Introduction

On 28 October 2024, the US Treasury Department issued a Final Rule implementing the Outbound Investment Program (OIP) under Executive Order 14105, which safeguards US national security by limiting investments by US persons in key technologies in “countries of concern,” specifically China including Hong Kong and Macau. Effective 2 January 2025, the OIP targets outbound investments in Semiconductors and Microelectronics, Quantum Information Technologies, and Artificial Intelligence by prohibiting certain transactions and permitting other transactions subject to a notification requirement (together, “covered transactions”).

While the OIP’s coverage is complex and requires significant diligence, certain investments are exempted. These include passive investments in listed securities like index and mutual funds, Limited Partner (LP) investments in pooled funds, intracompany transactions supporting ongoing operations, and transactions fulfilling preexisting commitments prior to EO 14105.

Criteria for Covered Transactions

Unless qualifying exempt as explained below, US LP investments will be deemed a covered transaction if the LP acquires an interest in a venture capital, private equity, fund of funds, or other pooled investment fund (where the fund is not a US person) and knows at the time of acquisition that the fund is likely to invest in entities within countries of concern in the technology sectors targeted by the Final Rule, and such fund undertakes a transaction that would be a covered transaction if undertaken by a US person.

The implication for LPs is that they are expected to conduct a “reasonable and diligent inquiry” on potential fund activities at the time of their investment. While recognizing the difficulty this may present as LPs cannot control fund investment decisions, Treasury does expect that LPs can at least determine the country and general sector of likely investments through reasonable inquiry. The key takeaway is that there is no safe harbor for LP investments, elevating requirements for diligence to confirm that funds do not invest in countries or technologies covered by the OIP, or that an LP exemption can be relied on.

Exemptions for LP Investments

The Final Rule sets forth several exemptions from the OIP, one of which applies for LP investments in venture capital, private equity, or other pooled funds where (1) the LP’s total committed capital does not exceed $2,000,000 across all fund vehicles, or (2) the LP has secured a binding contractual assurance that its capital in the fund will not be used to engage in a transaction that would be a prohibited transaction or notifiable transaction if engaged in by a US person. LPs can take advantage of other more generally applicable exemptions, such as for investments in a “publicly traded security” including publicly traded securities in any jurisdiction. LPs should be careful as exemptions may be lost if investments afford non-passive rights beyond standard minority shareholder protections with respect to the foreign person.

Takeaways

The OIP will present significant challenges for LPs to conduct diligence on investments, especially in funds engaged in countries of concern.