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A Fresh Take

Insights on M&A, litigation, and corporate governance in the US.

| 10 minutes read

U.S. Outbound Investment Restrictions on the Horizon – What You Need to Know

On June 21, 2024, the Department of the Treasury (Treasury) issued a Notice of Proposed Rulemaking (NPRM) to implement President Biden’s August 9, 2023 Executive Order on “Addressing United States Investments in Certain National Security Technologies and Products in Countries of Concern” (Outbound Investment EO). The Outbound Investment EO targets investments that could serve as a gateway for U.S. investor reputation, managerial expertise, and other soft benefits to facilitate Chinese technology advancements that may threaten U.S. national security.

The rule will have a significant impact on direct or indirect investment by U.S. persons in Chinese companies in the targeted technology sectors, with violations subject to potential civil and criminal penalties and forced divestment. Persons falling within the scope of the regulations will be required to conduct thorough diligence to ensure that they do not run afoul of the obligations.

The Outbound Investment EO prohibits certain investments and establishes a notification obligation for certain other investments by U.S. persons in Chinese companies, and non-Chinese companies with substantial Chinese ties, where such companies are engaged in certain activities in the semiconductor, supercomputer and quantum information technology, and artificial intelligence sectors. There is no U.S. government review to confirm whether an investment is prohibited or notifiable; transaction parties are required to self-evaluate and comply. The regulations target a wide variety of investment—including equity, contingent equity, debt with characteristics of equity, joint ventures, and greenfield investments. 

The NPRM is subject to public comment until August 4, 2024, after which Treasury will consider the comments and prepare a final rule. Treasury is not subject to a deadline for publication of the final rule, but we expect that publication would occur by the end of this year.

To listen to our podcast summarizing the proposed rule, please click here.

The following is a high-level summary of a very technical rule and is not intended to provide advice regarding specific situations. 

High-Level Summary, Takeaways, and Action Items

The NPRM largely aligns with the framework outlined in the Advance Notice of Proposed Rulemaking (ANPRM) published by Treasury last year concurrently with the Outbound Investment EO (see our prior post on the Outbound investment EO and the ANPRM here), clarifying a number of points in response to public comments.

Key features of the rule:

  • The rule targets only China (including Hong Kong) and companies with close ties to China (including companies that are 50%+ owned by Chinese persons or have greater than 50% of revenue or expense attributable to China).
  • The technology scope is limited, with the rule covering only direct or indirect investments in Chinese companies that are involved in the development, production, and certain services related to semiconductors, supercomputers and quantum information systems, and artificial intelligence (covered transactions). Other areas, like biotech, batteries, and other dual-use technologies are not targeted (to the extent that they do not involve a covered technology). 
  • Covered transactions are either prohibited or subject to notification within 30 days after completion. (See Table 1 at the end of this post for additional details on the covered technologies.)
    • Semiconductors: Investment is prohibited in companies that develop or produce EDA software, volume front-end fabrication equipment, or any EUV technology; design or fabricate certain advanced integrated circuits; or provide advanced packaging. Any other integrated circuit design, fabrication, and packaging would be subject to notification.
    • Supercomputers and Quantum: Investment is prohibited in companies that engage in activities related to supercomputers or develop or produce quantum-related technologies.
    • Artificial Intelligence: Investment is prohibited in companies that develop AI systems designed exclusively or intended to be used for military, government intelligence, or mass surveillance end use. Non-exclusive design for such uses or intent for use for cybersecurity, forensics, penetration testing, or control of robotics systems would be subject to notification. Prohibition and notification are also triggered if the AI is trained using computing power above specified thresholds. 
    • Companies on Restricted Party Lists: Investments that are otherwise subject to notification become prohibited if the Chinese company is on any of the U.S. restricted party lists (e.g., the Entity List).
  • It is not like CFIUS or export control regimes.
    • It is not a case-by-case government review. The burden is on the U.S. person investor to make the determination whether the transaction is prohibited, notifiable, or outside the scope of the regulation.
    • It is not a licensing regime, and it does not authorize the government to mitigate or restrict transactions that are subject only to notification. While there is the possibility for senior officials to grant an exception for otherwise prohibited transactions, it requires an affirmative government determination that the transaction is in the national interest of the United States.
  • The rule concerns investments by U.S. persons (including citizens, permanent residents, persons in the United States, U.S. entities, and their foreign branches). As discussed further below, the obligation on U.S. persons can extend to controlled foreign entities and U.S. persons as employees of foreign companies. 
  • Transaction types captured include acquisition of equity or contingent equity interests, conversion of contingent equity interests, debt that has equity-like characteristics, greenfield or other corporate expansions, joint ventures, and certain investments as a limited partner in non-U.S. pooled investment funds (discussed further below). 
  • Certain otherwise covered transactions are excepted, including essentially passive investments (publicly traded securities, mutual funds, certain interests arising out of debt, and certain limited partner interests as described further below) and investment by a U.S. person in its subsidiary, provided it does not result in a pivot of the subsidiary to engaging in covered activities that it was not previously engaged in.
  • Violations are potentially subject to civil penalties, criminal penalties, and forced divestment.

Key Takeaways

  • Certain foundational questions still have not been adequately answered. For example, if the identified concern is the intangibles like enhanced standing and prominence, managerial assistance, investment and talent networks, market access, and enhanced access to financing, what is the evidence that these benefits have materially enhanced the development of Chinese capabilities? Why focus on investment as opposed to services (or both)?
  • However, accepting that the government has determined that it is necessary to dissuade investment in key technology areas, the rule is relatively narrowly tailored, consistent with the statements that the Biden Administration has been making over the past two years. While it may have a broad chilling effect on investment in the targeted sectors, it is not likely to have spill-over effects into other areas of technology.
  • Given potential criminal and civil penalties, U.S. individuals and companies will need to carefully evaluate potential activities that could be subject to control and establish clear procedures and establish clear paper trails to demonstrate efforts to comply with the regulation in advance of making any investments.
    • U.S. persons will have to carefully evaluate Chinese targets to ascertain the scope of their activities. While the restrictions are broadest for semiconductors, supercomputers, and quantum, they are potentially most difficult to comply with as related to AI, as currently drafted. The rules related to AI carry some ambiguities that may be clarified in the final rule.
    • The rule establishes clear affirmative due diligence requirements to ascertain whether a transaction could be subject to prohibition or notification. This may include making inquiries, seeking public and non-public information, contractual representations and warranties, and confirmation of no warning signs.
    • It remains to be seen, but it is possible that Chinese targets may be unwilling or unable to share information necessary for the U.S. person to assess permissibility of the investment. This could arise out of Chinese data security laws or future responsive actions that the Chinese government may take. In such a situation, there may be considerable uncertainty as to whether the due diligence requirements can be satisfied. Furthermore, U.S. persons may be unable to obtain information necessary to submit notifications for covered investments that are not prohibited. And while the proposed rule does not clearly suggest that such a notifiable investment cannot proceed if the target refuses to provide the necessary information, it at least raises some degree of risk. 
  • It is not just direct investments by U.S. persons into China that are captured. U.S. persons may be responsible for investments by foreign entities and for investments in certain non-Chinese entities. Such foreign entities include non-U.S. companies with U.S. ownership, Chinese ownership, Chinese operations, where the U.S. person is an employee of the foreign company, or U.S. limited partner investors.
    • U.S. persons will be subject to affirmative requirements to take “all reasonable steps” to prevent controlled foreign entities from engaging in transactions that a U.S. person cannot engage in. U.S. companies will be responsible for the investments of non-U.S. subsidiaries (greater than 50% equity, voting, or board seats) and non-U.S. funds of which the U.S. person is the general partner or investment adviser.
    • U.S. persons employed by a foreign company cannot make or substantially participate in the decision making of the foreign company to make an investment that a U.S. person is prohibited from making. Persons with such authority to make or participate in such decision-making (including at least any officer, director, or senior-level person) would need to recuse themselves from any such discussions. Administrative employees and third-party service providers (like banks) would not be captured.
    • U.S. person limited partner investors in foreign private equity and venture capital funds are subject to special requirements. If there is reason to believe that the fund will invest in China in one of the targeted sectors, then the U.S. person investor could be held liable for an investment in a company that engages in prohibited activities. However, Treasury intends for there to be an exception, with the two options that it is considering including in the final rule being (a) if the investor is essentially passive and the U.S. person either does not constitute 50% of the assets under management or obtains a binding commitment from the fund not to make an investment that the U.S. person is prohibited from making directly, or (b) the investor’s committed capital in the fund is not more than $1 million.
  • U.S. person investment in non-Chinese companies with substantial ties to China could be captured.
    • Companies owned by non-U.S. person Chinese citizens or permanent residents would be captured, if that company engages in covered activities anywhere in the world. This includes second-tier subsidiaries (i.e., a company that is 50%+ owned by a company that is 50%+ owned by a Chinese person).
    • A non-Chinese company would be captured if it holds any ownership interest in a Chinese company (or Chinese-owned company) engaged in covered activities if more than 50% of the non-Chinese company’s revenue, income, capital expenditures, or operating expenses are attributable to the Chinese company.
    • The draft rule may intend not to cover the Chinese subsidiary of a non-Chinese parent company if the subsidiary does not satisfy the 50% threshold. However, it is ambiguous whether an investment in the parent would be considered a covered transaction as an indirect investment in the Chinese subsidiary, in which case the transaction would have to carve out the Chinese subsidiary, move it out of China, or shut it down. We would expect this to be clarified in the final rule.
  • The impact on a U.S. company’s transfers to its Chinese subsidiary is not entirely clear. The intent appears to be to provide that intracompany transactions between a U.S. parent and its Chinese subsidiary would not be excepted if they support a pivot of the Chinese subsidiary from not engaging in covered activities to now engaging in such activities. They would be excepted if they support non-covered activities, even if the subsidiary engages in covered activities. They would also be excepted if they support covered activities, provided those activities constitute “ongoing operations.” However, it is not clear what constitutes “ongoing operations” and how far such existing operations can be scaled up without losing the benefit of the exception. 

Action Items

  • Take inventory of the potential ways in which your company’s activities could be impacted by the rule, whether as a result of, for example, existing presence in China, existing commitments to make future investments in China, business plans that contemplate future investment in China or in companies with close ties to China, or presence of U.S. employees in your non-U.S. company. Begin developing mechanisms to ensure compliance once the final rule becomes effective.
  • The rule is generally not retroactive, and investments (a) made before the effective date of the future final rule, and (b) made after the effective date of the final rule but which are made pursuant to capital commitments made prior to the issuance of the Executive Order (August 9, 2023), are not subject to the regulations. However, investments made after the effective date of the final rule will be subject to the rule if the commitment post-dated the Executive Order, and any investments made after August 9, 2023, can be subject to information requests from the government. Accordingly, consider whether any investments committed since August 9, 2023, would be covered transactions, and consider the timing of such investments.
  • Consider whether any transactions that are expected to close in Q4 2024 or thereafter (i.e., after the potential final rule effective date) would be covered by the rules, and whether any additional diligence is necessary now with respect to in-flight transactions in light of the proposed rule.
  • Consider whether to submit comments on the NPRM. Comments are due by August 4, 2024. The NPRM solicits comments on 24 specific questions, in addition to comments more generally on the proposed text.

Table 1. Summary of Prohibited and Covered Transactions and Changes from ANPRM

Technology Prohibited Covered ActivityChangeNotifiable Covered ActivityChange
Semiconductors and microelectronics

(i) Advanced integrated circuit design and equipment; (ii) advanced IC design and production; (iii) supercomputers enabled by certain advanced integrated circuits. 


NoneDesign, fabrication, or packaging of integrated circuits not otherwise covered by the prohibited transaction definition.None
Quantum information technologies

(i) Quantum computers or producing any of the critical components required to produce a quantum computer.

(ii) Quantum sensing platform designed for or intended to be used by covered foreign for person, military, government intelligence, or mass-surveillance end uses.

(iii) Quantum network or quantum communication system intended to be used by covered foreign person for by (1) networking to scale up quantum computers; (2) secure communications; or (3) any other application that has military, government intelligence, or mass-surveillance end use. 

Additional criteria under quantum networkingN/ANone
Artificial Intelligence (AI) systemsDevelopment of any AI system (i) designed to be exclusively used for or intended to be used by covered foreign person exclusively for any military, government intelligence or mass surveillance end use or (ii) trained using more than a specified amount of computing power.Addition of computing power criterion.Development of any AI system (i) designed (not exclusively) to be used for military, intelligence, mass-surveillance, cybersecurity, digital forensics, penetration testing, or robotic systems control end uses or (ii) trained using less than the specified amount of computing power or certain end uses. Addition of certain non-exclusive criteria and computing power criterion.

Engages in a covered activity and:

  • Is listed on BIS Entity List or Military End User List
  • Meets BIS definition of “Military Intelligence End-User”
  • Is listed on Treasury’s SDN or NS-CMIC list
  • Is designated as a foreign terrorist organization by the Department of State
New categoryNoneN/A



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