Outbound Investment Rule Published

Key Elements of the NPRM

The following provides a general overview of the key elements of the NPRM. Please refer to the NPRM for further details, including important definitions.

• Requirements on U.S. persons: The proposed rule would place obligations on U.S. persons, including a notification requirement for certain transactions and prohibition of certain other transactions. A U.S. person would include any United States citizen or lawful permanent resident, as well as any entity organized under the laws of the United States or any jurisdiction within the United States, including any foreign branch of any such entity, and any person in the United States.

• Knowledge standard: The obligations of a U.S. person under the proposed rule would apply if such person has knowledge of relevant facts or circumstances related to a transaction.

The proposed rule would elaborate on what it means for a person to have knowledge of a fact or circumstance. Under the proposed standard, a U.S. person may be assessed to have knowledge if the U.S. person possesses actual knowledge that a fact or circumstance exists or is substantially certain to occur, if the U.S. person possesses an awareness of a high probability of a fact or circumstance’s existence or future occurrence, or if the U.S. person could have possessed such information through a reasonable and diligent inquiry.

To provide clarity, the proposed rule would include factors that Treasury could consider in assessing whether a U.S. person undertook a reasonable and diligent inquiry. Such factors reflect information that should be ascertainable and/or contractual assurances that should be obtainable through reasonable due diligence.

• Specific categories of covered transactions: The proposed rule would apply to certain transactions by U.S. persons, including the acquisition of an equity interest or contingent equity interest; certain debt financing that is convertible to an equity interest or that affords certain rights to the lender; the conversion of a contingent equity interest; a greenfield investment or other corporate expansion; a joint venture; and certain investments as a limited partner (LP) or equivalent in a non-U.S. person pooled investment fund.

• Involving covered foreign persons: The proposed rule would apply to certain transactions by a U.S. person that also involve a covered foreign person – that is, a person of a country of concern that is engaged in a covered activity related to defined sub-sets of technologies and products.

Under the proposed rule, a person of a country of concern would include 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.

Additionally, the proposed rule would include certain transactions involving an entity than has a voting interest, board seat, or equity interest in a covered foreign person where more than 50 percent of one of several key financial metrics of the entity is attributable to such covered foreign person.

In the Outbound Order, the President identifies the People’s Republic of China, along with the Special Administrative Region of Hong Kong and the Special Administrative Region of Macau, as a country of concern.

 o Publicly traded securities: An investment by a U.S. person in a publicly traded security or a security issued by an investment company, such as an index fund, mutual fund, or exchange-traded fund;

o Certain LP investments: A U.S. person’s investment of a certain size made as a limited partner or equivalent in a venture capital fund, private equity fund, fund of funds, or other pooled investment fund;

o 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;

o Intracompany transactions: An intracompany transaction between a U.S. parent and a majority-controlled subsidiary to support ongoing operations or other non-covered activities;

o Pre-Outbound Order binding commitments: A transaction fulfilling a binding, uncalled, capital commitment entered into prior to August 9, 2023;

o 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; and

o Third country measures: Certain transactions involving a person of a country or territory outside of the United States may be excepted transactions where the Secretary of the Treasury determines that the country or territory is addressing national security concerns posed by outbound investment and the transaction is of a type for which associated national security concerns are likely to be adequately addressed by the actions of that country or territory.

• National interest exemption: Under the proposed rule, a U.S. person could seek an exemption from the application of the prohibition or notification requirement on the basis that a transaction is in the national interest of the United States.   

Notification requirements:

The EO had been widely anticipated and described as “reverse CFIUS."  However, unlike CFIUS, which conducts resource intensive, case-by-case reviews of select inbound investments of security concern, EO 14,105’s outbound regime does not involve preclearance or individual reviews.

A U.S. person subject to the notification requirement under the proposed rule would be required to file a notification form with Treasury that includes information related to the transaction such as details about the U.S. person, the covered transaction, relevant national security technologies and products, and the covered foreign person.

The NPRM proposes that a notification must be filed no later than 30 days after a transaction is completed or, where a U.S. person acquires actual knowledge after the completion date of a transaction that the transaction would have been a covered transaction if such knowledge had been possessed at the time of the transaction, no later than 30 days after the U.S. person’s acquisition of such knowledge.

National Security Technologies and Products

The NPRM also provides proposed scoping of the sub-sets of national security technologies and products identified in the Outbound Order that would be subject to the regulations:

Semiconductors and microelectronics:.

  o Prohibited transactions: Treasury proposes a prohibition on 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.

o Notifiable transactions: Treasury proposes a notification requirement for covered transactions related to the design, fabrication, or packaging of integrated circuits not otherwise covered by the prohibited transaction definition.

Quantum information technologies:

o Prohibited transactions: Treasury proposes a prohibition on 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 artificial intelligence (AI) systems:

o Prohibited transactions: Treasury proposes a prohibition on 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 NPRM also proposes alternatives for a prohibition on covered transactions related to the development of any AI system that is trained using a specified quantity of computing power, and trained using a specified quantity of computing power using primarily biological sequence data.

o Notifiable transactions: Treasury proposes a notification requirement for 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).

Violations

The proposed rule outlines the penalty and disclosure framework for violations:

• Penalties: A violation would be subject to civil and criminal penalties as set forth in the International Economic Emergency Powers Act (IEEPA). In the event of a violation, Treasury is authorized to impose civil penalties and could also refer criminal violations to the Attorney General.

• Divestment: The Secretary of the Treasury could take any action authorized under IEEPA to nullify, void, or otherwise require divestment of any prohibited transaction.

• Voluntary self-disclosure: The proposed rule provides a process for a U.S. person to submit a voluntary self-disclosure if they believe their conduct may have resulted in a violation of any part of the proposed rule. Such self-disclosure would be taken into consideration during Treasury’s determination of the appropriate response to the self-disclosed violation.