ARTICLE
9 December 2024

US Restricts Outbound Investments To China – What You Need To Know

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Since 1975, the US Committee on Foreign Investment has reviewed the national security implications of proposed foreign investments into US industry.
United States Government, Public Sector

Since 1975, the US Committee on Foreign Investment has reviewed the national security implications of proposed foreign investments into US industry. Now, following the issuance of a final rule on October 28, 2024 by the US Department of the Treasury, the Outbound Investment Security Program ("Program") has been established to regulate and monitor US investments into foreign enterprises, specifically in China, Hong Kong SAR, and Macau, for the same reasons. Transactions with a "completion date" on or after January 2, 2025 will be subject to the Program's regulations.

Background
Under authority of the National Emergencies Act and the International Emergency Economic Powers Act, the Biden Administration issued Executive Order 14105 on August 9, 2023, instructing the Treasury Department to issue new regulations to prohibit or regulate certain transactions "covering foreign persons ... that prohibit United States persons from engaging" in certain transactions with "countries of concern" in sensitive national security technologies. The White House expressed concerns that US investments of this nature may accelerate the development and implementation of foreign technologies that threaten US national security interests. China is the sole country of concern and focus of the Program at present, although others may be added in the future.

The technologies addressed under the Program include semiconductors and microelectronics, quantum information technologies, and artificial intelligence. These technologies were deemed critical to military, intelligence, surveillance, and cyber-enabled capabilities by the Biden Administration. The Treasury Department issued a Notice of Proposed Rulemaking in June 2024, and published the final Outbound Security Program Rule (the "Rule") on October 28, 2024. The Program will be administered by the new Office of Global Transactions in the Treasury Department.

Who the Rule Covers
The Rule applies to "US Persons," which includes citizens (individual or corporate), permanent residents, foreign branches of US entities, and any person located in the United States. This is a much broader definition of "US Persons" than used in comparable regulatory programs, including both export control and sanctions regulations. The last category – any person located in the United States – begs the question as to whether a US-based employee of a foreign company would fall under the definition of "US Persons." The Treasury Department is expected to provide illustrative examples on the Program website in the near future.

What the Rule Covers
There are two categories of covered transactions under the rule: prohibited transactions and "notifiable" transactions. Whether a transaction falls under either category is sector-specific and technology-specific. Criteria for each of the covered technology areas are established under the Rules. Transactions that are allowable with notice must be filed electronically with the Treasury Department within 30 days of completion, or the "receipt of actual knowledge" of a covered transaction's completion. Covered transactions include a wide variety of investments such as equity and contingent equity investments (and the conversion thereof), certain debt financing transactions, corporate expansion, so-called "greenfield" investments, joint ventures, and limited partnerships or their equivalents in a non-US investment fund.

Knowledge
Knowledge is an important aspect of the Program rules and their application. Under the Rule, it is a violation to participate in or "knowingly direct" a prohibited transaction. Knowledge is considered both actual and constructive, and imposes a duty of reasonable inquiry. Willful ignorance is no excuse. Of particular importance, the prohibition on "knowingly directing" a prohibited transaction will have consequences in the financial services, banking, and consulting service industries. In short, it is a prohibition against facilitation.

Exceptions
Not all transactions involving the covered technologies and sectors are subject to the Program. Investments in publicly traded securities, intracompany transactions, and equity compensation are among the exemptions which are neither prohibited nor require reporting. An additional catch-all, "national interest" exemption is also established under the Rule. A national interest determination will be made by the Treasury Department on a case-by-case basis. Investment and corporate expansion in other technologies or industries not expressly identified in the Program may continue, subject to preexisting applicable securities, sanctions, and export laws and the like.

Enforcement
As with most international trade regulatory regimes, violations carry civil and criminal penalties, depending on the severity. Financial penalties can be significant. The current maximum civil penalty is the greater of $386,136 or twice the transaction value. The Government may also order divestment from the transaction as a consequence of violations. The Program's enforcement rules provide for voluntary self-disclosure, which may mitigate the consequences of a compliance failure.

Conclusion
China remains a primary focus of US national and economic security policy., Such focus is unlikely to change in the near future. It is in the best interests of both high technology enterprises and the financial community to understand the Outbound Investment Security Program and its rules as they take effect, and adjust their investment strategies accordingly.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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