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On January 2, 2025, a new Treasury Department Final Rule took effect that significantly restricts U.S. investments in Chinese entities involved in three key sectors: semiconductors/microelectronics, quantum information technology, and artificial intelligence. This rule implements Executive Order 14105 from August 2023.

According to the recent memo from law firm Seward & Kissel, the Final Rule (31 CFR Part 850) presents challenges and ambiguities to advisers, funds, and investors and may necessitate changes in the investment strategies and governance of (i) U.S. and non-U.S. private funds advised by U.S. investment advisers and (ii) non-U.S. funds advised by non-U.S. advisers with U.S. person investors.

The restrictions apply to U.S. citizens, permanent residents, U.S.-based persons, U.S. organizations, and foreign entities controlled by U.S. parents. It affects investments in companies either based in China or controlled (50%+ ownership) by Chinese entities, government, or citizens.

The rule prohibits or requires notification for "Covered Transactions," which include: • Acquiring equity interests, options, or convertible debt • Entering joint ventures • Acquiring limited partner interests in non-U.S. investment vehicles likely to invest in restricted Chinese entities

Violations can result in civil penalties up to double the transaction value or $368,136, plus potential criminal fines of $1 million and up to 20 years of imprisonment.......................

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