Client Alerts  - International Business Aug 22, 2023

U.S. Outlines Proposed Outbound Investment Restrictions

Measures Taken by the U.S. to Restrict Technology Investments in Countries of Concern

On August 9, 2023, the Biden Administration issued a much-anticipated Executive Order 14105 (EO), titled “Addressing United States Investments in Certain National Security Technologies and Products in Countries of Concern,” simultaneously with an accompanying “Advanced Notice of Proposed Rulemaking” (ANPRM) outlining the framework of a China-focused outbound investment regime. Together, the EO and ANPRM are intended to further address national security challenges posed by “countries of concern” —but for current purposes, specifically naming the People’s Republic of China (PRC), Hong Kong and Macau—by prohibiting U.S. persons from making, or requiring notification to U.S. authorities regarding, certain investments in advanced semiconductors, quantum technologies and artificial intelligence capabilities (AI) by entities in those countries.

These actions follow in the footsteps of previous measures aimed at meeting competitive and security concerns posed by Chinese developments in advanced microelectronic and AI technologies (allegedly often exploiting U.S. technology), such as the October 7, 2022, U.S. Department of Commerce publication of strengthened export restrictions on advanced computing and semiconductor manufacturing to China (87 FR 62186, 2022), as well as enactment of the “CHIPS and Science Act,” signed into law by President Biden on August 9, 2022. The President also endorsed the May 2023 G7 Leaders’ Statement on Economic Resilience and Economic Security, which expressly supported outbound investment review as a supplement to export controls in protecting sensitive technology.

In addition, the U.S. Senate has recently adopted (by a 91-6 vote) a proposed statutory provision requiring similar notification and review of such investments as part of its version of the pending National Defense Authorization Act (scheduled for conference in September) as discussed in a prior Phillips Lytle alert.1

Preliminary notes: The EO does not ban all U.S. investment in China, but instead targets three specific sectors. The rulemaking process is just beginning and will continue for some time.

Notice Requirements & Prohibition on Certain Transactions

Taken together, the EO and ANPRM establish a new and targeted national security program administered by the U.S. Department of the Treasury (“Treasury”), in consultation with other agencies, which: (1) require U.S. persons (broadly defined) to notify Treasury of certain investment transactions; and (2) prohibit U.S. persons from involvement in transactions with entities from or in identified countries engaged in activities related to specified particular subsets of technology.

  • Notification Requirement: The EO directs Treasury to adopt regulations requiring U.S. persons to notify Treasury regarding certain transactions involving entities located in, subject to the jurisdiction of, or owned by persons in a country of concern. It also requires notification of transactions involving investment in, and development of, certain targeted national security technologies and products.
  • Prohibition of Certain Transactions: Treasury is directed to adopt regulations prohibiting U.S. persons from undertaking particular transactions involving entities located in or subject to the jurisdiction of a country of concern, as well as certain other entities owned by persons of a country of concern that are engaged in activities related to defined subsets of technologies and products.

Definition of “Covered Foreign Persons”

A “Covered Foreign Person” under the EO is a “person of a country of concern” engaged in activities involving one or more “covered national security technologies and products.” A “person of a country of concern” is an individual who is a citizen or permanent resident of a country of concern, not a U.S. citizen or lawful permanent resident of the United States.

Also covered are entities having a principal place of business in, are incorporated in, or otherwise organized under the laws of a country of concern. This includes those in which a Covered Foreign Person or Persons hold individually or in the aggregate, directly or indirectly, ownership interests equal to or greater than 50% and comprise more than 50% of the revenue, net income or other economic measures of such person.

Lastly, coverage includes the government of a country of concern, including any political subdivision, political party, agency, or instrumentality thereof, or any person owned, controlled, directed by, or acting for or on behalf of the government of such country of concern.

Unsurprisingly, the ANPRM designates the PRC as a country of concern. Specifically, Treasury explained that the PRC is exploiting, or has the ability to exploit, U.S. investments to further its ability to produce a narrow set of sensitive technologies critical to military modernization; as such U.S. investments are often accompanied by certain intangible benefits, such as managerial assistance, investment and market access. As a result, the White House and Treasury have determined that further regulation and restriction on such investments are necessary.

Covered Transactions

The proposed regulations would cover U.S. persons involved in the following direct or indirect transactions:

  • Acquisition of an equity interest or contingent equity interest in a covered foreign person.
  • Provision of debt financing convertible to an equity interest to a covered foreign person.
  • Greenfield investment that could result in the establishment of a covered foreign person.
  • Establishment of a joint venture, wherever located, formed with a covered foreign person or that could result in the establishment of a covered foreign person.

Note that, in contrast to CFIUS (Committee on Foreign Investment in the United States) reviews of inbound investment (where greenfield transactions are not subject to review), Treasury is intentionally covering early-stage investment ―likely reflecting a desire to prevent the early development of certain national security technologies and products.

Exceptions: The ANPRM proposes excepting from coverage:

  1. Investments in certain publicly traded securities, index funds, mutual funds and exchange-traded funds.
  2. Certain passive limited partner investments below a de minimis threshold (to be determined).
  3. Uncalled committed capital investments.
  4. Intracompany transfers between a U.S. parent and a subsidiary.

Prohibited Technologies & Products

Treasury is charged with drafting regulations concerning three specific categories of national security technologies and products expressly identified in the EO:

  • Semiconductors and microelectronics.
  • Quantum information technologies.
  • Certain artificial intelligence systems.

Treasury has explained2 that these technologies and products were selected due to their “critical role in accelerating the development of advanced military, intelligence, surveillance, and cyber-enabled capabilities.” But the EO does not limit itself to just these technologies. Rather, it instructs Treasury (in consultation with the appropriate agencies) to further define what constitutes “sensitive technologies and products” for the purposes of the prohibition and the notification requirement.

Potential Penalties

Treasury is also tasked with investigating appropriate civil penalties and “refer[ing] potential criminal violations . . . to the Attorney General.” In terms of civil penalties, Treasury has stated it is considering penalizing the following:

  • Making material misstatements in, or material omissions from, information or documents submitted or filed with Treasury.
  • Undertaking a prohibited transaction.
  • Failing to timely notify Treasury of a transaction for which notification is required.

Treasury is empowered to “nullify, void, or otherwise compel the divestment of any prohibited transaction entered into after the effective date” of the regulations. Treasury does not anticipate retroactive application of these rules, stating in the ANPRM that it will “not use this authority to unwind a transaction that was not prohibited at the time it was completed.” It may, however, request information regarding transactions that closed or were agreed to after August 9, 2023.

Public Comment & Implementation

Considering the complexities of the rulemaking process, as well as the broad list of 83 specific questions which Treasury has posed for public comment, it will be some time before an effective date is set and the final rules are implemented. Indeed, both the effective date and the contours of a final rule are uncertain; likewise, how the process will be reconciled with the proposed investment restrictions pending in Congress—and vice versa—can’t be predicted with clarity.

Treasury however will begin reviewing public comments soon; comments on various issues under the proposed rule must be submitted by September 28, 2023. Given the substantial ambiguities regarding scope, affected investments and possible penalties, potentially affected parties (particularly multinational enterprises and investors) would be well advised to consider submitting comments.

In any case, the process should be monitored closely, and prospective investment decisions and strategies should be reviewed carefully in light of the new EO and rulemaking developments.

Additional Assistance

For further information regarding the proposed rule, the regulations (including available exemptions) or other matters regarding foreign investment, please contact James Kevin Wholey at (202) 617-2714,; Mitchell P. Snyder at (716) 847-8322,; any member of the Phillips Lytle International Team; or the Phillips Lytle attorney with whom you have a relationship.

1   “Senate Passes Proposed Expansion of CFIUS Jurisdiction Over Foreign Real Estate Investments,” Phillips Lytle International Business Client Alert, August 2023.

2   FACT SHEET: President Biden Issues Executive Order Addressing United States Investments in Certain National Security Technologies and Products in Countries of Concern; Treasury Department Issues Advance Notice of Proposed Rulemaking to Enhance Transparency and Clarity and Solicit Comments on Scope of New Program.

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