What Happened:

On June 21, 2024, the US Department of Treasury (Treasury) Office of Investment Security issued a Notice of Proposed Rulemaking (Outbound Investment NPRM) to implement Executive Order 14105 (the Outbound Investment Order), which directed Treasury to regulate certain US investments into China’s semiconductors and microelectronics, quantum information technologies and artificial intelligence sectors. The Outbound Investment NPRM builds on the Advanced Notice of Proposed Rulemaking (ANPRM) issued by Treasury in August 2023 and provides the full draft regulations and explanatory discussion regarding the intent of the proposal, and solicits comments from the public.

The Bottom Line:

The Outbound Investment NPRM gives further shape to a new national security program to be implemented and administered by Treasury to regulate US outbound investment. Companies with investments, or planning to invest, in China, particularly in the tech sector, should review the Outbound Investment NPRM to understand changing compliance obligations with respect to US outbound investment and consider providing comments to Treasury regarding implementation of the Outbound Investment Order.

The Full Story:

On August 9, 2023, President Biden issued the Outbound Investment Order directing Treasury, in consultation with other federal agencies, to regulate certain US investments into China’s semiconductors and microelectronics, quantum information technologies and artificial intelligence sectors. Treasury simultaneously released its ANPRM seeking public comment related to the implementation of the Outbound Investment Order. Our coverage of the Outbound Investment Order and the ANPRM, including our summary of the proposed rules, is available here.

On June 21, 2024, Treasury issued the Outbound Investment NPRM, providing the proposed regulations to implement the Outbound Investment Order. In its Press Release accompanying the NPRM, Treasury noted that the NPRM provides further detail on key concepts and aspects of the program’s implementation, including:

• the obligations of a US person regarding a “covered transaction;”
• categories of covered transactions and “excepted transactions;”
• technical specifications to inform the scope of covered transactions based on certain technologies and products in the areas of semiconductors and microelectronics, quantum information technologies and artificial intelligence;
• information that a US person is required to provide to Treasury as part of a notification;
• the knowledge standard and expectations for a US person to conduct a reasonable and diligent inquiry prior to undertaking a transaction; and
• conduct that would be treated as a violation of the proposed rule and applicable penalties for such conduct.

As discussed in our earlier coverage of the emerging outbound investment regime, the Outbound Investment Order directs Treasury to regulate two classes of covered transactions: (1) “notifiable transactions” for which US persons must provide notice to Treasury and (2) “prohibited transactions” from which US persons are prohibited from undertaking. The regulations proposed in the Outbound Investment NPRM would not entail a preliminary case-by-case review by Treasury of covered transactions or any other transactions, or establish a licensing or clearance process where a US person would seek prior authorization for a covered transaction. Rather, the relevant US person undertaking a transaction would have the obligation to determine whether the given transaction is prohibited, permissible but subject to notification, or not covered by the rule because either it is an excepted transaction or it is not within the authority set forth under the proposed rule.

Key differences in the Outbound Investment NPRM from our earlier summary of the ANPRM include:

• Knowledge Standard: In the ANPRM, Treasury indicated that it was considering adopting a knowledge standard across the outbound investment program, meaning that for a transaction to be a covered transaction, a US person would need to know, or reasonably should know, based on information publicly available or available through reasonable and appropriate due diligence, that it is undertaking a transaction involving a covered foreign person and that the transaction is a covered transaction. The Outbound Investment NPRM specified that for a transaction to be a covered transaction, a US person must have knowledge of the relevant facts or circumstances at the time of a transaction, including: actual knowledge that a fact or circumstance exists or is substantially certain to occur, an awareness of a high probability of a fact or circumstance’s existence or future occurrence, or reason to know of a fact or circumstance’s existence, each establishing that the transaction involves a covered foreign person (i.e., a person of a country of concern who or that is engaged in activities, involving one or more of the covered national security technologies and products identified in the Outbound Investment NPRM).
• Definitions: A number of defined terms were adjusted from definitions initially proposed in the ANPRM, including the definition of “AI systems,” which the Outbound Investment NPRM proposes should follow the definition in Executive Order 14110 (on artificial intelligence) but seeks comment on certain computational thresholds, and “covered transaction,” which the Outbound Investment NPRM proposes will include US person investments made as a limited partner into certain pooled funds that are not US persons where the US person investor knows at the time of the investment that the pooled fund likely will invest in a person of a country of concern engaged in one or more of the three sectors of covered national security technologies and products identified in the Outbound Investment Order.
• Controlled Foreign Entities: Obligations with respect to “controlled foreign entity” have been fleshed out to require US persons to apply the outbound investment rules to non-US entities under their control. The proposed rules also provide guidance on what constitutes “control.”
• Interplay With Other Regimes: The Outbound Investment NPRM proposes that any covered transaction is prohibited when it is with or involves a covered foreign person undertaking any covered activity—whether itself a prohibited transaction or a notifiable transaction—if the covered foreign person is included on one of several US government lists, such as the Entity List maintained by the US Department of Commerce’s Bureau of Industry and Security.
• Exceptions: The Outbound Investment NPRM proposes and seeks comments on alternative proposed exceptions for defining the threshold beneath which a US person limited partner’s investment into a pooled fund that then invests in a covered foreign person would constitute an excepted transaction, as well as a proposal to except certain transactions with or involving a person of a country or territory outside of the United States designated by Treasury in accordance with criteria (to be developed by Treasury) that relate to that country or territory’s own measures to address the national security risk related to certain outbound investment.

Treasury is requesting public comment on the Outbound Investment NPRM by August 4, 2024.