All Eyes on China: Upcoming Restrictions on Outbound Investment

The outbound investment review mechanism, which is akin to a “reverse” Committee on Foreign Investment in the United States (CFIUS) framework, is widely expected to require a notification to the U.S. government by U.S. persons in connection with certain outbound investments from the United States to countries of concern. It is possible that in addition to a notification requirement, certain transactions may be subject to review and government approval, with a smaller subset of investments in certain named companies being prohibited. While both the Biden administration and Congress appear to be in agreement about the need for review for investments in certain emerging technology sectors that involve “countries of concern,” the form of the review mechanism remains hotly contested. At this point in time, it is possible that regulations may be established by an executive order (EO), legislation or a form of hybrid approach.

Potential Executive Order

Based on public reporting and statements from U.S. government officials, the Biden Administration continues to consider issuing an EO on outbound investment, and such an EO could be published in the near term. U.S. Department of Treasury Secretary Janet Yellen recently stated that such a mechanism would be “narrowly scoped” and seek to strengthen U.S. national security, rather than restrict trade.

While no final decision has been announced, it has been widely reported that the EO would target investments in China’s advanced semiconductor, quantum computing and artificial intelligence (AI) sectors and prohibit U.S. persons from engaging in certain investments in these sectors. It has further been reported that the EO would likely not take effect until 2024 and would only apply to new investments.

There have been very few official statements detailing the specific scope of a potential EO. For example, it is unclear if the EO would only require notification regarding certain types of investment, or if it will cast a wider net, establishing a mandatory review of certain investments or perhaps outright prohibition in certain sectors. Unlike CFIUS, which underwent recent changes through the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA), an outbound investment system would be established through an entirely new legal mechanism, rather than building upon a pre-existing process.

The Biden administration’s potential EO will likely be informed by any legislation which may be passed in the coming months (discussed further below).

Pending Legislation

At this time, several bills are pending in Congress that could impact U.S. investment in China.

On July 13, Senators Bob Casey (D-PA) and John Cornyn (R-TX) introduced the Outbound Investment Transparency Act (OITA) as an amendment to the National Defense Authorization Act for Fiscal Year 2024 (NDAA). This bill is built on the foundation of the National Critical Capabilities Defense Act of 2021 (2021 NCCDA). The OITA is still pending and is the source of some contention in Congress.

If passed and signed into law, the OITA would require a “U.S. person” that plans to engage in a covered investment to submit a notification no later than 14 days before the anticipated completion date of the transaction to the Secretary of Treasury, who will then disseminate the notification to the relevant lead agency for review. Note that a U.S. person is defined in the bill as:

• An individual who is a citizen or national of the United States or an alien lawfully admitted for permanent residence in the United States; and
• Any corporation, partnership, or other entity organized under the laws of the United States or the laws of any jurisdiction within the United States.

As currently drafted, the OITA would require notification by U.S. persons to the U.S. government for “covered” economic activities in “countries of concern.” It defines a “covered activity” as certain activities engaged in by a U.S. person in a “national critical capabilities” sector. Relevant activities include the following:

• An acquisition of an equity interest or contingent equity interest, or monetary capital contribution, in a covered foreign entity, directly or indirectly, by contractual commitment or otherwise, with the goal of generating income or gain;
• An arrangement for an interest in the short- or long-term debt obligations of a covered foreign entity that includes government rights that are characteristic of an equity investment, management or other important rights;
• The establishment of a wholly owned subsidiary in a country of concern, such as a greenfield investment, for the purpose of production, design, testing, manufacturing, fabrication or development related to one or more national critical capabilities sectors;
• The establishment of a joint venture in a country of concern or with a covered foreign entity for the purpose of production, design, testing, manufacturing, fabrication or research involving one or more national critical capabilities sectors, or other contractual or other commitments involving a covered foreign entity to jointly research and develop new innovation, including through the transfer of capital or intellectual property or other business proprietary information; and
• The acquisition by a United States person of a foreign covered entity.

The amendment also defines a “covered foreign entity” as any entity that is incorporated in, has a principal place of business in, or is organized under the laws of a country of concern.

Sectors of “national critical capabilities” include the following:

• Semiconductor manufacturing and advanced packaging,
• Microelectronics,
• Large-capacity batteries with dual-use applications,
• Artificial intelligence,
• Quantum information science and technology,
• Hypersonics,
• Satellite-based communications, and
• Networked laser-scanning systems with dual-use applications.

“Critical capabilities” may also include any other technology that if produced in the United States would be included on the Commerce Control List under the Export Administration Regulations and subject to a license requirement if theoretically exporting that technology to a country of concern.

If passed, the OITA would require the administration to promulgate regulations to implement the bill and will take effect 90 days after the regulations are put into place. Failure to comply with the regulations may result in a civil penalty of up to $250,000 or twice the amount of the base covered activity. At this point, it is unclear if the proposed amendment would act as an alternative to the anticipated EO or if it could supplement it. While Senate Majority Leader Chuck Schumer has expressed support for the OITA, others have argued that it would establish a clunky and inefficient mechanism.

Separately, in May 2023 Representatives Rosa DeLauro (D-CT), Bill Pascrell (D-NJ), and Brian Fitzpatrick (R-PA) introduced an updated National Critical Capabilities Defense Act of 2023 (2023 NCCDA), revising the 2021 NCCDA language to reflect new sector priorities and additional review authorities in the Act, among other changes. The 2023 NCCDA, which maintains the same foundational language as the Casey-Cornyn amendment, would create a national security review process for outbound transactions by U.S. companies investing overseas. In key part, the bill would:

• Create a committee to oversee outbound investment, the National Critical Capabilities Committee (NCCC), which would be composed of representatives from a broad range of federal agencies, led by the Executive Office of the President;
• Include a process similar to CFIUS: the NCCC would have the ability to review and recommend to the President mitigating or halting outbound investments if it is determined that they pose a risk to national security; and
• Cover the following sectors: semiconductors, AI, quantum computing, large capacity batteries, critical minerals and materials, active pharmaceutical ingredients (API) and automobile manufacturing.

At time of publication, the 2023 NCCDA remains pending before the House Committee on Ways and Means.

Finally, Representative Andy Barr (R-KY) is reportedly drafting legislation that would prohibit investment in specific Chinese companies. Based on public reporting, it would require federal agencies that maintain restrictive lists, such as the Department of Commerce and Department of Treasury, to prioritize sanctions on certain Chinese sectors. The bill is the least restrictive of the three and would mirror existing sanctions programs.

Recent Action by the China Select Committee

As creation of an outbound investment review mechanism approaches, the House Select Committee on China has grown increasingly active. On July 13, 2023, the Select Committee held a hearing on the risks of doing business in China. More recently, the Committee has sent letters to a number of companies seeking information on investments in China in order to inform its legislative efforts.

Congress remains increasingly invested in evaluating the relationship between the United States and China, and we expect further investigations in a number of areas in addition to outbound investment regulation.