Outbound Investment EO ‘More of a Sanctions Program,' Former Official Says

The Biden administration’s road to implement regulations for its outbound investment executive order will be “incredibly complex,” particularly if agencies disagree on how narrow or broad to scope the restrictions,Thomas Feddo, a former Treasury Department official, said during a webinar this week. Lawyers on the webinar said investors are “very concerned” about the rules having a potential “chilling” effect on a broad range of investments, especially if the government fails to adequately define a range of key terms in the executive order.

Feddo, who previously led the Committee on Foreign Investment in the U.S. as Treasury’s assistant secretary for investment security, called the release of the order earlier this month “just the beginning of a long runway.” The restrictions will eventually lead to new prohibitions or notification requirements for certain U.S. capital investments in China’s semiconductor, quantum and artificial intelligence industries, but Treasury must first review public comments and write regulations, which will likely take months (see 2308090066).

Feddo, who helped oversee the implementation of the Foreign Investment Risk Review Modernization Act (see 2002110042), said he benefited from a statutory deadline as part of the FIRRMA legislation, which helped “drive interagency” discussions. With no hard deadline for the outbound investment rules, the administration should set up a “clear calendar” and a “ton of meetings” to make sure its working through the regulations efficiently, Feddo said, especially because the Treasury’s advance notice of proposed rulemaking, released alongside the executive order, asked so many questions about how the agency should implement the prohibitions.

“It seems to me it's going to be incredibly complex,” Feddo, now a senior adviser with Patomak Global Partners, said during the webinar, hosted by Squire Patton. “The work had to start yesterday,” he added, noting that clearly a “lot of work and homework has been done” already. He said the “toughest thing will be getting interagency consensus,” especially between national security-related departments and “those that might be a little more focused on keeping this as narrow as possible."

Feddo noted that the regime is not mirrored after CFIUS, which reviews investments for national security risks on a case-by-case basis and may impose mitigation measures to allow a deal to proceed. “I really think this is more of a sanctions program than a screening program,” he said. “It's really not screening at all.”

He expects Treasury officials working on the outbound investment rules to “draw” from the Office of Foreign Assets Control “and all of its experience administering those regulations and sanctions programs.” And even though it will operate differently than CFIUS, he expects there to be some collaboration between the two regimes.

“That will, I think, create a great deal of efficiency and a knowledge base” that will “hopefully lend a great deal of clarity to these new rules,” Feddo said. “Sharing information -- that's certainly something that I expect will happen and U.S. companies will have to think about.”

George Grammas, a Squire Patton lawyer, said industry fears the final regulations won’t be clear enough to define which technologies are impacted and what activities are prohibited. “We're very concerned about the regulations providing objective criteria for what are prohibited transactions,” he said. “Without objective clear standards on technology and uncovered transactions, there could be a chilling effect on transactions that otherwise should proceed.”

Although the order names three technology sectors, Treasury must decide how it will define the technologies subject to each. “If we say it's quantum computing, advanced integrated circuits and AI, what does that really mean?” Grammas said. “If that's not clear, then companies are likely to not proceed with transactions that perhaps they could have proceeded with, or it at least will create a delay in the process as companies try to understand with the government about whether they can proceed or not proceed with the transaction.”

The agency must also be clear about the types of transactions that will be captured, Grammas said, including for investments involving a non-U.S. buyer of a non-U.S. target. "The breadth of this is extensive,” he said. “It has to be well defined or it's going to capture many things that perhaps aren't intended to be captured.”