20-minute listen
Timothy O’Toole discusses the Treasury Department’s Notice of Proposed Rulemaking regarding a 2023 Executive Order focused on regulating certain outbound U.S. investments that could pose a national security threat. This would be known as the Outbound Investment Security Program.
Tim is a member of the law firm Miller & Chevalier and is the Practice Lead of Economic Sanctions and Export Controls. Tim’s white-collar defense practice focuses on high-stakes cases involving economic sanctions, export controls, foreign investment, cybersecurity, and anti-money laundering laws. You can find a link here to the Trade Compliance Flash that Tim and his colleagues published on this topic and a link to his bio on the Miller & Chevalier website.
Background: The Executive Order and Proposed Rulemaking
The Treasury’s NPRM follows an executive order issued by President Biden in August 2023, aimed at scrutinizing outbound investments from the United States that could potentially impact national security.
The NPRM outlines specific technological focus areas, such as semiconductors, microelectronics, quantum information technologies, and artificial intelligence (A.I.), and identifies China as the primary country of concern. This new program, tentatively named the Outbound Investment Security Program, seeks to regulate U.S. investments in these critical areas involving foreign entities that pose a national security threat.
Public Response & Key Concerns
The public comment period for the NPRM recently concluded, and the response highlighted several key concerns. A major point of contention revolves around the extent of due diligence required to determine whether an investment involves the specified technologies. Some companies expressed the need for more explicit guidelines on assessing their investments, especially when dealing with complex ownership structures that may obscure the involvement of restricted technologies or countries.
Another critical point discussed is the distinction between notification and prohibition. Under the proposed rules, specific transactions, like those in technologies or semiconductor firms, would require notification to the U.S. government, allowing the government to monitor these investments without necessarily prohibiting them. However, some transactions deemed too risky would be outright prohibited.
Navigating the New Compliance Landscape
One of the significant challenges that companies might face under this new program is understanding when a transaction falls under the notification requirement versus when it is prohibited. Regulations hinge on whether a U.S. entity ‘knowingly’ makes an investment that could compromise national security. This introduces a layer of complexity, particularly in cases where the foreign entity’s involvement in restricted technologies is not immediately apparent.
Hence, thorough due diligence, including public records research and non-public information, is essential to ascertain the true nature of the investment. This might involve negotiating due diligence rights during mergers and acquisitions (M&A) processes, especially when the target company has ties to China or other countries of concern.
Potential Risks & Hidden Pitfalls
Despite rigorous due diligence efforts, hidden risks remain. One such risk is the potential for a U.S. investment in a seemingly benign foreign entity to be subject to the new rules if the entity has indirect Chinese ownership or involvement in restricted technologies.
Even investments within the United States could trigger the regulations if they involve a Chinese investor, highlighting the program’s broad scope.
Implications for U.S. Technology Development
The proposed rules could have far-reaching implications for developing critical technologies in the U.S. and abroad.
By scrutinizing and potentially restricting U.S. investments in foreign entities involved in semiconductors, A.I., and other strategic areas, the government aims to keep American innovation and funding within its borders or among allied nations. This shift may drive U.S. companies to prioritize domestic development or seek partnerships with trusted foreign allies, aligning with the broader goal of safeguarding national security.
Conclusion
This RiskWatch episode underscores the importance of due diligence, strategic planning, and a clear understanding of the evolving rules to ensure compliance and protect national security and business interests.
The Treasury’s proposed Outbound Investment Security Program represents a significant step in addressing the national security concerns associated with U.S. investments. As the program moves closer to implementation, businesses involved in critical technologies must stay informed and prepared to navigate this new regulatory landscape.
For those interested in diving deeper into the topic, Timothy O’Toole and his colleagues at Miller & Chevalier have published a detailed trade compliance flash, and his bio is available on the Miller & Chevalier website.
And, for those interested in learning how Vcheck’s international due diligence supports the outbound investment process, contact us.
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