property (IP) issues.
Publication
We are delighted to announce that Al Hounsell, Director of Strategic Innovation & Legal Design based in our Toronto office, has been named 'Innovative Leader of the Year' at the International Legal Technology Association (ILTA) Awards.
Subscribe and stay up to date with the latest legal news, information and events . . .
© Norton Rose Fulbright LLP 2023