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The impact on Chinese venture capital firms shows that Biden’s order could have broader ramifications than was initially understood, potentially forcing a shake-up at top tiers of some firms.

The issue arises because some Chinese VC firms are run by “United States persons,” including people who were born in China but became U.S. citizens later. Those include David Zhang, one of the two founding partners of Matrix Partners China, which manages more than $8 billion. He is a U.S. citizen, according to a person with knowledge of the matter.

Another is James Mi, a founding partner of Lightspeed China Partners, a Chinese VC firm affiliated with—but separate from—Lightspeed Venture Partners of the U.S., and JP Gan, a founding partner of Shanghai-based INCE Capital. Both are U.S. citizens, according to their profiles in Forbes’ Midas List of the world’s top 100 venture capitalists. One of the two founding managing partners of Qiming Venture Partners, which manages $9.5 billion in assets, is Gary Rieschel, an American, according to a regulatory filing in China.

The executive order’s proposed regulations are still a work in progress, as there is an initial 45-day notice-and-comment period when the government will seek feedback from the public that could lead to adjustments.

Even so, the focus on “United States persons” could have profound consequences. Last year, the Biden administration’s semiconductor export restrictions, which included measures to limit U.S. citizens’ involvement in Chinese chip development activities, prompted Chinese chip firms to remove Americans from key positions.

If a U.S. person is among the general partners managing a fund investing in any of the three sensitive sectors in China, the executive order could have an impact, said Marcia Ellis, global co-chair of private equity practice at law firm Morrison Foerster.

The specific roles the U.S. person is currently playing by the U.S. person may be a key factor. Qiming’s Rieschel, for instance, told The Information via email that he was no longer involved in the firm’s day-to-day operations or investment decisions.

“The restriction would prohibit U.S. corporate officers and directors from ordering or approving investments by foreign branches or subsidiaries, or foreign funds, into Chinese entities involved in the covered technology sectors,” according to a notice to clients by law firm Sidley Austin.

Violations of the executive order could lead to civil penalties and criminal prosecutions.

One of the sectors the order covers, artificial intelligence, has been one of the few hot areas lately for China’s tech sector. Many local VC firms have invested in startups focusing on developing large-language models and applications. For example, Frontis, an AI startup founded by a professor of the prestigious Tsinghua University in Beijing, has received investments from Qiming and Matrix Partners China at a valuation of hundreds of millions of U.S. dollars, according to the startup’s website.

Lawyers say the Treasury Department’s advance notice of proposed rulemaking, released to accompany the president’s executive order, suggests that the regulations could apply even to investments by Chinese yuan funds operated by Chinese VC firms headed by U.S. persons. Major Chinese VC firms typically manage U.S.-dollar funds raised from global investors as well as Chinese yuan funds raised from domestic investors, including funds backed by state-owned enterprises and local governments. Chinese VC firms’ investments in the semiconductor sector—the most sensitive industry for both Beijing and Washington—are almost always from their Chinese yuan funds.

Questions about the order’s impact remain. On one hand, the scope of the order, which doesn’t include biotechnology or energy, appears relatively narrow. And it doesn’t mention any regulations on passive investments, in which U.S. institutions such as pensions and endowments invest in China-focused funds, which in turn invest in Chinese tech startups.