Biden Administration Implements New Outbound Investment Security Program

The Biden Administration has implemented a new outbound investment security program (the “OISP”) that prohibits and imposes notification requirements on certain types of investments by U.S. persons in Chinese companies. The OISP is designed to complement the existing inbound investment review regime of the Committee on Foreign Investment in the United States (“CFIUS”); both the OISP and CFIUS are designed to address and mitigate national security risks arising from cross-border investment.

Effective today, January 2, 2025, the Treasury Department’s Office of Investment Security will operate the OISP and enforce the new regulations that implement President Biden’s Executive Order 14105 of August 9, 2023 – “Addressing United States Investments in Certain National Security Technologies and Products in Countries of Concern” (the “EO”). The EO declared a national emergency to address the threat to the United States posed by China (including Hong Kong and Macau), which seeks to “develop and exploit sensitive technologies or products critical for military, intelligence, surveillance, or cyber-enabled capabilities.” The President determined that certain U.S. investments risk exacerbating this threat.

The new OISP regulations finalize rules first proposed by the Treasury Department in a June 2024 Notice of Proposed Rulemaking, described in our prior alert (Biden Administration Issues Draft Regulations for New Outbound Investment Regime). The OISP regulations, which apply to all transactions in scope entered into or completed as of January 2, 2025, detail the types of transactions covered by the OISP, the sub-sets of national security technologies and products within the scope, and describe process requirements related to filing notifications and seeking national interest exemptions.

As with any new regulatory regime, we expect that questions regarding the scope and processes of the OISP will arise as the program is implemented. Treasury has issued initial guidance in response to feedback from practitioners and we expect further FAQs and guidance to be issued in the future.

Summary of Outbound Investment Security Program Rules

To address the threat identified in the EO, the OISP (1) prohibits U.S. persons from engaging in certain transactions involving technologies that pose an acute national security threat to the United States, and (2) to require U.S. persons to notify Treasury of certain other transactions involving technologies that may contribute to the threat to U.S. national security. The OISP focuses on three sectors of national security technologies and products: semiconductors and microelectronics; quantum information technologies; and artificial intelligence (“AI”).

Though sometimes incorrectly referred to as “reverse CFIUS” in the press, the OISP does not include a screening regime to review and mitigate investments. Rather, transactions within the regulations’ scope are only either prohibited or require notification to Treasury.

Within that broader context, the OISP regulations include the following key elements:

Application Scope

The outbound investment program rules apply to “U.S. persons” involved in certain types of transactions with “covered foreign persons.”

U.S. persons include: U.S. citizens and lawful permanent residents, wherever located; any individuals in the United States; and any entities organized under the laws of the United States, including their foreign branches. In addition, any foreign entity in which a U.S. person holds more than 50% of the outstanding voting interest or voting power of the board, or is the general partner, managing member or equivalent, would also be subject to the rules applicable to U.S. persons.

The following persons engaged in activities subject to the prohibition or notification requirements would be considered a “covered foreign person” subject to the applicable investment restrictions:

(1) an individual who is a citizen or permanent resident of a country of concern (and not a U.S. citizen or permanent resident of the United States); an entity that is organized under the laws of a country of concern, headquartered in, incorporated in, or with a principal place of business in a country of concern; the government of a country of concern; or an entity that is directly or indirectly majority-owned by any persons or entities in any of the aforementioned categories;

(2) an entity that has a voting interest, equity interest, board seat, or contractual power to direct or cause the direction of the management or policies in a covered foreign person where more than 50% of one of several key financial metrics of the entity is attributable to such covered foreign person; and

(3) an entity that participates in a joint venture with a U.S. person that engages in activities subject to the prohibition or notification requirements.

The OISP regulations set forth Treasury’s expectation that U.S. persons will undertake “reasonable and diligent” inquiries of transactions to assess whether they are within the scope of the program. Violations can be subject to civil and criminal penalties as set forth under the International Emergency Economic Powers Act, which currently are civil fines up to $368,136 or twice the amount of the underlying transaction, and criminal fines of up to $1 million and 20 years’ imprisonment. Treasury Department is also authorized to order a divestment of an investment that violates the OISP regulations.

Transaction Scope

Covered Transactions

Under the OISP regulations, the following transactions by U.S. persons with covered foreign persons would be “covered transactions” subject to the prohibition and notification requirements:

• Acquisition of an equity interest or contingent equity interest in a covered foreign person;
• Provision of debt financing to a covered foreign person that affords the lender an interest in the covered foreign person’s profits, a right to appoint directors to its board, or other financial or governance rights characteristic of an equity investment rather than a loan;
• Conversion of a contingent equity interest in a covered foreign person if the interest was acquired by the U.S. person on or after January 2, 2025;
• Greenfield investment or certain other corporate expansions that either will establish a covered foreign person, or will cause an existing person of a country of concern to engage in a covered activity;
• Entry into a joint venture, wherever located, with a person of a country of concern where the joint venture will undertake a covered activity; and
• Investment as a limited partner or equivalent (“LP”) into a non-U.S. person pooled investment fund that invests in a covered foreign person.

Excepted and Exempted Transactions

The OISP carves out the following investments from the rule:

• Publicly traded securities: An investment by a U.S. person in a publicly traded security denominated in any currency and traded on any securities exchange in any jurisdiction, or a security issued by an investment company, such as an index fund, mutual fund, or exchange-traded fund;
• Certain LP investments: A U.S. person’s investment made as a limited partner or equivalent in a venture capital fund, private equity fund, fund of funds, or other pooled investment fund, where 1) the investment is of a certain size, or 2) there is a binding contractual assurance that the U.S. person’s capital in the fund will not be used to engage in a covered transaction;
• Derivatives: A U.S. person’s investment in a derivative, so long as the derivative does not confer the right to acquire equity or rights associated with equity in the covered foreign person, nor any of the covered foreign person’s assets;
• Buyouts of country of concern ownership: A U.S. person’s full buyout of all country of concern ownership of an entity, such that the entity would not constitute a covered foreign person following the transaction;
• Intracompany transactions: An intracompany transaction between a U.S. parent and a majority-controlled subsidiary to support covered activities engaged in prior to January 2, 2025, or other non-covered activities;
• Binding capital commitments: A transaction fulfilling a binding, uncalled, capital commitment entered into prior to January 2, 2025; and
• Certain syndicated debt financings: Where the U.S. person, as a member of a lending syndicate, acquires a voting interest in a covered foreign person upon default and the U.S. person cannot initiate any action vis-à-vis the debtor and does not have a lead role in the syndicate.

In addition, the OISP provides for an exemption process through which parties can seek an exemption from the OISP’s requirements if the Secretary of the Treasury, in consultation with the Secretaries of Commerce and State, determines the underlying transaction is in the national interest. 

Technology Scope

The new restrictions and requirements are also limited to a list of sensitive technologies:

Semiconductors and microelectronics:

• Prohibited transactions: Covered transactions related to electronic design automation software; certain fabrication and advanced packaging tools; the design, fabrication, or packaging of certain advanced integrated circuits; and supercomputers;
• Notifiable transactions: Covered transactions related to the design, fabrication, or packaging of integrated circuits not otherwise covered by the prohibited transaction definition.
  

Quantum information technologies

• Prohibited transactions: Covered transactions related to the development of quantum computers and production of critical components; the development or production of certain quantum sensing platforms; and the development or production of quantum networking and quantum communication systems.

Certain AI systems:

• Prohibited transactions: Covered transactions related to the development of any AI system designed to be exclusively used for, or intended to be used for, certain end uses. The Final Rule bases its prohibition on covered transactions related to the development of any AI system on whether the system was trained using a specified quantity of computing power or specified quantity of computing power using primarily biological sequence data.
• Notifiable transactions: Covered transactions related to the development of any AI system not otherwise covered by the prohibited transaction definition, where such AI system is designed or intended to be used for certain end uses or is trained using a specified quantity of computing power (set below the levels in the prohibited transaction definition).

Implications

The OISP is not intended to impede all U.S. investments in China or impose sector-wide restrictions on U.S. person activities. Instead, consistent with the Biden Administration’s “small yard, high fence” approach taken in other national security areas related to China, the OISP is intended to be a narrowly targeted action that complements existing U.S. export controls and CFIUS’s inbound investment screening process. In particular, the OISP aims to prevent Chinese companies from receiving the intangible benefits that often accompany U.S. investments, including “enhanced standing and prominence, managerial assistance, access to investment and talent networks, market access, and enhanced access to additional financing.”

The incoming Trump Administration may modify the OISP, but for now, U.S. persons considering investments or other transactions in China or with Chinese counterparties should review whether the investment targets have any touchpoints to the technologies and products that will be covered by the OISP and ensure they undertake “reasonable and diligent inquiries” to satisfy the OISP requirements.