Treasury Unveils Long-Awaited Proposed Rules for U.S. Outbound Investment Regime

In short

Situation:On June 21, 2024, the U.S. Department of the Treasury (“Treasury”) issued a Notice of Proposed Regulatory Position to implement President Biden’s Executive Order Ordering a National Security Review of Certain U.S. Investments in China.

Result:The proposed rules would either completely prohibit or require notification to the government of certain investments in the semiconductor and microelectronics, quantum information technology or artificial intelligence (“AI”) sectors in a “country of concern,” currently defined as China and its administrative regions of Hong Kong and Macau.

Looking to the future:The Treasury Department is seeking industry comment on the proposed rule by August 4, 2024. U.S. investors and technology-intensive companies in the affected sectors should consider the rule, its limitations, and the sample due diligence standards, and consider submitting comments.

On June 21, 2024, the Treasury Department issued a Notice of Proposed Regulatory Position to implement President Biden’s Executive Order Ordering a National Security Review of Certain U.S. Investments in China. The Treasury Department’s Notice contains a complete set of proposed regulations (the “Proposed Regulations”) that would either completely prohibit or require notification to the government of certain investments in the semiconductor and microelectronics, quantum information technology, or artificial intelligence sectors in a “country of concern,” currently defined as China and its administrative regions of Hong Kong and Macau.

The Treasury Department seeks industry comment on all aspects of the proposed rule by August 4, 2024. The proposed rule follows President Biden’s August 2023 executive order directing the Treasury Department to develop a new program to address national security risks arising from U.S. outward investments that could be used to develop sensitive technologies and products critical to military, intelligence, surveillance, or cyber capabilities. (Currently, the Treasury Department’s Committee on Foreign Investment in the United States (“CFIUS”) screens incoming (investment, while sanctions and export controls regulate activities involving specific third parties, regions and industry sectors.)

As currently written, the requirements of the Proposed Rule will apply if a U.S. person has knowledge (defined as including actual knowledge or reason to know) that a transaction is a covered transaction or if a U.S. person intends to engage in a covered transaction. The Proposed Rule explains that if a U.S. person has conducted a “reasonable and diligent investigation” and still does not have such knowledge that the transaction is prohibited or requires notice, Treasury would “ordinarily” not consider the transaction to be subject to the outbound investment rules. The Proposed Rule includes illustrative factors that Treasury would consider to indicate reasonable and diligent investigation, such as “efforts to obtain information and contractual assurances that should be obtainable through reasonable transaction due diligence.”

If notice is required, notice must be made within 30 days of the closing date of the transaction. However, if a U.S. person who did not previously have knowledge or reason to know at the time of the investment later obtains actual knowledge that the transaction is a “covered transaction,” notice must be made within 30 days of the U.S. person obtaining such knowledge. This suggests a final step in potential regulatory coverage for certain transactions and could serve as a springboard for requiring notifications if the government contacts the parties with inquiries about the transaction, effectively providing them with knowledge and creating a duty to notify.

Certain categories of transactions are excluded from the scope of the Proposed Regulation, including investments in publicly listed securities, certain investments made as limited partnership investors, intra-partnership transactions, and the purchase of an investor’s ownership interest in a country of interest. The Proposed Regulation also provides for the possibility for U.S. investors to claim a “national interest” exemption from the regulatory requirements for outward investments.

Although this initiative was originally called the “Reverse CFIUS” regime, the Proposed Regulations and accompanying Treasury Fact Sheet make clear that the outbound investment program is not intended to establish an individualized review or pre-clearance requirement at this time. With that in mind, violations of the outbound investment prohibition or notification requirement may still result in civil and criminal penalties under the International Emergency Economic Powers Act (the primary statutory basis for the Executive Order); and in the context of a prohibited transaction, may result in Treasury taking action to invalidate or void the transaction or otherwise require divestiture. The Proposed Regulations also provide for a process by which U.S. persons voluntarily disclose apparent violations, which may serve to mitigate potential penalties.

Three most important conclusions

The Treasury Department has proposed new regulatory rules that would either completely prohibit or require government notification of certain investments in high-tech sectors, including semiconductors and microelectronics, quantum information technology (AI) in China and the administrative regions of Hong Kong and Macau.

Industry representatives are encouraged to provide feedback on all aspects of the proposed rule, which provides an opportunity to clarify or provide guidance on how the rule may apply to U.S. stakeholders.

U.S. investors and companies operating in the affected high-tech sectors should continue to monitor the Treasury Department’s final implementation of the rule to determine what legal limitations, requirements, exceptions, and due diligence expectations may apply to their future business activities.