Behind the iron curtain of venture capital, a new wall is being built.
Text | Shi Jiaxiang
Editor | Liu Jing
On February 21st, Trump signed the Memorandum on "America First Investment Policy" (hereinafter referred to as the "America First Investment Policy"). The theme of the memorandum is clearly stated: American investors will invest in the future of the United States, not that of other countries.
Subsequently, the spokesperson of the Ministry of Foreign Affairs responded at a press conference, stating that the United States' tightening of security reviews on Chinese investments in the United States seriously undermines the confidence of Chinese enterprises in investing in the United States and damages the business environment of the United States itself. Intensifying restrictions on U.S. investments in China is an artificial interference in the independent decision - making of U.S. enterprises and distorts the investment exchanges between the two countries. The relevant memorandum issued by the U.S. side lists China as a "foreign adversary" on the grounds of "national security" and takes various discriminatory measures to strengthen restrictions on bilateral investments with China. The Chinese side is strongly dissatisfied and firmly opposed to this and has lodged solemn representations with the U.S. side.
In terms of content, the changes in the "America First Investment Policy" are mainly reflected in the following aspects:
It will significantly expand the scope of restrictions of the Reverse CFIUS (Foreign Investment in the United States) system. The scope will be expanded from the original three sensitive industries: semiconductors, artificial intelligence, and quantum computing to biotechnology, hypersonic technology, aerospace, advanced manufacturing, directed energy, and other areas affected by China's "civil - military integration" strategy;
It restricts investment types including private equity, venture capital, greenfield investment, corporate expansion, and public securities trading;
It restricts the sources of funds, including pension funds, university endowments, and other limited partnership investors.
In addition, the "America First Investment Policy" also includes measures such as strengthening the investment review system and adding new bilateral investment restriction measures, possibly exerting pressure on Chinese - listed companies in the U.S. from different angles, and considering whether to suspend or terminate the 1984 China - U.S. tax treaty. Xie Shipo, a partner at Han Kun Law Offices, believes that although the content of the tax treaty is only briefly mentioned in the memorandum, its adverse impact on the economic development of the two countries is likely to be long - lasting and far - reaching.
If the "China - bound Investment Review System" that came into effect on January 2nd this year was mainly targeted at the venture capital industry and some people thought it might not be fully implemented, then the "America First Investment Policy" shows a more radical and decisive signal.
One week after the release of the "America First Investment Policy", "Waves" interviewed Xie Shipo, a partner in the compliance department of Han Kun Law Offices. The term "chilling effect" was constantly mentioned in the interview. It is a term used to describe "people's fear". Although the "America First Investment Policy" does not have legal effect for the time being, the signal it brings is enough to cause huge waves in the future of the venture capital market.
The following is the transcript of the dialogue, edited by "Waves":
"Waves": Compared with the relevant Reverse CFIUS bills that officially came into effect on January 2nd, what specific changes are there in the "America First Investment Policy" this time?
Xie Shipo: In terms of restricted areas, compared with Reverse CFIUS, the "America First Investment Policy" further includes industries such as biotechnology, hypersonic technology, aerospace, advanced manufacturing, and directed energy on the basis of the semiconductor and microelectronics, quantum information technology, and artificial intelligence fields. These fields basically cover all the "hard - tech" areas where China currently has certain advantages or is seeking breakthroughs. In particular, the scope represented by "advanced manufacturing" is very broad.
In terms of sources of funds, the "America First Investment Policy" clearly states that it will restrict the investments of pension funds, university endowments, and other limited partnership investors. Special attention can be paid to the investments of other limited partnership investors. This may mean that the exemption for LP investments under Reverse CFIUS will be somewhat restricted.
"Waves": What historical logic led to these changes?
Xie Shipo: The general background of these changes is the United States' continuous containment of China in recent years, attempting to hinder the development of China's cutting - edge technologies and strategic industries. During Trump's first term, a series of containment measures against China were widely promoted, including imposing tariffs on Chinese products, initiating the Section 301 investigation, announcing the Department of Justice's China Initiative, strengthening CFIUS reviews, and passing the "Holding Foreign Companies Accountable Act" (HFCAA) to threaten to delist Chinese - listed companies in the U.S. Many of these measures are reflected in the current "America First Investment Policy".
In fact, the Biden administration has basically continued this approach, especially by issuing a large number of executive orders intensively at the end of last year and the beginning of this year.
"Waves": The memorandum clearly bears the label of "America First". How should we understand these four words?
Xie Shipo: "America First" is manifested in the following aspects: (1) American money should be invested in the United States; (2) Attract allies and friendly countries to invest in the United States' cutting - edge technologies and important industries, and use foreign capital to develop American industries, create American jobs and wealth; (3) Do not allow American capital to be used to develop the cutting - edge technologies and important industries of "adversary" countries, and do not allow "adversary" countries to control the United States' cutting - edge technologies and important industries.
On the one hand, the United States welcomes investments from its allies and "friendly countries". The memorandum specifically emphasizes the need to lower "thresholds and barriers". At the same time, it aims to restrict investments from "adversary countries" or "countries of concern" and investments in these countries.
"Waves": Will this memorandum have an impact on a group of Chinese US - dollar funds actively investing in the U.S. market?
Xie Shipo: Since the CFIUS system applies to specific minority equity investments, Chinese US - dollar funds investing in the U.S. market may also be subject to stricter CFIUS reviews.
However, the "America First Investment Policy" still welcomes pure passive investments without control rights or data access rights.
"Waves": Will the "America First Investment Policy" impose restrictions on mergers and acquisitions?
Xie Shipo: There will be restrictions on both sides.
When it comes to U.S. investors' mergers and acquisitions of Chinese enterprises, mergers and acquisitions of Chinese enterprises in sensitive industries will fall under the scope of the Reverse CFIUS system. However, the Reverse CFIUS system has an exemption for U.S. enterprises' acquisition of 100% equity of restricted Chinese enterprises, so such mergers and acquisitions are not affected. But in practice, China is also very likely to strengthen the review of such transactions.
For Chinese investors, the expansion of restricted industries and the reduced possibility of accepting behavioral commitment measures will inevitably lead to an increase in the difficulty of merging and acquiring U.S. enterprises.
"Waves": Will Chinese - listed companies in the U.S. that are currently in the process of going public be affected?
Xie Shipo: First of all, if relevant departments strengthen the supervision of Chinese - listed companies in the U.S., they may face more stringent information disclosure requirements during the listing process, resulting in a longer listing process, a longer review time, and greater uncertainty in listing. Secondly, if the PCAOB once again believes that it cannot access the audit working papers of Chinese - listed companies in the U.S., these companies may face the risk of being forced to delist after listing.
The VIE structure is a matter specifically mentioned in the "America First Investment Policy", so Chinese - listed companies in the U.S. may need to take a more cautious attitude towards the VIE structure.
"Waves": The memorandum mentions strengthening the supervision of Chinese - listed companies in the U.S. How will such supervision be implemented?
Xie Shipo: The "America First Investment Policy" mentions two directions of supervision. On the one hand, it is to strengthen the enforcement of the "Holding Foreign Companies Accountable Act" (HFCAA) and supervise the audit quality of Chinese - listed companies in the U.S. through the Public Company Accounting Oversight Board (PCAOB).
On December 18, 2020, the "Holding Foreign Companies Accountable Act" in the United States came into effect. The act stipulates that if an issuer is identified by the U.S. Securities and Exchange Commission (SEC) for three consecutive years as a target issuer whose audit institution and audit working papers cannot be inspected by the PCAOB, the target issuer will be subject to a trading ban by the SEC and face the risk of being forced to delist.
However, according to relevant Chinese regulatory rules, it is difficult for U.S. law - enforcement agencies to inspect the audit working papers and relevant documents of the audit reports of Chinese - listed companies in the U.S. issued by accounting firms located in China.
Therefore, the SEC began to release a supervision list in March 2022, including hundreds of Chinese - listed companies in the U.S., and these companies once faced the risk of delisting. Many Chinese state - owned enterprises delisted their American depositary shares from the New York Stock Exchange, also affected by the uncertain regulatory prospects.
So the PCAOB has been a cloud hanging over Chinese - listed companies in the U.S. that have already been listed for a long time.
It was not until the end of 2022 that through consultations between the two countries, the two sides reached an agreement on supervision, and the PCAOB obtained the authority to conduct comprehensive inspections and investigations of Chinese companies for the first time in history.
If the "America First Investment Policy" is implemented, the SEC may once again believe that the PCAOB cannot inspect the audit institutions and audit working papers of Chinese - listed companies in the U.S., and these companies will face the same delisting risk again.
On the other hand, it is to strengthen the review of the auditability, corporate governance, and the existence of criminal or civil fraud of Chinese - listed companies in the U.S.
The "America First Investment Policy" requires the Attorney General and the Director of the Federal Bureau of Investigation to coordinate and review the auditability, corporate governance, and the existence of criminal or civil fraud of foreign adversary companies such as Chinese companies listed on U.S. exchanges. It clearly states that special attention will be paid to the variable interest entity (VIE) structure and subsidiary structure. The memorandum believes that these structures limit the ownership and protection of U.S. investors and that accusations of such fraud should be strictly reviewed.
"Waves": The memorandum also mentions that investments in publicly traded securities may be included in the jurisdiction of the Reverse CFIUS system. It sounds difficult to trace the source?
Xie Shipo: The "America First Investment Policy" initially mentions that it may restrict Americans from investing in the securities of listed companies in sensitive fields such as semiconductors, artificial intelligence, quantum, biotechnology, hypersonics, aerospace, advanced manufacturing, and directed energy.
In terms of specific implementation, since the information of cornerstone investors and investors with a relatively high shareholding ratio may be publicly disclosed, once the above - mentioned investment restriction system comes into effect, US - dollar capital will most likely not participate in the cornerstone investment of Chinese - listed companies in the U.S. In addition, the chilling effect may also cause US - dollar capital to actively choose not to invest in the A - share or Hong Kong - stock markets to avoid penalties.
"Waves": Will this have a specific impact on Chinese entrepreneurs in the United States? For example, are there more specific restrictions on the AI industry?
Xie Shipo: At present, these are only partial policy proposals. The specific implementation of the proposed policies has not been carried out, and the investment restrictions on the AI industry have not been further clarified.
However, if Chinese entrepreneurs engaged in sensitive industries in the United States are of Chinese nationality and do not hold a U.S. green card, they may be restricted due to the expansion of Reverse CFIUS in the "America First Investment Policy".
"Waves": Are there any areas that are completely unaffected at present?
Xie Shipo: Generally speaking, the overall direction of the United States is to contain China's development of cutting - edge technologies, so it is hard to say which areas are completely unaffected.
In addition, if the measures in the "America First Investment Policy" to exert pressure on Chinese - listed companies in the U.S. are implemented, it is very likely that Chinese - listed companies in the U.S., including those in the consumer and entertainment industries, will be negatively affected and may even face the risk of delisting and penalties.
"Waves": Apart from the above - mentioned issues, are there any other key issues in the "America First Investment Policy" that investors and entrepreneurs need to pay attention to?
Xie Shipo: The "America First Investment Policy" requires a review of whether to suspend or terminate the "Agreement between the Government of the People's Republic of China and the Government of the United States of America for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income" signed in 1984.
The China - U.S. tax treaty is one of the important cornerstones of economic cooperation between the two countries. If the China - U.S. tax treaty is suspended or even cancelled, the tax costs of economic exchanges between the two countries will increase significantly, which will obviously have a heavy impact on the exchanges of capital, human resources, trade, and technology between the two countries.