The Treasury Department's Office of Investment Security published the Notice of Proposed Rulemaking for the Outbound Investment Rule announced June 21st.
This notice of proposed rulemaking (NPRM) seeks public comment on various topics related to the implementation of Executive Order 14105 of August 9, 2023, “Addressing United States Investments in Certain National Security Technologies and Products in Countries of Concern,” which declares a national emergency to address the threat to the United States posed by “countries of concern, which seek to develop and exploit sensitive technologies or products critical for military, intelligence, surveillance, or cyber-enabled capabilities.”
Though the EO is framed as applying broadly to outbound investments directed toward “countries of concern,” its annex identifies the People’s Republic of China, including Hong Kong and Macau, as the sole country in this category.
This proposed rule does not prohibit all investment activity in countries of concern. The Outbound Order is narrowly targeted at certain types of investments in country of concern entities and related to sensitive technologies and products critical for military, intelligence, surveillance, or cyber-enabled capabilities.
The NPRM builds on the Advance Notice of Proposed Rulemaking issued by Treasury last August and provides the full draft regulations and explanatory discussion regarding the intent of the proposal, and solicits comment from the public
The Outbound Order specifically directs the Treasury Secretary to issue regulations that
The Outbound Order identifies three categories of national security technologies and products to be covered by the program:
Key Elements of the NPRM
The following provides a general overview of the key elements of the NPRM. Please refer to the NPRM for further details, including important definitions.
The proposed rule would elaborate on what it means for a person to have knowledge of a fact or circumstance. Under the proposed standard, a U.S. person may be assessed to have knowledge if the U.S. person possesses actual knowledge that a fact or circumstance exists or is substantially certain to occur, if the U.S. person possesses an awareness of a high probability of a fact or circumstance’s existence or future occurrence, or if the U.S. person could have possessed such information through a reasonable and diligent inquiry.
To provide clarity, the proposed rule would include factors that Treasury could consider in assessing whether a U.S. person undertook a reasonable and diligent inquiry. Such factors reflect information that should be ascertainable and/or contractual assurances that should be obtainable through reasonable due diligence.
Under the proposed rule, a person of a country of concern would include an individual who is a citizen or permanent resident of a country of concern (and not a U.S. citizen or permanent resident of the United States); an entity that is organized under the laws of a country of concern, headquartered in, incorporated in, or with a principal place of business in a country of concern; the government of a country of concern; or an entity that is directly or indirectly majority-owned by any persons or entities in any of the aforementioned categories.
Additionally, the proposed rule would include certain transactions involving an entity than has a voting interest, board seat, or equity interest in a covered foreign person where more than 50 percent of one of several key financial metrics of the entity is attributable to such covered foreign person.
In the Outbound Order, the President identifies the People’s Republic of China, along with the Special Administrative Region of Hong Kong and the Special Administrative Region of Macau, as a country of concern.
Excepted transactions:
Treasury proposes excepting certain types of transactions from the rule’s coverage, as summarized below, provided that such transactions do not afford a U.S. person certain rights that are not standard minority shareholder protections.
o Publicly traded securities: An investment by a U.S. person in a publicly traded security or a security issued by an investment company, such as an index fund, mutual fund, or exchange-traded fund;
o Certain LP investments: A U.S. person’s investment of a certain size made as a limited partner or equivalent in a venture capital fund, private equity fund, fund of funds, or other pooled investment fund;
o Buyouts of country of concern ownership: A U.S. person’s full buyout of all country of concern ownership of an entity, such that the entity would not constitute a covered foreign person following the transaction;
o Intracompany transactions: An intracompany transaction between a U.S. parent and a majority-controlled subsidiary to support ongoing operations or other non-covered activities;
o Pre-Outbound Order binding commitments: A transaction fulfilling a binding, uncalled, capital commitment entered into prior to August 9, 2023;
o Certain syndicated debt financings: Where the U.S. person, as a member of a lending syndicate, acquires a voting interest in a covered foreign person upon default and the U.S. person cannot initiate any action vis-à-vis the debtor and does not have a lead role in the syndicate; and
o Third country measures: Certain transactions involving a person of a country or territory outside of the United States may be excepted transactions where the Secretary of the Treasury determines that the country or territory is addressing national security concerns posed by outbound investment and the transaction is of a type for which associated national security concerns are likely to be adequately addressed by the actions of that country or territory.
Notification requirements:
The EO had been widely anticipated and described as “reverse CFIUS." However, unlike CFIUS, which conducts resource intensive, case-by-case reviews of select inbound investments of security concern, EO 14,105’s outbound regime does not involve preclearance or individual reviews.
A U.S. person subject to the notification requirement under the proposed rule would be required to file a notification form with Treasury that includes information related to the transaction such as details about the U.S. person, the covered transaction, relevant national security technologies and products, and the covered foreign person.
The NPRM proposes that a notification must be filed no later than 30 days after a transaction is completed or, where a U.S. person acquires actual knowledge after the completion date of a transaction that the transaction would have been a covered transaction if such knowledge had been possessed at the time of the transaction, no later than 30 days after the U.S. person’s acquisition of such knowledge.
National Security Technologies and Products
The NPRM also provides proposed scoping of the sub-sets of national security technologies and products identified in the Outbound Order that would be subject to the regulations:
Semiconductors and microelectronics:.
o Prohibited transactions: Treasury proposes a prohibition on covered transactions related to electronic design automation software; certain fabrication and advanced packaging tools; the design, fabrication, or packaging of certain advanced integrated circuits; and supercomputers.
o Notifiable transactions: Treasury proposes a notification requirement for covered transactions related to the design, fabrication, or packaging of integrated circuits not otherwise covered by the prohibited transaction definition.
Quantum information technologies:
o Prohibited transactions: Treasury proposes a prohibition on covered transactions related to the development of quantum computers and production of critical components; the development or production of certain quantum sensing platforms; and the development or production of quantum networking and quantum communication systems.
Certain artificial intelligence (AI) systems:
o Prohibited transactions: Treasury proposes a prohibition on covered transactions related to the development of any AI system designed to be exclusively used for, or intended to be used for, certain end uses. The NPRM also proposes alternatives for a prohibition on covered transactions related to the development of any AI system that is trained using a specified quantity of computing power, and trained using a specified quantity of computing power using primarily biological sequence data.
o Notifiable transactions: Treasury proposes a notification requirement for covered transactions related to the development of any AI system not otherwise covered by the prohibited transaction definition, where such AI system is designed or intended to be used for certain end uses or is trained using a specified quantity of computing power (set below the levels in the prohibited transaction definition).
Violations
The proposed rule outlines the penalty and disclosure framework for violations:
The NPRM, fact sheet, and additional information are available at
https://home.treasury.gov/policy-issues/international/outbound-investment-program
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