On August 9, 2023, the Biden Administration issued its long-awaited executive order (“EO”) granting the U.S. government the authority to establish and enforce an outbound investment screening regime (hereinafter, “outbound investment program”) that will be administered by the U.S. Department of the Treasury (“Treasury”) in consultation with other agencies, including the U.S. Department of Commerce (“Commerce”).

In the EO, President Biden declared a national emergency and determined the need for action due to the policies and actions of countries of concern that seek to, among other things, exploit U.S. outbound investments to develop sensitive technologies and products critical for military, intelligence, surveillance, and cyber-enabled capabilities.

The outbound investment program, pursuant to forthcoming implementing regulations, will (1) require U.S. persons to notify Treasury of certain transactions and (2) prohibit U.S. persons from engaging in other transactions, in both cases related to certain Chinese parties that are engaged in subsets of three advanced technology sectors: (a) semiconductors and microelectronics; (b) quantum information technologies and (c) certain artificial intelligence (“AI”) systems. In particular, the outbound investment program will be focused on investments that could result in the advancement of sensitive technologies critical to China’s military modernization.

Alongside the EO, Treasury issued an Advance Notice of Proposed Rulemaking (“ANPRM”), which details the intended scope of the outbound investment program and solicits input from the public in order to engage stakeholder participation in the rulemaking process. The ANPRM provides a 45-day public comment period (ending September 28, 2023) and solicits feedback on more than 80 questions, which are intended to inform the forthcoming implementing regulations.

Importantly, while the EO articulates the broad contours of the outbound investment program and the ANPRM proposes some preliminary details, the specifics of the program, including the entities and activities that will be covered, remain in flux. It will be critical for U.S. and foreign stakeholders to actively engage in the rulemaking process to shape the program.  Below is a summary of the key details of the outbound investment program, as set forth in the EO and ANPRM. 

Which investors will be covered by the outbound investment program?

• The outbound investment program will cover U.S. persons that engage in transactions involving certain foreign persons from a “country of concern” (defined below) that are engaged in certain advanced technology sectors.  The EO defines U.S. persons as “any United States citizen, lawful permanent resident, entity organized under the laws of the United States or any jurisdiction within the United States, including any foreign branches of any such entity, and any person in the United States.”

Which foreign countries will the outbound investment program target?

• The EO identifies China (including Hong Kong and Macau) as the “country of concern” that will be subject to the regulations, once issued.

What kinds of foreign persons will be covered by the outbound investment program?

• Treasury anticipates that the outbound investment program will define “person of a country of concern” as:
  • Any individual that is not a U.S. citizen or permanent resident and is a citizen or permanent resident of a country of concern
  • Any entity organized under the laws of, or with a principal place of business in, a country of concern
  • The government of any country of concern and any person owned, controlled, or directed by or acting for or on behalf of such government; or
  • Entities that are 50% or more owned, directly or indirectly, by persons described above.

Treasury anticipates defining a “covered foreign person” as a “person of a country of concern” that is engaged in certain defined activities involving “covered national security technologies and products.”

Which sectors will be covered by the outbound investment program?

• Treasury anticipates that the outbound investment program will cover investments involving certain persons engaged in “covered national security technologies and products”, which relate to three categories of advanced technologies: (1) semiconductors and microelectronics, (2) quantum information technologies, and (3) certain AI systems. As discussed in further detail below, Treasury is considering imposing outright prohibitions on U.S. investments in certain of these sectors, whereas it is considering notification requirements in others. Per the ANPRM, there are elements of these three categories of advanced technologies that would fall into so-called “notifiable transactions” and elements that would fall into so-called “prohibited transactions.”

Will any transactions be outright prohibited by the outbound investment program?

• Treasury is considering imposing an outright prohibition on investments into “covered foreign persons” engaged in certain activities within the semiconductors and microelectronics sector (e.g., developing electronic design automation software or semiconductor manufacturing equipment; designing, fabricating, or packaging advanced integrated circuits; and installing or selling supercomputers) and certain activities within the quantum information technologies sector (e.g., producing quantum computers and certain components; developing certain quantum sensors; and developing quantum networking and quantum communication systems). Treasury may also pursue a prohibition on investments involving covered foreign persons engaged in certain activities involving the development of software that incorporates AI and that is designed to be exclusively used (or perhaps “primarily used”) for military, government intelligence, or mass-surveillance end-uses.

What types of transactions will be covered by the outbound investment program?

• According to the ANPRM, Treasury anticipates focusing the outbound investment program on certain types of transactions that could convey intangible benefits to “covered foreign persons,” including:
  • acquisitions of equity interests (e.g., via mergers and acquisitions, private equity, venture capital, and other arrangements);
  • greenfield investments;
  • joint ventures; and
  • certain debt financing transactions that are convertible to equity.

What types of transactions will be excepted from the outbound investment program?

• According to the ANPRM, Treasury is considering excepting from coverage certain types of transactions that may pose a lower likelihood of conveying intangible benefits to “covered foreign persons.” Specifically, Treasury is currently contemplating carving out certain passive and other types of investments, including:
  • certain U.S. investments into publicly-traded securities, index funds, mutual funds, exchange-traded funds;
  • certain investments made as a limited partner;
  • committed but uncalled capital investments; and
  • intracompany transfers of funds from a U.S. parent company to its subsidiary.

Treasury also noted that it does not intend to capture certain activities, including university-to-university research collaborations, intellectual property licensing arrangements, and others.

What types of transactions must be notified under the outbound investment program?

• Treasury is considering imposing a notification requirement for U.S. investments in “covered foreign persons” engaged in (1) the design, fabrication, and packaging of less advanced integrated circuits and (2) activities related to software that incorporates an AI system and is designed for certain end-uses that may have military or intelligence applications and pose a national security risk. Treasury does not appear to be considering a notification requirement for the quantum information technologies sector at this time.

Will the outbound investment program apply retroactively?

• Treasury is not proposing that the program apply retroactively; thus the program will likely apply to new investments — not to existing investments. Treasury notes, however, that it may nonetheless request information about transactions that were completed or agreed to after the effective date of the EO for the purposes of informing the development and implementation of the outbound investment program.

When will the outbound investment program go into effect?

• The outbound investment program will go into effect following a notice and comment period, which is designed to allow businesses and other stakeholders to weigh in on the details of the program prior to the promulgation of the official regulations. Public comments must be submitted within 45 days of the publication of the ANPRM in the Federal Register, allowing the public until September 28 to submit comments. Given the comment period and subsequent development of the implementing regulations, the outbound investment program may not take effect until 2024.

Next steps

Companies assessing the impact of the EO on their business and operations should consider the potential impact of the outbound investment program on their businesses and investments.  They also should take into account the possibility that U.S. allies and partners may adopt similar outbound investment restrictions.

In order to help shape this important program, it will be critical for the public to submit comments. Please contact any of the listed Hogan Lovells lawyers if you would like to provide comments to Treasury during the 45-day comment period or if you have questions on how to prepare for the U.S. outbound investment program.

Authored by Timothy Bergreen, Brian Curran, Anne Salladin, Kelly Ann Shaw, Ari Fridman, Zach Alvarez, Hao-Kai Pai and Tyra Walker.