On June 21, 2024, the Treasury Department issued a Notice of Proposed Rulemaking (NPRM) setting out draft rules for regulating certain outbound U.S. investments. The NPRM incorporates feedback received by the Treasury Department in response to an Advanced Notice (ANRPM) issued alongside Executive Order 14105 and summarized in a previous post. The Treasury Department is encouraging written comments on the NPRM by August 4, 2024 from interested parties.

The NPRM would curtail the outflow of investment to “countries of concern” in relation to certain sensitive U.S. products and technology. The People’s Republic of China (PRC), along with the Special Administrative Region of Hong Kong and the Special Administrative Region of Macau, remain the sole focus of the Executive Order and NPRM, subject to revision.

Overview

The outbound investment screening program will prohibit certain transactions while subjecting others to notification requirements. Of note, unlike the CFIUS review process, the notification requirement is post-closing and there is no review process under which notified transactions could be unwound.

The outbound investment screening program’s prohibitions would kick in for certain kinds of undertakings related to technologies and products that pose a particularly acute national security threat. The program’s notification requirements would similarly apply to other categories of activities related to technologies that may contribute to the threat to national security. The rules set out criteria for determining whether the transaction is prohibited or notifiable, such as by specifying certain performance parameters.

Subject to specific criteria, below is a list of activities that may be prohibited or otherwise subject to notification requirements based on the proposed rule:

Prohibited Transactions
- Certain semiconductors- and microelectronics-related investments in:
  - The development or production of front-end semiconductor fabrication equipment designed for performing the volume fabrication of integrated circuits;
  - The design of any integrated circuit having one or more digital processing units having either (1) a total processing performance of 4800 or more, or (2) a total processing performance of 1600 or more and a performance density of 5.92 or more.
- Certain quantum information technology-related investments in:
  - The development of a quantum computer or production of critical components required to produce a quantum computer such as dilution refrigerator or two-stage pulse tube cryocooler;
  - The development or production of any quantum sensing platform designed for, or which the relevant covered foreign person intends to be used for, any military, government intelligence, or mass-surveillance end use.
- Certain artificial intelligence systems-related investments:
  - The development of any AI system that is designed to be exclusively used for, or intended to be used for, military, government intelligence, or mass surveillance end uses;
  - The development of any AI system that is trained using a quantity of computing power greater than certain tentatively defined computational operations (e.g., integer or floating-point operations), or certain tentatively defined systems using primarily biological sequence data.
Notifiable transactions
- Any semiconductors- and microelectronics-related investments that would not be prohibited under the program, such as the fabrication or packaging of non-prohibited integrated circuits; and
- Any non-prohibited, artificial intelligence systems-related investment in:
  - AI systems designed to be used for government intelligence, mass-surveillance, or military purposes;
  - Intended to be used for cybersecurity applications, digital forensics tools, and penetration testing tools, or the control of robotic systems; or
  - Training using a tentatively defined quantity of computing power (e.g., integer or floating-point operations).

Both triggers would be designed with a focus on preventing outbound U.S. investments that could enhance a country of concern’s military, intelligence, surveillance, or cyber-enabled capabilities.

Knowledge Requirement and Standard

Notably, in the case of certain greenfield, brownfield, or joint venture investments, the program’s requirements would trigger where a U.S. actor knows that the project will or intends to undertake any covered activity. Whether to incorporate a “knowledge” standard was a central point of discussion during the ANPRM process. In response to concerns surrounding the difficulty of ascertaining when a transaction is covered by the program, the NPRM defines “knowledge” as actual knowledge and also knowledge that could be gleaned from reasonable diligence, or awareness of a high probability a fact will occur.

Another key difference between the program’s prohibitions and notification requirements is that the rule as proposed would extend to instances where a U.S. actor knowingly directs a non-U.S. person or entity to engage in a transaction that would prohibited if undertaken by a U.S. person. The rule also covers investments in entities that are not in “countries of concern” in some situations where those entities are themselves investing in or controlling entities that do fall within the scope of the restrictions. The goal is to limit the workarounds that could exist through indirect investment activity.

Because U.S. actors will be responsible for determining their obligations under the rules, it is critical to become familiar with the reach of the Treasury Department’s proposed rule over U.S. and foreign entities’ activities.

Additional Changes

Other areas of evolution to note are the following:

Clarification on when the prohibitions would apply to investments in an entity that owns or controls entities covered by the prohibition or notification requirements;

An exception for transactions involving persons of third countries that have similar measures aimed at outbound investments as designated by the Secretary of the Treasury; and

The scope of LP investments that would be covered by the proposed rule and those that would be excepted.

An overview of the latest updates to the proposed Outbound Investment Program can be found here, alongside a Fact Sheet that addresses Frequently Asked Questions. Companies that are potentially impacted by the restrictions should consider commenting before the August 2, 2024 date. Please contact our sanctions, export controls, and CFIUS team if you need assistance navigating these latest developments.

Treasury Issues Proposed Rules on Outbound Investments to China and Solicits Comments