U.S. Outbound Investment Restrictions And Notification Requirements Mandated By Executive Order: Cur

U.S. Outbound Investment Restrictions And Notification Requirements Mandated By Executive Order: Cur


U.S. Outbound Investment Restrictions And Notification Requirements Mandated By Executive Order: Currently Limited To Certain Investments In China Tech

17 August 2023

Squire Patton Boggs LLP

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On August 9, 2023, U.S. President Joe Biden signed an Executive
Order (“EO”) titled “Addressing United States
Investments in Certain National Security Technologies and Products
in Countries of Concerns,” mandating the establishment of an
outbound investment regulatory regime. The EO mandates that the
Treasury Department, in coordination with other agencies, issue
regulations to establish a “program” to prohibit or
require notification concerning certain outbound investments by
U.S. persons involving a country of concern and a narrow set of
advanced technologies and products. In the EO, the President
identified one country as a country of concern: the People’s
Republic of China, including Hong Kong and Macau. However, the
President may update the list of countries of concern in the

Immediately below is a summary of the new outbound regulatory
program mandated by EO. Further below is a summary of the Advance
Notice of Proposed Rulemaking (“ANPRM”) issued by the
Treasury Department concurrently with the EO along with key
considerations for enterprises potentially affected by the new EO
and proposed rule.

Overview of Executive Order Addressing United States
Investments in Certain National Security Technologies and Products
in Countries of Concerns

The Executive Order directs the Secretary of the Treasury,
working with the Secretary of Commerce, and, as appropriate, the
heads of other executive departments and agencies, to issue
regulations to address the following concepts, requirements, and
prohibitions applicable to the mandated outbound investment
regulatory program.

  1. Covered foreign person. Subject
    investments must involve a covered foreign person,
    which is a person (entity or individual) from a country of concern
    that conducts activities in one or more of the following
    “covered national security technologies and
  2. Covered national security technologies and
    . Defined as sensitive technologies and
    products in the following areas, which are “critical for the
    military, intelligence, surveillance, or cyber-enabled capabilities
    of a country of concern, as determined by the Secretary in
    consultation with the Secretary of Commerce and, as appropriate,
    the heads of other relevant agencies.”

    1. Semiconductors and microelectronics
    2. Quantum information technologies
    3. Artificial intelligence
  3. Notification requirement. Provide
    notification of certain transactions by U.S. persons in
    “covered foreign persons.”
  4. Investment prohibition. Prohibit U.S.
    persons from engaging in certain other transactions in
    “covered foreign persons.” (The EO does not distinguish
    which transactions will be notifiable and which will be prohibited,
    but rather directs that distinction to be implemented through

The EO also grants authority to the Secretary of Treasury to
extend prohibitions and notification requirements to U.S. persons
under the following scenarios:

  • Where a U.S. person is involved indirectly in covered
  • If U.S. persons “knowingly direct” transactions by
    non-U.S. persons, where such transactions would otherwise be
    prohibited or require notification if engaged in by a U.S. person;
  • If foreign entities controlled by U.S. persons enter
    transactions that would otherwise be notifiable or prohibited if
    engaged in by a U.S. person.

Overview of Advance Notice of Proposed Rulemaking to Implement
the Outbound Investment Regulatory Program

On August 9, 2023, concurrent with the EO by the President, the
Treasury Department issued an Advance Notice of Proposed Rulemaking
(ANPRM) containing its initial proposals with respect to the
forthcoming outbound investment regime mandated by the EO and
soliciting comments (due September 28). In an overview of the
proposed program, the ANPRM stated that Treasury “does not
contemplate that the program will entail a case-by-case review of
U.S. outbound investments,” rather the contemplated program
requires parties to self-determine “whether a given
transaction is prohibited, subject to notification, or permissible
without notification.”

  1. Key Concepts

The ANPRM provides a proposed framework for understanding the
applicability of the outbound investment prohibitions and
notification requirements. The following are key concepts outlined
in the ANPRM.

  • U.S. persons responsible for compliance of
    controlled subsidiaries or for knowingly “directing”
    U.S. persons will be responsible for
    adhering to the prohibition and the notification requirement,
    including for knowingly “directing” transactions by
    non-U.S. persons. Treasury proposes defining “directing”
    as when a person “order[s], decides, approves, or otherwise
    causes” a covered transaction to be performed, while excluding
    from the definition the provision of secondary, wraparound, or
    intermediary services. Furthermore, Treasury is considering placing
    obligations on U.S. persons for foreign entities that they control,
    which Treasury proposes defining as owning, directly or indirectly,
    a 50 percent or greater interest. U.S. persons would be responsible
    for (1) notifying Treasury of transactions by their controlled
    foreign entities that would be notifiable transactions if engaged
    in by the U.S. person and (2) taking reasonable steps to prohibit
    and prevent transactions by their controlled foreign entities that
    would be prohibited if engaged in by the U.S. person.
  • Covered foreign persons:
    These are entities that are organized under the laws of a country
    of concern, have a principal place of business in a country of
    concern, or are majority-owned by country of concern individuals or
    entities, and are either engaged in activities related to a defined
    “covered national security technology or product” or have
    subsidiaries or branches engaged in activities related to a
    “covered national security technology or product.”
  • Types of covered investments, potential indirect
    investments covered, and excepted transactions.
    ANPRM proposes that the program include acquisitions of equity or
    contingent interests, greenfield investments, joint ventures, and
    certain debt financing transactions by U.S. persons.
  • Indirect investments considered.
    Treasury is also seeking comments as to whether it should include
    “indirect” transactions such as knowingly investing in a
    third-country entity that would use the investment to undertake a
    transaction that would otherwise be subject to the program.
  • Excepted transactions
    . Treasury is considering creating
    an exception for certain types of passive and other investments
    that may pose a lower likelihood of conveying intangible benefits.
    Excepted transactions would include certain U.S. investments into
    publicly traded securities, index funds, mutual funds,
    exchange-traded funds, certain investments made as a limited
    partner, complete buy-outs, intracompany transfer of funds from a
    U.S. person parent company to its subsidiary, and committed but
    uncalled capital investments. However, Treasury indicated that any
    investment that affords a U.S. person rights beyond standard
    minority shareholder protections, such as membership or observer
    rights, nomination rights, or involvement in substantive business
    decisions, will not be excepted.
  • No retroactivity application, but Treasury may inquire
    about post-EO transactions.
    The ANPRM does not propose
    retroactive application from the date of the final rule, but the
    ANPRM states that Treasury may require information about
    transactions that were completed or agreed to after date of the
    issuance of the EO.
  1. Proposed Activities to Determine Prohibition or

As provided in the EO, whether a U.S. person is subject to a
prohibition or notification requirement will be based on the type
of activity that the covered foreign person conducts with
“covered national security technology or product,” as to
be clarified in the regulations. The ANPRM provides a proposal for
the types of activities that would be subject to either the
prohibition or notification requirements within each of the three
sectors identified by the EO: (1) semiconductors and
microelectronics, (2) quantum information technologies, and (3)
artificial intelligence. A summary chart outlining these activities
is appended to this article.

  1. Proposed Notification Review Process and

For transactions requiring notification, Treasury is considering
requiring U.S. persons to file through a portal hosted on
Treasury’s website no later than 30 days following the closing
the transaction. The contemplated notification will require
information about the parties, the transaction/investment, and
previous transactions or planned/contemplated future transaction
made by the U.S. person into the covered foreign person. Regarding
the notification and review process, the ANPRM specifically
solicited comments about the following proposals:

  • Whether it should be a joint filing (with the U.S. person and
    covered foreign person);
  • Whether there should be combined versus separate notifications
    when multiple U.S. persons are involved in a transaction; and
  • Whether Treasury should implement a pre-closing as opposed to
    post-closing notification process.

Concerning potential penalties or enforcement actions, the EO
grants Treasury the authority to “nullify, void, or otherwise
compel divestment of any prohibited transaction entered into after
the effective date” of the regulations. Treasury is further
considering penalizing with a civil penalty (1) material
misstatements in or omissions from filed information, (2) failure
to timely notify a transaction for which notification is required,
and (3) undertaking prohibited transactions. The ANPRM specifically
seeks comments regarding:

  • How to address situations where a party submits a post-closing
    notification, but Treasury determines that the transaction was
    actually prohibited; and
  • How to tailor, if at all, penalties and other enforcement
    mechanisms (such as ordering the divestment of a prohibited
    transaction) to the size, type, or sophistication of the U.S.
    person or the nature of the violation.

Conclusion: Submitting Comments and Preparing for

The EO and ANPRM create an outbound investment regulatory
program that will subject U.S. business and investors to new
compliance requirements. The Biden Administration is moving quickly
to get these rules enacted. Given that comments are due September
28, it is plausible that a final rule implementing the EO comes
into effect by the end of the year. With this in mind, the
businesses should immediately take steps to manage compliance with
the forthcoming requirements. This is particularly applicable to
U.S. businesses and their controlled subsidiaries operating in the
key sectors identified by the EO: (1) semiconductors and
microelectronics, (2) quantum information technologies, and (3)
artificial intelligence. Similar concerns apply to private equity
firms with portfolio operations in those key sectors, or pending
investments this space.

Although many transactions may only require notification, the
ANPRM states that the notification requirement is intended to
enhance the U.S. government’s visibility into certain
transactions that may threaten national security to inform future
policy objectives. Accordingly, transactions subject to such
notification requirements may be subject to additional restrictions
in the future.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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