Treasury Finalizes Scope of Outbound Investment Rules

The Treasury Department's new outbound investment rules will officially take effect Jan. 2, creating new prohibitions and notification requirements to limit certain U.S. business activities in China’s semiconductor, artificial intelligence and quantum sectors. The 297-page final rule, released in pre-publication form Oct. 28, adopts many of Treasury’s proposed regulations issued in June (see 2406210034) with a host of notable tweaks and clarifications, including a more detailed description for the rules’ AI investment threshold and insight into the agency’s due diligence expectations for U.S. companies.

The rule was released about 14 months after President Joe Biden signed an executive order directing Treasury to design a new outbound investment regime, which the administration said would complement U.S. inbound investment screening efforts and export controls used to protect sensitive American-made technologies from being obtained by China and others (see 2308090066). The rule continues to targets investments in mainland China, Hong Kong and Macau, along with the three categories of technologies that were outlined in the proposed rule, despite efforts from some in Congress to add other countries and industries (see 2403040084 and 2409230016).

Treasury chose to solely focus on semiconductors, AI and quantum because it believes those technologies are “core for the next generation of military, cybersecurity, surveillance and intelligence applications,” a senior administration official said during an Oct. 28 call with reporters. The official called the rule “targeted and narrowly scoped,” adding that it sets “clear thresholds and definitions” and includes a “detailed explanatory discussion regarding its intent and application to assist investors and other stakeholders to help them navigate this new program.”

The final rule adopts similar but more detailed portions of the definitions for the three covered technology categories outlined in the proposed rule, including for covered AI items. Treasury said it will prohibit AI-related investment transactions involving the “development of any AI system that is trained using a quantity of computing power greater than 10ˆ25 computational operations, or trained using primarily biological sequence data and a quantity of computing power greater than 10ˆ24 computational operations.”

The rule's notification requirements would capture “any AI system not otherwise covered by the prohibited transaction definition, where such AI system is: designed or intended to be used for certain end uses or applications; or trained using a quantity of computing power greater than 10ˆ23 computational operations,” Treasury said.

The rule also addresses how it expects companies and investors to comply with the regulations after trade groups, law firms and technology companies earlier this year called for more clarity surrounding the due-diligence steps that will be required of deal-makers (see 2310050035).

Although the agency said “information required to assess whether a transaction is a covered transaction” may sometimes “be difficult to ascertain,” it also said U.S. companies should be able to comply with the new rules “through a reasonable and diligent transactional due diligence and compliance process.” That may include first securing “representations or warranties” from a counterparty that a deal isn’t a covered transaction.

“The Treasury Department expects a U.S. person to make a reasonable effort, taking into account the context of a given transaction and any warning signs, among other factors,” the agency said.

Firms may be held liable if they ignore the regulations when they have knowledge their investment is covered by the rules, Treasury said. That knowledge includes “actual knowledge,” a “high probability of a fact or circumstance’s existence or future occurrence,” or if the U.S. person “could have possessed such information through a reasonable and diligent inquiry,” it said.

“A person who fails to undertake a reasonable and diligent inquiry prior to a transaction may be responsible for knowledge it could have acquired,” Treasury said.

The rule lists several factors Treasury will consider when determining whether a U.S. person or company did enough diligence, and it adds new language to clarify that it will take into account situations in which a U.S. company faces “obstacles to conducting due diligence.”

But the agency also declined to include a “safe harbor provision” in the regulations or “prescribe specific due diligence obligations” that companies must follow.

Along with the more detailed scope for covered AI transactions, Treasury said there are several “key differences” between the proposed rules and the final version, including to the scope of the prohibition on U.S. people or companies “knowingly directing” certain transactions; the scope of limited partner investments that are covered transactions and those that are exempt; and the agency’s definition of “covered foreign person with respect to persons holding an interest in a person of a country of concern.” The agency also said it revised how it will treat certain debt and contingent equity transactions, derivative transactions, exceptions to transactions between a U.S. person and its controlled foreign entity; and more.

Several trade groups had urged the Biden administration not to finalize the new prohibitions without similar buy-in from allies, including from the EU. The European Commission is studying whether to mandate new investment restrictions (see 2407250013), and a senior administration official said the U.S. has had productive discussions with the bloc along with the non-EU members of the Group of 7 nations, including Canada, Japan and the U.K.

“It's a conversation that we're frequently having with our key partners and allies,” the official said.

The agency said it plans to issue more guidance, including information about how to file an electronic notification about a transaction to the agency, before the rule takes effect next year. It also plans to publish more information on the “factors” it will consider for determining whether a foreign country is “adequately” addressing outbound investment issues related to national security, which could qualify certain transactions involving that country for an exemption under the rules.