I. Introduction
Effective in January 2025, the U.S. Department of the Treasury issued a final rule (colloquially known as "Reverse CFIUS") implementing the Outbound Investment Program, which prohibits U.S. persons from making certain investments involving a defined set of technologies (currently certain semiconductors/microelectronics, quantum computing, and artificial intelligence systems) with persons from countries of concern (currently only China) that pose a national security threat to the United States. Additionally, the Outbound Investment Program requires U.S. persons to notify the Treasury Department of certain other transactions involving persons from countries of concern that may contribute to a threat to U.S. national security. Despite some referring to the Outbound Investment Program as "Reverse CFIUS," the program differs significantly in that there is no preapproval process by the U.S. Government as is the case with mandatory filings that must be submitted and reviewed by the Committee on Foreign Investment in the United States ("CFIUS") prior to closing for certain inbound investments by foreign persons in U.S. businesses. Both U.S. and nonU.S. investors alike should familiarize themselves with the requirements of the Outbound Investment Program.
While the list of targeted countries currently only includes China, it may be expanded in the future to include other countries that the U.S. perceives as posing a national security threat. The covered technologies currently fall into three categories that could also be expanded in the future: semiconductors and microelectronics, quantum information technologies, and artificial intelligence. The Outbound Investment Program took effect on January 2, 2025. Given the extraterritorial reach of the rule, businesses in the United States and abroad will need to adopt new diligence measures and other internal policies and procedures to comply with its requirements.
II. Whose Investments are Impacted?
A. U.S. Persons
Every U.S. person is required to comply with the provisions of the Outbound Investment Program. For the purposes of the Outbound Investment Program, the term "U.S. persons" includes:
1. any United States citizen or lawful permanent resident;
2. any entity organized under the laws of the United States or any jurisdiction within the United States, including any foreign branch of such an entity;
3. and any person located in the United States, regardless of their country of citizenship.
Treasury has clarified that, while a U.S. subsidiary of an entity incorporated outside of the U.S. is a U.S. person, simply having a U.S. subsidiary or U.S.-based employees does not make the foreign parent a U.S. person as well.
B. Foreign Entities Controlled by U.S. Persons
The Outbound Investment Program requires U.S. persons to take "all reasonable steps to prohibit and prevent" their controlled foreign entities from engaging in transactions that would be prohibited if undertaken by a U.S. person. The rule also requires U.S. persons to notify the Treasury Department of any notifiable transaction carried out by a controlled foreign entity The term controlled foreign entity means any entity incorporated in, or otherwise organized under the laws of, a country other than the United States of which a U.S. person is a parent.
For purposes of this term, the following rules shall apply in determining whether an entity is a parent of another entity in a tiered ownership structure:
(1) Where the relationship between an entity and another entity is that of parent and subsidiary, the holdings of voting interest or voting power of the board, as applicable, of a subsidiary shall be fully attributed to the parent.
(2) Where the relationship between an entity and another entity is not that of parent and subsidiary (i.e., because the holdings of voting interest or voting power of the board, as applicable, of the first entity in the second entity is 50 percent or less), then the indirect downstream holdings of voting interest or voting power of the board, as applicable, attributed to the first entity shall be determined proportionately.
(3) Where the circumstances in paragraphs (b)(1) and (2) of this section apply (i.e., because a U.S. person holds both direct and indirect downstream holdings in the same entity), any holdings of voting interest shall be aggregated for the purposes of applying this definition, and any holdings of voting power of the board shall be aggregated for the purposes of applying this definition. Voting interest shall not be aggregated with voting power of the board for the purposes of applying this definition.
In the event a controlled foreign entity engages in a prohibited transaction, the Treasury Department will consider several factors to determine whether the U.S. person took all reasonable steps to prohibit and prevent the entity from engaging in the transaction. The factors the Treasury Department will evaluate include:
(a) The execution of compliance agreements related to the final rule between the U.S. person and its controlled foreign entity;
(b) The existence and exercise of governance or shareholder rights by the U.S. person over the controlled foreign entity, where applicable;
(c) The implementation of periodic training and internal reporting requirements by the U.S. person at its controlled foreign entity concerning compliance with the final rule;
(d) The development and use of appropriate, documented internal controls, including internal policies, procedures, or guidelines that are periodically reviewed internally by the U.S. person and its controlled foreign entity; and
(e) The implementation of a documented process for testing and/or auditing internal policies, procedures, or guidelines.
It is important to note that the factors listed above are non-exhaustive, and the Treasury Department may consider other factors not listed to determine whether the U.S. person took "all reasonable steps" to prohibit and prevent its controlled foreign entity from engaging in the unauthorized transaction.
III. How will U.S. Individuals and Entities be Expected to Comply with the Outbound Investment Rules?
A U.S. person's knowledge of certain facts or circumstances is generally a pre-requisite for the obligations under the Outbound Investment Program to apply. The Treasury Department therefore anticipates that U.S. persons should be able to comply with the Outbound Investment Program through a reasonable and diligent transactional due diligence and compliance process. The analysis of whether the Outbound Investment Program applies is independent of whether other U.S. Government rules or restrictions apply (or not). A U.S. person who fails to undertake a reasonable and diligent inquiry prior to a transaction may be responsible for knowledge that could have been acquired had the U.S. person undertaken such an inquiry.
The Outbound Rule further prohibits U.S. persons from "knowingly directing" a transaction by a nonU.S. person if, at the time of the transaction, the U.S. person knows that the transaction would be prohibited if engaged in by a U.S. person. A U.S. person "knowingly directs" a transaction when they have the authority, individually or as part of a group, to make or substantially participate in decisions on behalf of a non-U.S. person and exercise that authority to direct, order, decide upon, or approve a transaction. This authority exists when a U.S. person serves as an officer, director, or holds executive responsibilities at a non-U.S. entity, which could bring into scope the activities of many nonU.S. entities that would not otherwise be subject to the outbound investment rules. A senior Treasury official has confirmed that the non-U.S. person employer of a U.S. person who knowingly directs a prohibited transaction does not itself face liability under the Outbound Rule.1 The senior Treasury official also confirmed that the prohibition on U.S. persons "knowingly directing" transactions only applies to prohibited transactions, not those that are merely notifiable.
The Outbound Investment Program does not restrict a U.S. person from working at any entity that receives investment that is subject to the Outbound Investment Program, nor does it restrict a U.S. person from working at an entity making such an investment. However, the Outbound Investment Program requires a U.S. person's recusal from participation in certain activities to avoid violating this prohibition, including:
(a) Participating in formal approval and decision-making processes related to the transaction, including making recommendations;
(b) Reviewing, editing, commenting on, approving, or signing relevant transaction documents; and
(c) Engaging in negotiations with the investment target or the relevant transaction counterparty, such as a joint venture partner.
The Treasury has made clear that the Outbound Investment Program is "not intended to create an ongoing obligation for a U.S. person to monitor or prevent post-transaction changes to an investment target's activities," however, an investment target's pivot to a covered activity could raise implications under the Outbound Investment Program if a. "the U.S. person had knowledge at the ime of the transaction regarding the later corporate pivot into a covered activity, including whether the U.S. person had" or b. "should have had an awareness of a high probability of a fact or circumstance's existence or future occurrence." In either case, the transaction would be a notifiable transaction or a prohibited transaction, depending on the covered activity involved. Further, pursuant to section 850.403, "if following a transaction a U.S. person later acquires 'actual knowledge' of a fact or circumstance that, if known to the U.S. person at the time of the transaction, would have resulted in a notifiable transaction or a prohibited transaction, the U.S. person will be required to submit a notification within 30 days of acquiring such knowledge. Section 850.403 requires 'actual knowledge' of a fact or circumstance and does not include 'reason to know,' as the intention is not to create a requirement to conduct continuing diligence or actively monitor the activities of the target of the transaction after the completion date for purposes of section 850.403, assuming that a 'reasonable and diligent inquiry' had been conducted at the time of the transaction." See FAQ III.3.
Below is a list of examples provided by the Treasury Department describing situations where a U.S. person would be knowingly directing a prohibited transaction.
Example 1: A U.S. person is a corporate officer at Company I, a non-U.S. person operating company incorporated in a foreign jurisdiction. The U.S. person's role includes substantial participation in investment decisions related to Company I's strategic acquisitions, including as a member of the investment committee that votes on whether to undertake potential investments. The U.S. person participates in deliberations among Company I's leadership about whether to undertake a share purchase in Company J, a privately-held covered foreign person that develops a quantum computer. Following these deliberations, the U.S. person votes in favor of the share purchase and knows at the time of the vote that the share purchase would be a prohibited transaction if undertaken by a U.S. person. The U.S. person has knowingly directed an otherwise prohibited transaction under the Outbound Investment Program, because such person has authority to make or substantially participate in decisions as part of a group on behalf of Company I and has exercised that authority to direct a transaction that would be prohibited if engaged in by a U.S. person.
Example 2: A U.S. person is an accountant employed at Company K, a company that is not a U.S. person, and does not have the authority to make decisions on behalf of the company. Per instructions from Company K's management, the U.S. person accountant undertakes financial due diligence in support of a potential corporate investment into a covered foreign person that would be a prohibited transaction if engaged in by a U.S. person. Company K then makes the investment. Absent additional facts, the U.S. person employee has not knowingly directed an otherwise prohibited transaction under the Outbound Investment Program, because the U.S. person employee did not have the authority to make decisions on behalf of Company K.
Example 3: A U.S. person serves on the management committee at a pooled investment fund that is not a U.S. person. The fund makes an investment into a covered foreign person that would be a prohibited transaction if performed by a U.S. person. While the management committee reviews and approves all investments made by the fund, the U.S. person recuses themself from the deliberations related to the particular investment, the decision-making, the work on relevant transaction documents, and negotiations with the investment target; absent additional facts, the U.S. person has not knowingly directed an otherwise prohibited transaction.
Treasury further provided guidance that "where an advisory board or committee has the authority to approve or disapprove certain transactions, such as those where conflicts of interest are present, the advisory board or committee would have the authority to 'make or substantially participate in decisions' of the pooled investment fund. In cases where an advisory board or committee approves a transaction that would be a covered transaction if undertaken by a U.S. person, a U.S. person that participates in the advisory board or committee would be liable for 'knowingly directing' such a transaction unless they recuse themself." The Treasury Department has stated that U.S. persons are not prohibited from working at an entity that receives an investment that is subject to the Outbound Investment Program, nor are U.S. persons restricted from working at an entity making such an investment.
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