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LawFuel: New U.S. Government Regulation on Restricted Outbound Investments

Insights LawFuel: New U.S. Government Regulation on Restricted Outbound Investments Chelsea Ellis · December 20, 2024

“New U.S. Government Regulation on Restricted Outbound Investments”  by Rimon attorney Chelsea Ellis.

Published by LawFuel and republished in full with consent of publisher

The U.S. Government recently issued final regulations on restricted outbound investments (a.k.a. “Reverse CFIUS”), 31 CFR Part 850, which will go into effect January 2, 2025.   On December 9, 2024, we attended the 2024 Outbound Investment Security Conference in Washington, D.C., where representatives from the U.S. Department of the Treasury, Department of Commerce, and State Department discussed the new CFIUS outbound investment regulations. The discussions focused on jurisdictional elements, covered transactions and excepted transactions,  technical thresholds, the impact on covered technologies, and international collaboration.

Below, we summarize the key takeaways and their implications for those engaged in outbound investments in “countries of concern” (i.e., currently, China, Hong Kong, and Macau), particularly in sensitive technology sectors.

  1. Jurisdictional Scope and Covered Transactions

Officials discussed the jurisdictional framework governing outbound investments, emphasizing the definitions of covered transactions and the obligations of U.S. investors, including:

  1. Controlled Foreign Entity: A “controlled foreign entity” refers to any non-U.S. organized entity where a U.S. person holds a controlling interest. This includes roles such as general partner, managing member, investment adviser (for pooled investment funds), or ownership of 50% or more of the voting interest or board voting power.
  1. Ownership Thresholds: A U.S. company is considered a covered foreign person if individuals or entities from a country of concern hold 50% or more of its ownership. Ownership determinations should be based on the most recent audited financial statements to ensure accuracy and transparency. When ownership includes both U.S. persons and foreign nationals, it is important to clarify the majority owner’s status. For example, U.S. persons, including green card holders, are not considered foreign owners under these rules, even if originally from a country of concern.

Indirect control – e.g., if a foreign national exerts significant influence through agreements, voting rights, or other mechanisms,  could trigger covered foreign person status even if the direct ownership threshold is not met. In cases where U.S. persons and foreign nationals jointly own a company, clear documentation of control rights, decision-making authority, and majority owner status is critical.

For companies with complex, multi-tiered ownership structures, the rules require tracing ownership through all layers to determine ultimate beneficial ownership.

For greenfield or brownfield investments, the ownership threshold determination applies to the post-transaction entity. Pre-existing ownership percentages do not shield companies if new investments alter the structure.

  1. Convertible and Contingent Interests: Investments involving convertible debt or contingent equity interests require consideration at both the acquisition and conversion stages. U.S. persons are expected to avoid conversion if a transaction becomes prohibited under the new rules. Convertible debt and contingent equity interests (e.g., stock options and convertible bonds) can shift the ownership structure of a company over time. If conversion or realization of these interests leads to foreign nationals obtaining 50% or more of the ownership, the company could retroactively fall under the classification of a covered foreign person.
  1. Exception for Maintenance: Transactions related to the maintenance of existing covered activities are not treated as covered transactions under the new rules. However, new covered activities would not fall under this exception. Specific exceptions exist for intercompany transactions between a U.S. parent and its controlled foreign entity. These exceptions include activities necessary to maintain existing operations, provided these activities were already conducted before January 2, 2025.
  1. Due Diligence Expectations for U.S. Investors: Investors must conduct “reasonable” due diligence to verify information provided by investment targets, focusing on:
  1. Ownership structures.
  2. The financial contributions of covered foreign persons to the target’s operations.
  3. Utilizing public and commercial resources to verify information from the target entity.
  4. Compliance requires proactive verification of ownership structures and the nature of the investment target’s activities to determine whether they fall within the scope of the regulations.
  1. Technical Thresholds

Officials addressed specific thresholds for prohibited and notifiable transactions involving sensitive technologies, i.e., semiconductors, AI, and quantum computing.

  1. Semiconductors:
  1. Prohibited Transactions: Advanced fabrication and packaging technologies, high-performance integrated circuits, and supercomputers due to military and surveillance applications.
  1. Notifiable Transactions: Investments in legacy semiconductor technologies that could indirectly support adversarial capabilities are notifiable. This can include older nodes or packaging technologies.
  1. Artificial Intelligence:
  1. Prohibited Transactions: AI systems designed exclusively for military, intelligence, or mass surveillance purposes. Computational thresholds (e.g., 10^25 floating-point operations for general AI training) also define covered activities.
  1. Notifiable Transactions: Lower thresholds apply to AI technologies intended for cybersecurity, controlled robotics, or penetration testing. Development activities involving customization or fine-tuning of off-the-shelf AI models for internal, non-commercial use may qualify for exemptions, provided they do not further prohibited end uses.
  1. Quantum Computing: Prohibited activities include developing quantum computers, critical components, or sensing platforms for military or intelligence applications.
  1. International Collaboration and Legislative Updates

Officials emphasized multilateral collaboration to address outbound investment risks.

  1. Engagement with Allies: The U.S. is working closely with G7 partners, the European Commission, and the United Kingdom to encourage the adoption of complementary outbound investment regimes. Efforts focus on preventing regulatory gaps and ensuring shared security objectives are implemented. Officials discussed potential exceptions for transactions involving countries or territories with substantially similar regulatory frameworks.
  1. Legislative Developments: Ongoing congressional initiatives will continue but are expected to complement, not delay, the effective date (January 2, 2025) of the outbound rules.  Additional guidance and FAQs will be released in the coming weeks, although no advisory opinions are currently expected.

The CFIUS Outbound Investment Conference emphasized the U.S. government’s goal to implement and enforce the new outbound investment rules without delay, i.e., compliance is expected on the effective date of January 2, 2025. Officials highlighted their intent to issue further guidance and examples for further clarification.  Stakeholders should expect a dynamic regulatory environment with continuous updates in the coming months.

This summary is provided for informational purposes only and is not intended to constitute legal advice nor does it create an attorney-client relationship with Rimon, P.C. or its affiliates.

Chelsea Ellis is an associate in Rimon’s New York office. Ms. Ellis’ practice focuses on international trade, trade enforcement matters, economic sanctions, export controls, CFIUS, internal corporate compliance, import regulations, customs, internal investigations, data privacy, financial technology, and other cross-border transactional and regulatory law. She has experience in federal and state regulatory compliance concerning securities, corporate, and intellectual property law. As legal counsel for many global corporations, she brings extensive experience to her clients. She provides practical and solution-driven advice on complex matters such as U.S. secondary sanctions and the extraterritorial implications of U.S. export control laws. Read more here