The U.S. Government has long made clear its desire to restrict certain outbound U.S. investments, but it was unclear whether a restriction would come through executive or legislative action. Last week, we received an answer — executive action. On August 9, 2023, President Biden issued Executive Order 14105 titled “Executive Order on Addressing United States Investments in Certain National Security Technologies and Products in Countries of Concern” (the “Order”).¹

The Order requires that the Department of the Treasury (“Treasury”) issue regulations that require any company undertaking certain transactions with foreign persons or entities to notify Treasury of such transactions, as well as issue regulations that prohibit certain transactions with particular foreign persons or entities. Specifically, the Order targets outbound investments to foreign persons or entities of any “country of concern,” where such investments involve “covered national security technologies and products.” “Covered national security technologies and products” are defined as advanced semiconductors and microelectronics, quantum computing, and artificial intelligence (“AI”) that are critical for the military, intelligence, surveillance, or cyber-enabled capabilities of a country of concern. The Order specifically lists the following as countries of concern:

• The People’s Republic of China
• The Special Administrative Region of Hong Kong
• The Special Administrative Region of Macau

Treasury wasted no time beginning its rulemaking process for the regulations implementing the Order. On August 14, 2023, Treasury published its advance notice of proposed rulemaking (the “ANPRM”) under the Order² (with an unpublished version having previously been available). In establishing a program under the Order, Treasury stated that it does not contemplate a case-by-case review of U.S. outbound investments, and that, instead, parties involved in a transaction will have the obligation to determine whether a transaction is prohibited, subject to notification, or permissible without notification.

Transactions to Be Covered Under the Outbound Investment Program

Under the ANPRM, Treasury anticipates considering any transaction that is prohibited or notifiable as a “covered transaction.” The potential definition for a covered transaction is a U.S. person or entity’s direct or indirect investment in, or that establishes, a foreign person or entity of a country of concern, where that foreign person or entity is involved with covered national security technologies and products. Such investments include (1) the acquisition of an equity interest or contingent equity interest; (2) the provision of debt financing convertible to an equity interest; (3) certain greenfield investments; and (4) the establishment of certain joint ventures. However, Treasury has also noted that it intends to implement exceptions for certain transactions, such as investments in publicly traded securities and exchange-traded funds.

For covered transactions, Treasury has proposed either the prohibition or required notification of such transactions based on the specific type of covered national security technology or product in question.

• Semiconductors and Microelectronics. Treasury is considering the prohibition of certain semiconductor and microelectronics transactions, limited to (i) specific technology, equipment, and capabilities that enable the design and production of advanced integrated circuits or enhance their performance; (ii) advanced integrated circuit design, fabrication, and packaging capabilities; and (iii) the installation or sale to third-party customers of certain supercomputers, which are enabled by advanced integrated circuits. The ANPRM outlines specific technical requirements as to which activities would fall under this prohibition. Treasury is considering requiring notification for transactions involving the design, fabrication, and packaging of other integrated circuits that do not fall under the specific requirements for the prohibited semiconductor and microelectronic transactions.
• Quantum Information Technologies. Treasury is considering the prohibition of transactions involving certain quantum information technologies, including (i) the production of quantum computers and components; (ii) the development of quantum sensors; and (iii) the development of quantum networking or quantum communication systems. At this time, Treasury has not provided information on a potential notification requirement for quantum information technologies, only the potential prohibition.
• AI Systems. Treasury is considering the prohibition of transactions involving certain AI systems for transactions involving development of software that incorporates an AI system and is designed to be exclusively used for military, government intelligence, or mass-surveillance end uses. For purposes of the outbound investment program, Treasury is considering defining AI systems as engineered or machine-based systems that can, for a given set of objectives, generate outputs such as predictions, recommendations, or decisions influencing real or virtual environments. These AI systems can be designed to operate with varying levels of autonomy. In addition to prohibiting transactions involving certain AI systems, Treasury is considering a notification requirement for other transactions related to the development of software that incorporates an AI system and is designed to be exclusively used for various purposes. Such purposes include cybersecurity applications, digital forensics tools, and penetration testing tools; the control of robotic systems; surreptitious listening devices that can intercept live conversations without the consent of the parties involved; non-cooperative location tracking (including international mobile subscriber identity (IMSI) catchers and automatic license plate readers); or facial recognition.

Notification Requirements When a Transaction Is Covered Under the Outbound Investment Program

Treasury is considering requiring U.S. persons or entities subject to a mandatory notification under the outbound investment program to notify the Treasury within 30 days following the closing of a covered transaction. The notification is expected to be made through an electronic filing portal, and Treasury is considering the following requirements for the notification to include:

• The identity of the person(s) engaged in the transaction, as well as their nationality or place of incorporation for entities;
• The name, location(s), business identifiers, key personnel and beneficial ownership of the parties engaged in the transaction;
• The date of the transaction;
• The nature of the transaction, which should include how it will be effectuated, the value of the transactions and a business rationale;
• A description of the basis for determining that the proposed transaction is a covered transaction which requires identifying the covered technologies;
• Additional transaction details, such as those regarding transaction documents and other related agreements or activities;
• Additional information about the transaction’s foreign person or entity;
• A description of the due diligence conducted regarding the transaction;
• Information about previous transactions between these parties, as well as planned or contemplated future investments; and
• Additional information about the U.S. person or entity, including the primary business activities and plans for growth.

What’s Next as Treasury Finalizes the Outbound Investment Program?

The ANPRM sets out a variety of specific questions (83, to be exact) for which Treasury is seeking public input, and any comments on the ANPRM must be submitted by September 28, 2023. After the ANPRM’s deadline for comments, the typical rulemaking process requires Treasury to publish a notice of proposed rulemaking (“NPRM”) that sets out a proposed rule. This NPRM process will allow further comments to be submitted, and Treasury will likely issue its final and effective regulations on the outbound investment program after considering those further NPRM comments.

Aside from considering involvement in the rulemaking process, U.S. persons and entities should be mindful when undertaking investments that may qualify as the type of transactions targeted by the Order, even if such investments close before the final regulations for the program are published. Although Treasury does not anticipate making the outbound investment program retroactive, Treasury may request information relating to transactions that were completed or agreed to in the period between the issuance of the Order on August 9, 2023, and the issuance of the final effective regulations.

Finally, although President Biden has taken executive action on outbound investment, other developments may impact the implementation of the program. For one, legislation on outbound investment remains pending in Congress. In particular, a proposed amendment to the National Defense Authorization Act for Fiscal Year 2023 would establish a different (although not completely dissimilar) outbound investment regime. The passage of such legislation could complicate the outbound investment program as currently envisioned by Treasury. The outbound investment program could also become entangled in protracted litigation. In today’s landscape, rarely does a presidential action go unchallenged, and a plaintiff may find a basis to challenge in court the executive authority asserted in establishing the outbound investment program. Although such challenges are less likely to be successful in the context of national security, they are not unheard of, and any such lawsuit should be closely monitored for its potential impact on the Order.

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¹ Exec. Order No. 14105, 88 Fed. Reg. 54,867 (Aug. 11, 2023), https://www.govinfo.gov/content/pkg/FR-2023-08-11/pdf/2023-17449.pdf.

² Provisions Pertaining to U.S. Investments in Certain National Security Technologies and Products in Countries of Concern, 88 Fed. Reg. 54,961 (Aug. 14, 2023), https://www.govinfo.gov/content/pkg/FR-2023-08-14/pdf/2023-17164.pdf.