Private Equity 20 Lectures (13) Building High Walls in Small Yards, Dollar Funds Say Goodbye to C
Private Equity 20 Lectures, Legal Essentials for Silicon Valley Investors, I'm U.S. Attorney Xiaoxiao Liu.
On August 9, 2023, U.S. President Joe Biden formally signed a much-anticipated executive order aimed at prohibiting U.S. private equity funds from investing in Chinese high-tech companies in three areas: semiconductors and microelectronics, quantum information technology, and artificial intelligence. Its English name is very long, I'll just put it here, so you can see for yourself, Executive Order on Addressing United States Investments in Certain National Security Technologies and Products in Countries of Concern, and we only need to look at its Chinese name, which is ill-intentioned will be clearly revealed, called "Executive Order on China Investment Review". At the same time that this Executive Order was issued, Biden declared a national emergency in the United States.
I call this executive order CFIUS bill "mirror bill", the promulgation of this executive order, marking the dollar fund and China to say goodbye to the founders of high-tech projects, really be ready for the winter!
1.The Mirror Image of the CFIUS Act
First of all, let's briefly introduce a background, that is, I just mentioned the CFIUS Act, this bill in the "Private Equity Fund 20 Lectures" with the 7th and 8th issue of the whole two issues of the page to introduce the CFIUS Act from the World War I period in the U.S. Woodrow Wilson (Woodrow Wilson) during the birth of the presidency, the next after five periods of reinforcement, each time the U.S. feels the threat of foreign capital, it will further strengthen this bill. The CFIUS Act was born during the World War I era under President Woodrow Wilson, and has been strengthened over the next five periods, with the Act being further strengthened every time the U.S. feels threatened by foreign capital, until President Biden's most recent action in September 2022, which has brought the CFIUS Act to a height of unprecedented strengthening, and this time the U.S. is alerted to the Chinese threat, and the most recent strengthening has been described by industry analysts as a real attempt to restrict China, although not explicitly stated.The centerpiece of the CFIUS Act is the restriction on foreign capital The core of the CFIUS bill is to limit foreign investment into the United States TID, that is, key technology (Technology), key technology facilities (Infrastructure) and sensitive personal data (Data), that is to say, the current CFIUS bill we can simply understand that the United States is not want to let the Chinese capital into the United States of America's core technology areas.
And August 9, 2023 Biden introduced this executive order, the reason why I call it the CFIUS Act "mirror bill", is because CFIUS to restrict Chinese capital to invest in U.S. core technology, in layman's terms is not to allow Chinese people to come to the U.S. to invest in the United States, and this recent executive order is to restrict U.S. capital to invest in the key technology areas of China, in layman's terms is to restrict U.S. capital to invest in the key technology areas of China. China's key technology areas, in layman's terms, is to prevent Americans from investing in China, and the recent one is even more blatantly pointed directly at China, so we have this bill is translated as "China Investment Review Executive Order".
This time, the bill is directed at China, the bill defined "Country of Concern" is said to be mainland China, Hong Kong Special Administrative Region, Macao Special Administrative Region, this side of the restriction is the investee. As for the investor, the restriction is on the United States Person (Section 9(h)): any U.S. citizen, lawful permanent resident, entity organized under the laws of the United States or any jurisdiction within the United States, including any foreign branch of any such entity, and any person within the United States.
2. There are only three areas of restriction, the small yard to build a high wall
This time the bill mainly restricts the three areas of semiconductors and microelectronics, quantum information technology and artificial intelligence systems.
What are these three areas respectively?
Semiconductors we should not be unfamiliar with, which is the core, but also the United States is most concerned about the chip, the chip industry is also China's most concerned about the key industries, recently not just came out of a movie called "My China Core" it, you can go to see. At present, other countries can only make more than 14 nm chips, and 10 nm below the range, including 7 nm, 5 nm and 3 nm now commonly used on cell phones and computers, are only Taiwan's TSMC (TSMC), South Korea's Samsung (Samsung) and the United States of America's Intel (Intel) can be made, and the first two of the most critical steps in the manufacture of the technology, but also in the hands of the In 2018, the U.S. restricted Huawei because it did not want Huawei to continue to make progress in the field of chips. Last year, Huawei's former party committee, Zhu Shiyao, also said with great pride that "the 14-nanometer chip is safe and we don't have to rely on the Americans", and this year Huawei's newly launched Mate60 has actually appeared in the 7-nanometer chip, which is breathtaking, but the netizens said that the 7-nanometer chip is of unknown origin. Said these are actually trying to tell you, the chip field can basically be said to be the first strategic location of China and the United States in the technology war, nowadays, no one is willing to relax a step.
Artificial Intelligence system, that's with needless to say, the hot AI technology in recent years, especially after Chat GPT out of the generation is artificial intelligence (AIGC) this wave, now these entrepreneurs who come to me to register the company's name is called what what what what what GPT, and now I'm afraid that no one doesn't know that Artificial Intelligence is the next ten years of the most potent point of economic growth.
Quantum information technology we may not have heard much, this is belongs to the laboratory stage, mainly including quantum computing, quantum communications, quantum precision measurement. Today's supercomputer 2 days to finish things, quantum computers only need 3 minutes, it can be said that who mastered the quantum technology, can lead the next era of science and technology. The U.S. "Suzuki" quantum computer and China's "Zuchongzhi II" quantum computer can reach this level. Unlike other fields in which all countries compete with each other, in the field of quantum computing, only China and the United States can be comparable. Quantum information technology is also the area in which China is most likely to overtake the United States.
Although these three areas are indeed very critical, but we will find, compared to the CFIUS Act, this time the "China Investment Review Executive Order" restrictions on the scope of a lot smaller. CFIUS in the pilot bill listed 27 key areas, and in the formal bill passed, although it is the TID three categories, that is, key technology (Technology), key technology, key technology, key technology, key technology, key technology, key technology, key technology, key technology, key technology, key technology, key technology, key technology, key technology, key technology, key technology, key technology, key technology, key technology and key technology. (Technology), key technology facilities (Infrastructure) and sensitive personal data (Data), but actually involves dozens of sub-divisions, or nearly a hundred.
The "Executive Order on China Investment Review" only restricts three areas. That is to say, CFIUS is the United States does not want Chinese capital to invest in U.S. companies to spy on key U.S. technologies, the circle drawn very large, basically the most cutting-edge areas are now covered. While the "China Investment Review Executive Order" the United States does not allow their own country's money to invest in China's field but only a small number of items. Although the two directions are mirror images, but the scope is not symmetrical.
Regarding why the "Executive Order on China Investment Review" only restricts three areas, the Biden administration says it wants to maintain a "small yard with a high fence," or more loosely translated, "a small yard with a high fence. or, more loosely translated, "small yard with a high fence". Mike Froman, president of the Council on Foreign Relations, said on CNBC, "As long as that yard stays small and focuses on key national security technologies, I think we're on very strong ground."
3.Things are far from simple
Now it sounds is not already scared to death, but in fact things are far more serious than we think, for the Biden "China investment restrictions bill" only limit the three areas, the United States is not actually no domestic rhetoric, said Biden is too light. The U.S. Congress has quite a few voices have suggested expanding the scope of foreign investment review, advanced aviation, biotechnology and energy industries are included in the review, and some people even call for a more thorough decoupling. It can be seen that it is not that the once pro-China Biden has changed his face, but that Biden is still a relatively pro-China one among the U.S. authorities, and it is just that there is no way to help the U.S. anti-Chinese voices that are too heavy.
When you see a cockroach in your home, then you actually have a cockroach nest in your home.
Back in August 2022, Biden formally signed the Chips and Science Act 2022 (CHIPS and Science Act 2022), which encourages companies to develop and manufacture chips in the United States by providing financial support to the semiconductor industry, while restricting U.S. companies from supporting semiconductor research, development, and manufacturing in countries like China.
Additionally, as recently as July 2023, the U.S. House of Representatives Select Committee on U.S.-China Strategic Competition sent separate letters to four top U.S. private equity funds
GGV Capital
GST Ventures
Walden international
Qualcomm Ventures
These U.S. private equity funds were asked to provide information on their investments in Chinese companies in the artificial intelligence, semiconductor and quantum industries.
Sequoia Capital, which has always loved investing in Chinese projects, also divested its China business early in 2023, which is also related to the ongoing scrutiny from the DC side. US direct investment in China fell to a 20-year low of $8.2 billion last year, while US investment in China's high-tech sector fell to a 10-year low of $1.3 billion last year. Not only that, but all U.S. companies have already slowed or suspended their deals in China while waiting for the new rules.
The Chinese government has expressed strong opposition to the measure, saying the executive order seeks to "politicize and weaponize" trade between the world's two largest economies.
4.Response
Because the bill is still in a very preliminary state, it does not specify the specific measures and consequences of the review, but it is nothing more than stopping trading, divestiture of capital and cash penalties.
If you ask me, what should I do if I am investigated? Two words: "cool it". This executive order is not an unexpected "black swan", on the contrary, it is another concept called "gray rhinoceros", that is to say, we all know that the rhinoceros will come crashing down, and we all see the rhinoceros crashing down on you, but we can not do anything about it.
Recently the United States introduced one after another to China to restrict the executive order, is the times under the flood tide of the big wind and big waves, the ocean-going giant ship will be subverted in this storm, not to mention you and me this small boat of entrepreneurship, or that the naked swimmers? The era of globalization that has been soaring for the past 20 years is over, and the good thing that the welfare of both China and the United States is no longer there. What you as an entrepreneur can do well is to stay in China if you are Chinese, and stay in the US if you are American, forget about cross-border, and put in for the long haul.
Private Equity 20 Lectures, Legal Essentials for Silicon Valley Investors, I'm U.S. attorney Liu Xiaoxiao.
