On October 28, 2024, the US Department of the Treasury issued a final rule (the “Rule”) to implement Executive Order 14105 (“EO”) establishing a new Outbound Investment Program ("OIP") to prohibit or require notification of certain outbound US investments to China (including Hong Kong and Macau) in several technology sectors relevant to military, intelligence, surveillance, or cyber-enabled capabilities. The Rule will go into effect January 2, 2025, and adopts much of the regulatory framework outlined in the proposed regulations issued earlier this year, which we previously described. The Rule applies broadly to US persons (regardless of location), and includes a “knowledge” standard requiring due diligence in connection with compliance. The OIP needs to be carefully considered as a factor potentially affecting investments and other transaction decisions relating to semiconductors and microelectronics, quantum computing, and artificial intelligence (“AI”) systems. Companies should work to develop compliance procedures to effectively manage obligations before the OIP takes effect in January.
We described the contours of the OIP, which largely track with the proposed regulations issued last summer, here. The following highlights key practical points for parties to consider as the OIP comes into effect.
- The OIP is relatively narrow in scope, but captures US persons broadly—including imposing requirements on non-US entities. US person is defined broadly under the Rule and can apply to a) US entities, b) foreign branches and subsidiaries of US entities, c) US citizens and US permanent residents wherever located, and d) individuals physically located in the United States. The first two elements have a clear nexus to US businesses and operations, but the latter two have wider application. For example, the OIP can impact foreign entities that employ US persons as well as those that have employees who may conduct business activities when physically located in the United States (e.g., during a business trip). The Rule also imposes specific extraterritorial requirements, including within its ambit that US persons needs to comply with OIP prohibition and notification requirements for transactions carried out by their foreign subsidiaries. Moreover, a foreign entity that employs a US individual in a management role is also captured as the Rule prohibits US persons from knowingly directing a transaction that would be prohibited if done by a US person. This means that US person management personnel (e.g., at an investment firm) would need to fully recuse themselves from being involved in the non-US company’s decisions relating to such a transaction.
- The OIP has significant implications for private equity, venture capital, and other fund-structure investments. The Rule has several provisions that are notable both for limited partner (“LP”) investors and fund managers. An investment as an LP is a covered transaction if the LP knows the fund might make a prohibited or notifiable transaction and the fund actually does so. Under the Rule, however, the LP’s investment in the fund can be exempt by a) keeping its aggregated investment in the fund capped at $2 million (a relatively low threshold), or b) by obtaining contractual assurances that its capital will not be used for transactions subject to the OIP. The net result is that LPs have a path for avoiding the OIP (though it puts some limits on the scope of their investment options), but this may significantly limit the ability of funds to raise capital to support investments relating to semiconductors and microelectronics, AI systems, and quantum computing with a nexus to China. Of course, such an outcome would be fully consistent with the stated goals of the OIP.
- Companies need to start developing OIP compliance programs now. Companies—both US and non-US—considering transactions in the relevant technology areas should develop OIP compliance programs and procedures before the rule takes effect on January 2, 2025. This will help ensure that companies understand how the Rule applies to them and do not run afoul of OIP requirements. This is particularly important since there is no review or approval “safe harbor” process under the OIP—US persons are simply required to comply with the requirements of the Rule. Given the expansive knowledge standard in the Rule, if there is ultimately a violation, implementing a compliance program and conducting appropriate due diligence can also help defend against the US Government asserting that a US person had reason to know of the violation. As the OIP is a new program, compliance policies may need to be refined as practical details and lessons learned become clearer in implementation, but companies should work to be prepared for OIP implementation come January.
- Violations of the OIP may be subject to civil and criminal penalties. OIP violations may be subject to both civil and criminal penalties, thereby further emphasizing the importance of careful compliance. Violations or attempted violations can incur a civil penalty of up to twice the amount of the violating transaction or $368,136 (subject to annual adjustment for inflation), whichever is greater. Willful violations or attempted violations may incur a criminal fine of up to $1,000,000 and, if the violating party is a natural person, potential imprisonment of up to 20 years. The Rule does allow for voluntary self-disclosures, but also notes a variety of circumstances in which disclosures will not be considered “voluntary.” For example, if a party discloses something the Treasury Department is already aware of—even if that is unknown to the disclosing party—that would not be considered a voluntary self-disclosure. Moreover, the Rule also compels certain notices—such as if a person learns it made a representation to the Treasury Department that included a material omission or inaccuracy. Accordingly, companies should prioritize compliance—including in light of the Rule’s broad knowledge standard—and be expedient in addressing violations if they arise.
- Submissions to the US Government under the OIP are generally confidential, but the Rule includes a number of exceptions that could result in disclosure. For example, the Rule provides for disclosure of non-public information relevant to judicial or administrative proceedings, provided to Congress, or shared with US or foreign governments where helpful to national security actions or analysis. The Rule also adds the ability for public disclosure if the Assistant Secretary of the Treasury for Investment Security (or higher-level officials within the Treasury Department) determine that disclosure is in the national interest. Though it remains to be seen how this will operate in practice, it does create the potential for disclosure of confidential information submitted to the US Government under the OIP. For example, it is possible that the Treasury Department could determine it is in the “national interest” to publish details of enforcement actions to help facilitate improved compliance with OIP requirements. Parties should be mindful of the confidentiality rules when considering transactions that would be subject to notification requirements under the OIP.
Grace Hochstatter (White & Case, Law Clerk, Washington, DC) contributed to the development of this publication.
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This article is prepared for the general information of interested persons. It is not, and does not attempt to be, comprehensive in nature. Due to the general nature of its content, it should not be regarded as legal advice.
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