Scrutiny over investment security continues to grow, with an accelerated policy and regulatory debate occurring in the United States regarding the imposition of novel outbound investment notification and review requirements. This debate follows on the jurisdictional expansion of the Committee on Foreign Investment in the United States (CFIUS) with the passage of the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA), heightened scrutiny more broadly regarding foreign investment in sensitive technologies, and the broader perceived threats from China in the economic, financial, and technical domains. The formulation of outbound investment security rules is now crystallizing with the likely issuance of an Executive Order (EO) that introduces an outbound investment regime in the United States.

Key Conclusions

• Public reports and recent statements from senior Biden Administration (the Administration) officials suggest that the Administration is nearing completion of an EO related to outbound investment that may restrict U.S. investments in China, including advanced dual-use technologies such as semiconductors, artificial intelligence, decryption, and quantum computing.
• As described in its 2022 National Security Strategy, “the Administration is considering the establishment of a program to address national security concerns arising from outbound investments from the United States into sensitive technologies that could enhance the technological capabilities of countries of concern in ways that threaten U.S. national security.”[1] This approach was supported in recent Department of Commerce (Commerce) and Department of the Treasury (Treasury) reports submitted to the Congress, as well as in the President’s fiscal 2024 budget request.[2]
• It is likely that the anticipated EO will include, at a minimum, a requirement of notification to the U.S. government of an investment in certain but not yet specified technology sectors in China—and a requirement for continued tracking of that investment.
• The anticipated EO represents a significant expansion of government oversight authority. Investing parties should expect increased regulatory enforcement in the areas of export controls, economic sanctions, and especially regarding U.S. investments in China.
• Investing parties should ensure that due diligence regarding current operations and potential future investments involving sensitive technologies include thorough analysis to anticipate risks and assess potential mitigation terms or other means to identify and address U.S. national security concerns.
• The timing of the anticipated EO remains uncertain. For several months, public reporting has consistently anticipated a decision to be in the immediate future only to be further delayed. Some recent reports indicate the Administration may issue the EO as early as April or May of 2023.[3]

Notification and Focused Approach to Outbound Investment Reviews Likely

Expectations differ on what the EO might ultimately require. The Administration’s recent reports to Congress state that the program would be implemented and administered by Treasury, Commerce, and “other Federal departments and agencies, and focus on investments that could result in the advancement of military and dual-use technologies by countries of concern. The investments that would be subject to the program are of a nature that they are not presently captured by export controls, sanctions, or other related authorities.”[4]

While the reports to Congress did not identify the specific technology sectors considered at risk, they do state that the Administration is considering restrictions or notice requirements for “certain entities involved in a sub-set of certain key advanced technologies that are critical to U.S. national security. Action may include prohibiting certain investments and/or collecting information about other investments to inform potential future action.”[5]

Additionally, the President’s budget for fiscal year 2024 includes $5 million for Commerce to assist Treasury in further scoping an outbound investment review program.[6] As noted in Commerce’s budget proposal fact sheet, the Administration is “considering the establishment of a program to address national security risks associated with outbound investments, which would prevent U.S. capital and expertise from financing advances in critical sectors that undermine U.S. national security while not placing an undue burden on U.S. investors and businesses.”[7]

In recent remarks, Secretary of Commerce Gina Raimondo explained that it was not clear when the Administration will finalize any outbound investment restrictions. She stated that implementation would be in “months not years for sure,” and added that a pilot project is likely prior to implementing final regulations. She added, “It makes sense to walk before you run because getting it wrong has consequences we want to avoid.” [8]

 Congressional Efforts to Limit Outbound Investments

Since 2018, Congress has worked to restrict U.S. exports and investments in certain high-technology areas, especially those headed to China.[9] Among several proposed bills, some legislation sought to impose restrictions on certain outbound investments, but the sponsors ultimately dropped those provisions amid concerns that such restrictions would generate uncertainty in the investment and business communities, harm U.S. competitiveness abroad, and needlessly restrict capital flows and foreign investments.

The legislation will likely be reintroduced in the current Congress. Objections however, remain, and they suggest at least one reason behind both the Administration’s prolonged considerations of these issues and the continued anxiousness in certain communities over the anticipated EO.[10] These objections also suggest that whatever regulations the Administration drafts to implement the EO will likely face vigorous debate and rigorous commentary.

Considerations for the Private Sector: Investment Due Diligence Should Include U.S. National Security Considerations

Public reports regarding the anticipated EO reflect ongoing and intensifying concerns about strategically important technologies, particularly those developed or advanced by U.S. investments in China. Investing parties should expect more scrutiny concerning such endeavors, their customers, counterparties, supply chain vulnerabilities, and the threats that each of these may pose to U.S. national security.

The intersection of national security and economic development is increasingly complex and will continue to dominate issues related to investments into and out of the United States. Investing parties should consider how the Administration thinks about regulatory compliance and enforcement in general and policies related to China in particular. The Administration’s approach to such matters will likely be repeated regarding outbound investment related issues.

In anticipation of new regulations to implement the expected EO, investors and companies with facilities or joint ventures in China should reevaluate both their current operations in sectors that could potentially affect U.S. national security interests and their future investment decisions. Some companies are already consulting independent national security experts to help them vet new China-technology-related investments and understand how the many nuanced facets of the larger U.S.-China relationship could affect their commitments in China.[11] Other companies have already accelerated plans to relocate production facilities and their supply chains outside of China.[12]

Ultimately, whether the Administration issues the EO, Congress re-initiates legislative action, or both, investing parties should prepare for enhanced regulatory oversight, new notice requirements, investment restrictions, and documentation requirements that will affect the timing, focus, and manner in which investments outside the United States can be made. Given the Administration’s approach to the other national security-related restrictions noted above, it is likely that the EO will have an expansive reach with carveouts for certain types of outbound investments. Investing parties seeking to proactively screen their investments and review their strategies should seek guidance from counsel experienced in national security matters.

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[1] See The National Security Strategy of the United States, Oct 12, 2022, https://nssarchive.us/national-security-strategy-2022/. The NSS further notes that while Russia is diminishing in strength, China has become the only competitor to the U.S. with both the expressed intent to expand its role in international affairs, and also the economic, military, diplomatic, and technological means to do so. Speaking at an event immediately following the release of the NSS, President Biden’s National Security Advisor, stated: “Our strategy proceeds from the premise that two strategic challenges—geopolitical competition and shared transnational threats—are intertwined.” Remarks by National Security Advisor Jake Sullivan on the Biden-Harris Administration’s National Security Strategy, The White House, October 12, 2022, https://www.whitehouse.gov/briefing-room/speeches-remarks/2022/10/13/remarks-by-national-security-advisor-jake-sullivan-on-the-biden-harris-administrations-national-security-strategy/.

[2] Department of Commerce, International Trade Administration’s “Outbound Investment Initiative” Report to Congress, https://subscriber.politicopro.com/f/?id=00000186-b8fb-d9f3-abef-bfffb67e0000; The Department of the Treasury Report to Congress: “Proposed Program to Address National Security Threats Emanating from United States Outbound Investment,” https://subscriber.politicopro.com/f/?id=00000186-b8fa-d147-a7f7-fefac9010000; and the President’s Budget for Fiscal Year 2024, www.omb.gov/budget.

[3] Lim, D., McBride, S., and Leonard, J., “Private Equity Slows China Investments as Biden Prepares Curbs,” Bloomberg, March 6, 2023, https://www.msn.com/en-us/money/other/private-equity-slows-china-investments-as-biden-prepares-curbs/ar-AA18imGD.

[4] Department of Commerce and Department of the Treasury reports to Congress, Op.Cit.

[5] Lim, D., McBride, S., and Leonard, J., “Private Equity Slows China Investments as Biden Prepares Curbs,” Op.Cit.

[6] President Biden’s Fiscal Year 2024 Budget Would Bolster Key Commerce Department Initiatives, U.S. Department of Commerce Press Release, March 9, 2023, https://www.commerce.gov/news/press-releases/2023/03/president-bidens-fiscal-year-2024-budget-would-bolster-key-commerce.

[7] Id.

[8] Shepardson, D., “U.S. Outbound Investment Should Not be Overly Broad,” Reuters, March 2, 2023, https://www.reuters.com/world/us/us-outbound-investment-measure-should-not-be-overly-broad-biden-official-says-2023-03-02/.

[9] See, e.g., Senators Casey (D-PA) and Cornyn (R-TX) reintroduced the National Critical Capabilities Defense Act (NCCDA) in 2021 as a part of the https://www.congress.gov/bill/117th-congress/house-bill/4346 (CHIPS Act). In August 2022, however, President Biden signed into law a version of the CHIPS Act that omitted the NCCDA provisions.

[10] Manak, I., “Outbound Investment Screening Would Be a Mistake,” Council on Foreign Relations, June 30, 2022, https://www.cfr.org/article/outbound-investment-screening-would-be-mistake; See also ITI letter to U.S. lawmakers expressing concern over legislation seeking to impose outbound investment restrictions and notification requirements, May 3, 2022, https://www.itic.org/news-events/news-releases/iti-cautions-new-outbound-investment-provisions-in-bipartisan-innovation-act-could-undermine-u-s-competitiveness.

[11] Viswanatha, A., Yang, J., and Jin, B., “Sequoia Turns to Outside National-Security Experts to Vet New China Tech Investments,” Wall Street Journal, February 24, 2023, https://www.wsj.com/articles/sequoia-pares-back-china-tech-investments-as-u-s-national-security-concerns-grow-c17348b5. See also Lim, D., McBride, S., and Leonard, J., “Private Equity Slows China Investments as Biden Prepares Curbs,” Op.Cit.

[12] Yang, J., and Tilley, A., “Apple Makes Plans to Move Production Out of China,” Wall Street Journal, December 22, 2022, https://www.wsj.com/articles/apple-china-factory-protests-foxconn-manufacturing-production-supply-chain-11670023099.