Treasury’s Outbound Investment Security Program Focusing on China Is in Effect (for Now)

At a Glance

• The U.S. Department of the Treasury’s (Treasury) final rule implementing its outbound investment regime went into effect on January 2, 2025.
• Under the outbound investment regulations, U.S. persons are prohibited from engaging in certain investments and required to notify Treasury about certain other investments in Chinese companies involved in the semiconductors and microelectronics, quantum information technologies and artificial intelligence (AI) sectors.
• On January 20, 2025, President Trump issued his America First Trade Policy memorandum directing Treasury and the Department of Commerce to review whether the outbound investment executive order should be modified or rescinded and replaced, and assess whether the final rule implementing the executive order includes sufficient controls to address national security threats.

Treasury’s final rule implementing its outbound investment regime went into effect on January 2, 2025. The final rule implemented Executive Order (E.O.) 14105 of August 9, 2023, which declared a national emergency to address threats “posed by countries of concern that seek to develop and exploit sensitive technologies or products critical for military, intelligence, surveillance, or cyber-enabled capabilities.” The countries of concern include the People’s Republic of China (China), Hong Kong and the Special Administrative Region of Macau.

Under the outbound investment regulations, 31 CFR part 850 (the Regulations), U.S. persons are: (i) prohibited from engaging in covered transactions involving a covered foreign person that are prohibited (Prohibited Transactions); and (ii) required to report to Treasury covered transactions involving a covered foreign person that are notifiable (Notifiable Transactions). For example, a U.S. person could be prohibited from acquiring an equity interest in a Chinese company that packages integrated circuits using certain “advanced packaging” techniques. On the other hand, a U.S. person may be required to notify Treasury if it acquires an equity interest in a Chinese company that designs, fabricates or packages any integrated circuits that are not described as Prohibited Transactions. The Regulations broadly restrict or prohibit traditional investments, such as equity investments or certain loans, as well as other types of investments, such as joint ventures and greenfield or brownfield investments (e.g., acquisition, leasing development of operations, land, property or assets in China to build a facility that designs certain integrated circuits).

On January 20, 2025, President Trump issued his America First Trade Policy memorandum directed the secretary of the Treasury, in consultation with the secretary of Commerce, to review whether E.O. 14105, the outbound investment E.O., should be modified or rescinded and replaced, and assess whether the final rule implementing the E.O. includes sufficient controls to address national security threats. According to the memorandum, Treasury must make recommendations based upon the findings of the review, including potential modifications to the Outbound Investment Security Program.

Provided below is a general overview of the key elements of the Outbound Investment Security Program.

Covered Foreign Persons

Under the Regulations, the term “covered foreign person” means: (i) a person of a “country of concern” (i.e., China, Hong Kong or Macau) who is engaged in a “covered activity” (i.e., a Prohibited Transaction or Notifiable Transaction); (ii) a person who has a voting interest or equity interest in, board seat on, or certain powers over a person of a country of concern who engages in a covered activity, where such person derives or incurs more than 50% of its revenue, net income, capital expenditures or operating expenses from one or more such “persons of a country of concern” engaged in a covered activity; and (iii) a “person of a country of concern” that participates in a joint venture that is a covered transaction.

Covered Transactions

For purposes of Prohibited Transactions and Notifiable Transaction, “covered transactions” include the following transactions:

• Equity interest: An acquisition of an equity interest or contingent equity interest
• Certain loans and debt financing: Certain loans or similar debt financing arrangements
• Convertible equity: The conversion of a contingent equity interest into an equity interest
• Greenfield or brownfield investment: The acquisition, leasing or other development of operations, land, property or other assets in a country of concern that the U.S. person knows at the time of such acquisition, leasing or other development will result in, or that the U.S. person plans to result in: (i) the establishment of a covered foreign person; or (ii) the engagement of a person of a country of concern in a covered activity
• Joint ventures: The entrance into a joint venture, wherever located, that is formed with a person of a country of concern, and that the subject U.S. person knows at the time of entrance into the joint venture that the joint venture will engage, or plans to engage, in a covered activity
• Certain limited partner (LP) investments: The acquisition of a LP or equivalent interest in a non-U.S.-person pooled investment fund

National Security Technologies and Products

Under the Regulation, Treasury targets the “covered transactions” described above involving “covered foreign persons” in semiconductors and microelectronics, quantum information technologies (IT), and certain AI systems. Depending on the criteria below, the “covered transactions” are either prohibited or notifiable:

Excepted Transactions

In addition to a process where a U.S. person can request an exemption on the basis that a transaction is in the national interest of the United States (the “National Interest Exemption”), the Regulations include the following exceptions from the regime’s coverage:

• Publicly traded securities: An investment by a U.S. person in a publicly traded security or a security issued by a registered investment company (e.g., an index fund, mutual fund or exchange-traded fund)
• Certain LP investments: A U.S. person’s investment made as an LP in a venture capital fund, private equity fund, fund of funds or other pooled investment fund, if such investment is $2,000,000 or less or if the U.S. person has received a contractual assurance that its capital will not be used by the fund to engage in what would be a prohibited or notifiable transaction
• Derivatives: A U.S. person’s investment in certain derivative securities
• 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 does not constitute a “covered foreign person” following the transaction
• Intracompany transactions: An intracompany transaction between a U.S. person and its “controlled foreign entity” to support operations that are not covered activities or to maintain ongoing operations with respect to covered activities that the “controlled foreign entity” was engaged in prior to January 2, 2025
• Certain pre-Final Rule binding commitments: A transaction fulfilling a binding, uncalled capital commitment entered into prior to January 2, 2025
• 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 is not the syndication agent
• Equity-based compensation: A U.S. person’s receipt of employment compensation in the form of an award or grant of equity or an option to purchase equity in a covered foreign person, or the exercise of such option
• 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 related to 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.

Actions of a Controlled Foreign Entity

Notably, under 850.302 of the Regulations, U.S. persons are required to take all reasonable steps to prohibit and prevent any transaction by its controlled foreign entity (e.g.., a foreign subsidiary of a U.S. company) that would be a prohibited transaction if engaged in by a U.S. person. U.S. persons are also prohibited from knowingly directing a transaction by a non-U.S. person that the U.S. person knows at the time of the transaction would be a prohibited transaction if engaged in by a U.S. person.

Knowledge Standard

In determining whether a U.S. person has violated the Regulations, Treasury will assess whether the person has or had knowledge of the relevant facts and circumstances at the specified time. Section 850.104 of the Regulations provides guidance on the knowledge standard that will apply to U.S. persons. For example, in assessing whether a person has or had knowledge of a given fact or circumstance, Treasury will assess the information a U.S. person had or could have had through a reasonable and diligent inquiry (e.g., due diligence inquiries, contractual representations or warranties, available information and efforts to obtain nonpublic information, the presence or absence of red flags, etc.). A failure to conduct a reasonable and diligent inquiry may result in Treasury assessing that the U.S. person had reason to know of facts or circumstances that would cause the transaction to be a covered transaction.

Notification Requirements

For Notifiable Transactions, U.S. persons are required to file a notification form in Treasury’s Outbound Notification System on its website that includes information about the transaction set out in § 850.405 of the Regulations and a certification described in § 850.203 of the Regulations. The notification must occur: (i) no later than 30 days after a transaction is completed; or (ii) where a U.S. person acquires actual knowledge after the completion date of a transaction that the transaction would have been a covered transaction, no later than 30 days after the U.S. person’s acquisition of such knowledge.

Violations

Violations of the Regulations would be subject to civil penalties (i.e., the greater of $377,700 per violation or twice the value of the underlying transaction) and criminal penalties under the International Economic Emergency Powers Act. Treasury could also take action to nullify, void or otherwise require divestment of any Prohibited Transaction. The regulations provide a process for a U.S. person to submit a voluntary self-disclosure to Treasury for any potential violations of the Regulations.

For More Information

For more information on how these developments could affect your company or any transactions in which you are currently engaged or contemplating, please do not hesitate to contact the authors below or any other member of the customs and international trade team.