On August 9, 2023, U.S. President Joe Biden signed an Executive Order (“EO”) titled “Addressing United States Investments in Certain National Security Technologies and Products in Countries of Concerns,” mandating the establishment of an outbound investment regulatory regime.  The EO mandates that the Treasury Department, in coordination with other agencies, issue regulations to establish a “program” to prohibit or require notification concerning certain outbound investments by U.S. persons involving a country of concern and a narrow set of advanced technologies and products.  In the EO, the President identified one country as a country of concern: the People’s Republic of China, including Hong Kong and Macau. However, the President may update the list of countries of concern in the future.  

Immediately below is a summary of the new outbound regulatory program mandated by EO.  Further below is a summary of the Advance Notice of Proposed Rulemaking (“ANPRM”) issued by the Treasury Department concurrently with the EO along with key considerations for enterprises potentially affected by the new EO and proposed rule.

Overview of Executive Order Addressing United States Investments in Certain National Security Technologies and Products in Countries of Concerns

The Executive Order directs the Secretary of the Treasury, working with the Secretary of Commerce, and, as appropriate, the heads of other executive departments and agencies, to issue regulations to address the following concepts, requirements, and prohibitions applicable to the mandated outbound investment regulatory program. 

1. Covered foreign person.  Subject investments must involve a covered foreign person, which is a person (entity or individual) from a country of concern that conducts activities in one or more of the following “covered national security technologies and products.”

2. Covered national security technologies and products. Defined as sensitive technologies and products in the following areas, which are “critical for the military, intelligence, surveillance, or cyber-enabled capabilities of a country of concern, as determined by the Secretary in consultation with the Secretary of Commerce and, as appropriate, the heads of other relevant agencies.” 

   • Semiconductors and microelectronics

   • Quantum information technologies

   • Artificial intelligence

3. Notification requirement.  Provide notification of certain transactions by U.S. persons in “covered foreign persons.”

4. Investment prohibition.  Prohibit U.S. persons from engaging in certain other transactions in “covered foreign persons.” (The EO does not distinguish which transactions will be notifiable and which will be prohibited, but rather directs that distinction to be implemented through regulation.)

The EO also grants authority to the Secretary of Treasury to extend prohibitions and notification requirements to U.S. persons under the following scenarios:

• Where a U.S. person is involved indirectly in covered transactions;

• If U.S. persons “knowingly direct”transactions by non-U.S. persons, where such transactions would otherwise be prohibited or require notification if engaged in by a U.S. person; or

• If foreign entities controlled by U.S. persons enter transactions that would otherwise be notifiable or prohibited if engaged in by a U.S. person.  

Overview of Advance Notice of Proposed Rulemaking to Implement the Outbound Investment Regulatory Program

On August 9, 2023, concurrent with the EO by the President, the Treasury Department issued an Advance Notice of Proposed Rulemaking (ANPRM) containing its initial proposals with respect to the forthcoming outbound investment regime mandated by the EO and soliciting comments (due September 28).  In an overview of the proposed program, the ANPRM stated that Treasury “does not contemplate that the program will entail a case-by-case review of U.S. outbound investments,” rather the contemplated program requires parties to self-determine “whether a given transaction is prohibited, subject to notification, or permissible without notification.” 

1. Key Concepts

The ANPRM provides a proposed framework for understanding the applicability of the outbound investment prohibitions and notification requirements.  The following are key concepts outlined in the ANPRM.

• U.S. persons responsible for compliance of controlled subsidiaries or for knowingly “directing” investments: U.S. persons will be responsible for adhering to the prohibition and the notification requirement, including for knowingly “directing” transactions by non-U.S. persons. Treasury proposes defining “directing” as when a person “order[s], decides, approves, or otherwise causes” a covered transaction to be performed, while excluding from the definition the provision of secondary, wraparound, or intermediary services. Furthermore, Treasury is considering placing obligations on U.S. persons for foreign entities that they control, which Treasury proposes defining as owning, directly or indirectly, a 50 percent or greater interest. U.S. persons would be responsible for (1) notifying Treasury of transactions by their controlled foreign entities that would be  notifiable transactions if engaged in by the U.S. person and (2) taking reasonable steps to prohibit and prevent transactions by their controlled foreign entities that would be prohibited if engaged in by the U.S. person.

• Covered foreign persons: These are entities that are organized under the laws of a country of concern, have a principal place of business in a country of concern, or are majority-owned by country of concern individuals or entities, and are either engaged in activities related to a defined “covered national security technology or product” or have subsidiaries or branches engaged in activities related to a “covered national security technology or product.”

• Types of covered investments, potential indirect investments covered, and excepted transactions. The ANPRM proposes that the program include acquisitions of equity or contingent interests, greenfield investments, joint ventures, and certain debt financing transactions by U.S. persons.

• Indirect investments considered.  Treasury is also seeking comments as to whether it should include “indirect” transactions such as knowingly investing in a third-country entity that would use the investment to undertake a transaction that would otherwise be subject to the program.

• Excepted transactions considered. Treasury is considering creating an exception for certain types of passive and other investments that may pose a lower likelihood of conveying intangible benefits. Excepted transactions would include certain U.S. investments into publicly traded securities, index funds, mutual funds, exchange-traded funds, certain investments made as a limited partner, complete buy-outs, intracompany transfer of funds from a U.S. person parent company to its subsidiary, and committed but uncalled capital investments. However, Treasury indicated that any investment that affords a U.S. person rights beyond standard minority shareholder protections, such as membership or observer rights, nomination rights, or involvement in substantive business decisions, will not be excepted.

• No retroactivity application, but Treasury may inquire about post-EO transactions.  The ANPRM does not propose retroactive application from the date of the final rule, but the ANPRM states that Treasury may require information about transactions that were completed or agreed to after date of the issuance of the EO.

• Proposed Activities to Determine Prohibition or Notification

As provided in the EO, whether a U.S. person is subject to a prohibition or notification requirement will be based on the type of activity that the covered foreign person conducts with “covered national security technology or product,” as to be clarified in the regulations.  The ANPRM provides a proposal for the types of activities that would be subject to either the prohibition or notification requirements within each of the three sectors identified by the EO: (1) semiconductors and microelectronics, (2) quantum information technologies, and (3) artificial intelligence.  A summary chart outlining these activities is appended to this article. 

• Proposed Notification Review Process and Penalties

For transactions requiring notification, Treasury is considering requiring U.S. persons to file through a portal hosted on Treasury’s website no later than 30 days following the closing the transaction. The contemplated notification will require information about the parties, the transaction/investment, and previous transactions or planned/contemplated future transaction made by the U.S. person into the covered foreign person.  Regarding the notification and review process, the ANPRM specifically solicited comments about the following proposals:

• Whether it should be a joint filing (with the U.S. person and covered foreign person);

• Whether there should be combined versus separate notifications when multiple U.S. persons are involved in a transaction; and

• Whether Treasury should implement a pre-closing as opposed to post-closing notification process.

Concerning potential penalties or enforcement actions, the EO grants Treasury the authority to “nullify, void, or otherwise compel divestment of any prohibited transaction entered into after the effective date” of the regulations. Treasury is further considering penalizing with a civil penalty (1) material misstatements in or omissions from filed information, (2) failure to timely notify a transaction for which notification is required, and (3) undertaking prohibited transactions. The ANPRM specifically seeks comments regarding:

• How to address situations where a party submits a post-closing notification, but Treasury determines that the transaction was actually prohibited; and

• How to tailor, if at all, penalties and other enforcement mechanisms (such as ordering the divestment of a prohibited transaction) to the size, type, or sophistication of the U.S. person or the nature of the violation.

Conclusion: Submitting Comments and Preparing for Compliance

The EO and ANPRM create an outbound investment regulatory program that will subject U.S. business and investors to new compliance requirements. The Biden Administration is moving quickly to get these rules enacted. Given that comments are due September 28, it is plausible that a final rule implementing the EO comes into effect by the end of the year.  With this in mind, the businesses should immediately take steps to manage compliance with the forthcoming requirements.  This is particularly applicable to U.S. businesses and their controlled subsidiaries operating in the key sectors identified by the EO: (1) semiconductors and microelectronics, (2) quantum information technologies, and (3) artificial intelligence.  Similar concerns apply to private equity firms with portfolio operations in those key sectors, or pending investments this space.

Although many transactions may only require notification, the ANPRM states that the notification requirement is intended to enhance the U.S. government’s visibility into certain transactions that may threaten national security to inform future policy objectives. Accordingly, transactions subject to such notification requirements may be subject to additional restrictions in the future.

View a print-ready PDF of the Outbound Investment Review Program chart