Treasury Department Unveils Long-Anticipated Proposed Regulations for U.S. Outbound Investment Regime

On June 21, 2024, Treasury issued a notice of proposed rulemaking to implement President Biden's executive order mandating national security review of certain U.S. investments in China. Treasury's notice contains a complete set of draft regulations ("Proposed Rule") that would either outright prohibit or require notice to the government of certain investments in the semiconductors and microelectronics, quantum information technologies, or AI sectors in a "country of concern," currently defined as China and its administrative regions of Hong Kong and Macau. 

Treasury is seeking industry feedback on all aspects of the Proposed Rule through August 4, 2024. The Proposed Rule follows from President Biden's August 2023 executive order directing Treasury to develop a new program to address national security threats presented by U.S. outbound investment that could be used to develop sensitive technologies and products critical for military, intelligence, surveillance, or cyber-enabled capabilities. (Currently, the Treasury-led Committee on Foreign Investment in the United States ("CFIUS") screens inbound investment, while sanctions and export controls regulate activities involving specific third-parties, regions, and industry sectors.)

As presently drafted, the Proposed Rule's requirements will apply if a U.S. person has knowledge (defined to encompass actual knowledge or reason to know) that the transaction is a covered transaction or if the U.S. person intends to engage in a covered transaction. The Proposed Rule clarifies that if a U.S. person has undertaken a "reasonable and diligent inquiry" and still does not have such knowledge that a transaction prohibited or requires notification, Treasury "ordinarily" would not deem the transaction as subject to the outbound investment regulations. The Proposed Rule includes illustrative factors that Treasury would deem indicative of a reasonable and diligent inquiry, such as "efforts to obtain information and contractual assurances that should be obtainable through a reasonable transactional due diligence process."

Where a notification is required, the notification generally must be made within 30 days of the transaction completion date. However, if a U.S. person that previously lacked knowledge or a reason to know at the time of the investment later acquires actual knowledge that the transaction is a "covered transaction," notification must be made within 30 days of the U.S. person obtaining such knowledge. This suggests a tail end of potential regulatory coverage for some transactions and could serve as a springboard towards requiring submissions if the government reaches out to parties with inquiries about a transaction, effectively giving them knowledge and creating a notification obligation.

Certain categories of transactions are excepted from coverage under the Proposed Rule, including investments in publicly traded securities, certain investments made as a limited partner investor, intracompany transactions, and buying out the ownership interest of a country-of-concern investor. The Proposed Rule also contemplates affording U.S. investors the ability to seek a "national interest" waiver to the application of the outbound investment regulatory requirements. 

Though this initiative was originally dubbed a "Reverse CFIUS" regime, the Proposed Rule and accompanying Treasury Fact Sheet clarify that the outbound investment program is not intended to establish a case-by-case review or pre-approval requirement at this time. With that said, violations of an outbound investment prohibition or notification requirement may still result in the imposition of civil and criminal penalties under the International Emergency Economic Powers Act (the executive order's main statutory basis); and in the context of a prohibited transaction could lead to Treasury taking action to nullify or void a transaction or otherwise require divestment. The Proposed Rule also contemplates a process for U.S. persons to voluntarily self-disclose apparent violations, which may serve to mitigate a potential penalty.