Treasury Department Issues Proposed Rules for Outbound Investment

For companies, organizations, and individuals with overseas investments or who conduct business that may touch nations of concern, the United States is moving forward with promulgating regulations on outbound investment notification and screening. On June 21, 2024, the U.S. Department of the Treasury (Treasury) issued a Notice of Proposed Rulemaking (Notice) to implement President Biden’s Executive Order 14105, Addressing United States Investments in Certain National Security Technologies and Products in Countries of Concern (Outbound Order). The draft regulations would (1) require U.S. persons to notify Treasury regarding certain transactions, and (2) prohibit U.S. persons from engaging in certain transactions involving persons of a country of concern who are engaged in activities involving particular national security technologies and products.  

The action follows the Outbound Order’s directive to prevent exploitation of U.S. outbound investments by countries of concern, which pose national security risks to the United States and identifies the People’s Republic of China (including Hong Kong and Macau). In accordance with the Outbound Order, this Notice targets countries of concern that are seeking to develop sensitive technologies or products related to military, intelligence, surveillance, artificial intelligence, cyber-enabled capabilities.¹

However, in aiming to operationalize the outbound investment screening mechanism, the draft regulations provide extensive parameters for a range of topic areas, including:

• Obligations of a U.S. person regarding a covered transaction.
• Categories of covered transactions and excepted transactions.
• Technical specifications to inform the scope of covered transactions based on technologies and products in semiconductors and microelectronics, quantum information technologies, and artificial intelligence.
• Required notification information a U.S. person is required to provide to Treasury.
• The knowledge standard and expectations for a U.S. person to conduct an inquiry prior to undertaking a transaction.
• Conduct that would be treated as a violation of the proposed rule and applicable penalties for such conduct.

The 165-page rule provides extensive information on covered persons, transactions, and technologies.² However, although the regulations ostensibly focus on U.S. persons and particular technologies, their reach extends much further. For example, the regulations would prohibit transactions with a wide range of foreign persons, including but not limited to a “covered foreign person” who is included on one of several U.S. Government lists, such as the Entity List, maintained by the U.S. Department of Commerce’s Bureau of Industry and Security.  

Regarding industry impact, the proposed regulations identify three categories of critical and emerging national security technologies and products to be covered by the program: semiconductors and microelectronics; quantum information technologies; and artificial intelligence. Given the rapid development in each of these technological areas and the broad reporting requirements and prohibitions envisioned under the proposed regulations, it is plausible that covered technologies will expand based on innovation.

At a high level, the proposed regulations indicate that the U.S. Government is focused on the national security imperative of preventing countries of concern from harnessing advanced technologies against the United States. According to Assistant Secretary of the Treasury for Investment Security Paul Rosen, “(t)his proposed rule advances our national security by preventing the many benefits certain U.S. investments provide — beyond just capital — from supporting the development of sensitive technologies in countries that may use them to threaten our national security.”³ At the same time, Treasury states that the “United States is committed to fostering an open investment environment, and this new program will not change that.”⁴ Despite the business and compliance challenges it could raise, countering countries of concern is widely supported.  For example, reflecting this support, Republican Chairman of the House Financial Services Committee, Patrick McHenry (NC-10) noted that “(t)his rulemaking appears to be a step in the right direction.” Given this state of play, it is likely that the proposed regulations will continue to move forward, and ultimately establish a reverse-CFIUS style program.

As a practical matter, the proposed regulations would create additional compliance hurdles and risks that may slow investment, require notification, and in some cases prevent transactions. Accordingly, additional diligence would be required for U.S. persons, engaged in business in covered technologies or products. However, given the ascendency of the national security priorities, it is likely that this trajectory will continue for the foreseeable future, regardless of the outcome of November’s election.  

As such, it is vital that U.S. persons who may be impacted conduct advance planning, ensure their business continuity will not be disrupted by the new program, and develop contingency strategies to mitigate risks posed by the new notice and screening regime. Parties may submit comments on the proposed regulations by August 4, 2024.⁵ The notice of proposed rulemaking will be followed at a later date by final implementing regulations, which will set an effective date for the program.

For assistance on foreign investment compliance issues, CFIUS matters, or other export control-related matters, Buchanan’s team of national security, trade, investment, and tax attorneys are here to help. In addition to assisting clients with direct investment, economic sanctions, and export control matters, our attorneys also assist clients with a wide variety of international trade compliance matters.