Long-Awaited Executive Order on Outbound Investment Issued: Regulatory Comment Process Commences in Advance of Implementation of Any New Rules

On August 9, 2023, President Biden issued an Executive Order on Addressing United States Investments in Certain National Security Technologies and Products in Countries of Concern. The new Executive Order (EO) is the culmination of more than a year of deliberation by the Biden Administration regarding outbound investment provisions and kicks off a 45-day comment process to develop a new regulatory mechanism for reviewing outbound investments in foreign countries of concern. This regulatory process and the criteria under consideration are described in the Department of the Treasury’s Advance Notice of Proposed Rulemaking (ANPRM), the key aspects of which are summarized below.

Importantly, the ANPRM does not itself implement the EO and is not draft regulatory text. The ANPRM will be followed by draft regulations after Treasury receives and reviews comments. The administration did not lay out a specific timeline for the implementation of the outbound investment regime.

Notification and Prohibition Requirements
The EO directs the Department of Treasury, in consultation with other agencies such as the Department of Commerce, to establish and implement a new national security program aimed at monitoring outbound investments.

The new national security program will:

1. Require U.S. persons to notify Treasury of certain transactions involving covered foreign persons (“notifiable transactions”), and
2. Prohibit U.S. persons from undertaking certain other transaction involving covered foreign persons (“prohibited transactions”).

The EO broadly references “covered national security technologies and products,” which are defined to include technologies and products in the (1) semiconductors and microelectronics, (2) quantum information technologies, and (3) artificial intelligence sectors that are critical to China’s military, intelligence, surveillance or cyber-enabled capabilities.

The ANPRM provides additional details on the sub-sets of technologies currently contemplated for future regulation. The chart below summarizes the potential sectors the Treasury Department is contemplating covering as prohibited or notifiable transactions.

(click to enlarge)

Treasury does not anticipate that the program will involve a “case-by-case” review of U.S. outbound investments (as is the case with inbound investment as reviewed by the Committee on Foreign Investment in the United States).

Key Defined Terms
The EO offers the following key definitions:

• “Covered foreign person” means a person of a “country of concern” who or that is engaged in activities involving one or more covered national security technologies or products.
  • Based on the ANPRM, Treasury is considering elaborating upon this definition, which may include companies outside of a “country of concern,” where more than 50 percent of that company’s or its subsidiaries’ consolidated revenue, net income, capital expenditure or operating expenses is derived from a “country of concern.”
• “Covered transaction.” This term is not defined in the EO. Pursuant to the ANPRM, Treasury is considering using a single term, “covered transaction,” that would apply to the definition of both prohibited and notifiable transactions. Treasury is considering defining the term “covered transaction” to mean a U.S. person’s direct or indirect:

(1) acquisition of an equity interest or contingent equity interest in a covered foreign person;
(2) provision of debt financing to a covered foreign person where such debt financing is convertible to an equity interest;
(3) greenfield investment that could result in the establishment of a covered foreign person; or
(4) establishment of a joint venture, wherever located, that is formed with a covered foreign person or could result in the establishment of a covered foreign person.

• “Countries of concern” are identified in the Annex to the EO. At this time, these include China, Hong Kong and Macau.
• “U.S. persons” are defined 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. The regulations apply to U.S. persons wherever they are located.
• While not directly defined to include foreign subsidiaries of U.S. companies, the EO states that the Treasury Department may require U.S. persons to:
  • Provide notification to of any transaction by a foreign entity controlled by such United States person that would be a notifiable transaction if engaged in by a United States person; and
  • Take all reasonable steps to prohibit and prevent any transaction by a foreign entity controlled by such United States person that would be a prohibited transaction if engaged in by a United States person.

The EO also provides the Treasury Department with authority to prohibit U.S. persons from “knowingly directing” transactions that would be prohibited if engaged in by a U.S. person. Pursuant to the ANPRM, Treasury is considering defining “directing” to mean that a U.S. person orders, decides, approves or otherwise causes to be performed a transaction that would be prohibited under these regulations if engaged in by a U.S. person. This definition could capture U.S. persons serving as general partners of a foreign fund, as well as U.S. persons serving in senior level roles that are directing transactions. The Treasury Department is contemplating excluding from this prohibition certain identified conduct which is attenuated from national security, such as the provision of secondary, wraparound, or intermediary services.

While the EO does not have retroactive effect, the Treasury Department may, after the effective date of the regulations, request information about transactions by United States persons that were completed or agreed to after the date of the issuance of the EO to “better inform the development and implementation of the program.”

What’s Next?
The EO is the first step in establishing what is likely to be a more comprehensive outbound investment mechanism. Notably, it comes alongside pending legislation on outbound investment that has been introduced in Congress and will likely influence efforts by Congress to create a similar mechanism. Our team recently explored such legislation here.

Given the potential issues and impact that could be presented by new rules on Outbound Investment, Treasury is soliciting comments by September 28, 2023, to inform drafting of a proposed regulation.