Congress’s Emerging Vision of an ‘Outbound Investment Screening Mechanism’

At a Glance

• A newly introduced House bill offers a fresh look at Congress’s vision for a so-called “outbound investment screening mechanism” aimed at preventing certain countries — chief among them, China — from receiving U.S. investments in select industries.
• Legislative action is expected to be preceded by an executive order establishing an “outbound investment screening mechanism” with a more limited scope. 

Ready or Not: Momentum Continues to Build in Washington for Outbound Investment Screening Mechanism

On May 9, 2023, a bipartisan group of U.S. House members introduced the National Critical Capabilities Defense Act of 2023 (NCCDA), a revamped version of legislation that would establish a so-called “outbound investment screening mechanism” aimed at preventing certain countries — chief among them, China — from receiving U.S. investments in select industries, including:

• semiconductor manufacturing and advanced packaging
• large-capacity batteries
• critical minerals and materials
• artificial intelligence
• quantum information science and technology
• active pharmaceutical ingredients
• automobile manufacturing

The NCCDA, which builds on a long-standing proposal championed by U.S. Senators Bob Casey (D-PA) and John Cornyn (R-TX), reportedly reflects input received from industry stakeholders and the Biden administration. It also offers a preview of an outbound investment screening mechanism that is expected to be included in the Senate’s forthcoming Chinese Government Competition Act.

What Would the NCCDA Do?

Establishment of New Committee

As proposed in the House bill, the outbound investment screening mechanism would center upon the creation of an interagency “Committee on National Critical Capabilities” (Committee), consisting of representatives from at least 13 different agencies and departments, including: the United States Trade Representative (USTR); the Office of the Director of National Intelligence (DNI); and the Commerce, State, Labor, Agriculture, Treasury, Defense and Homeland Security Departments.

Required Notifications of Planned “Covered Activity”

Similar to the process for reviewing “inbound” investments for national security risks via the Committee on Foreign Investment in the United States (CFIUS), the bill would require U.S. persons planning to engage in a “covered activity” to notify the Committee within 90 days before the anticipated initiation date.

As defined in the NCCDA, a “covered activity” is limited to a “national critical capabilities sector” (i.e., semiconductor manufacturing and advanced packaging; large-capacity batteries, critical minerals and materials; artificial intelligence; quantum information science and technology; active pharmaceutical ingredients; and automobile manufacturing).

Moreover, the activity must involve a “covered foreign entity,” defined as an entity that is incorporated in, has a principal place of business in, is organized under the laws of, or has other specific ties (as laid out in the statute) to a “country of concern” (which, in turn, is defined as any country whose government “is engaged in a long-term pattern or serious instances of conduct significantly adverse to the national security of the United States or the security and safety of United States persons,” with China, Russia, Iran, North Korea, Cuba, and Venezuela listed as examples).

As drafted, the NCCDA would likely cover, for example, the following hypothetical transactions:

• U.S. company seeks to establish a wholly owned subsidiary in China or engage in a joint venture with a Chinese entity for the purpose of producing, designing, testing, manufacturing, fabricating, developing or researching a product that falls within one or more national critical capabilities sectors.
• U.S.-based hedge fund seeks to acquire an equity interest in a Chinese entity that produces a product that falls within one or more “national critical capabilities sector.”
• U.S. financial institution issues a long-term debt obligation to a Chinese entity that produces a product that falls within one or more “national critical capabilities sector.”

Timeline for Committee Review and Decision

The proposed bill provides that the Committee, following receipt of a “covered activity” notice, will have 45 days to determine whether to initiate a formal review. This decision will hinge on whether the covered activity “poses a risk to the national security of the United States,” following the consideration of certain factors, including, for example, “the economic, intelligence, military, health, or agricultural interests of the United States” and “the impact on the domestic industry and resulting resiliency, including the domestic human capital and supply chains, taking into consideration any pattern of foreign investment in the domestic industry,” among others.

If a formal review is undertaken, the Committee would then have 90 days to determine whether it intends to prohibit or regulate the “covered activity” (e.g., via a mitigation agreement) upon certain findings. Similar to CFIUS, the proposed bill includes penalty provisions for: (1) engaging in a prohibited covered activity; (2) failing to submit notification of a covered activity; (3) making a material misstatement or omitting a material fact in any information submitted to the Committee; or (4) breaching or violating a mitigation agreement.

Looking Ahead

The idea of subjecting outbound investments to a review process — which first surfaced on Capitol Hill during the congressional debate surrounding the Export Control Reform Act (ECRA) and the Foreign Investment Risk Review Modernization Act (FIRRMA) in 2018 — continues to build steady momentum in Washington (and among Western allies, including the European Union). Of note, on May 3, 2023, Senate Democratic leadership, in announcing its intentions to craft a “Chinese Government Competition Bill,” affirmed that one of the five pillars of the bill will be “limit[ing] the flow of investment to the Chinese Government” — a clear nod to the Senate’s plans to implement an outbound investment screening mechanism.

However, in the midst of these legislative developments, it is anticipated that the White House will soon be issuing an executive order that establishes an outbound investment screening mechanism, albeit in a narrower form than contemplated by current congressional proposals (particularly when it comes to the industries targeted).

It remains to be seen whether the forthcoming executive order will ultimately act as a “gap-filler” for eventual legislative action. But one thing is certain: the legislative debate surrounding the contours and mechanics of an outbound investment screening process is now beginning in earnest.

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 Faegre Drinker Customs and International Trade Team.