US Firms Fear Facing Outbound Investment Rules Long Before Competitors, Treasury Hears

Trade groups, lawyers, investment firms, technology companies and foreign governments suggested a range of changes to the Treasury Department’s proposed outbound investment rules (see 2406210034), echoing calls last year for more clarity surrounding the due-diligence steps that will be required of deal-makers and warning that the U.S. risks chilling a broad range of U.S. ventures in China (see 2310050035). Several commenters also urged the Biden administration not to finalize the new prohibitions without similar buy-in from allies, with at least one group suggesting the U.S. is further from coordinating the rules among trading partners than it has let on.

U.S. allies with footholds in the semiconductor industry supply chain, including the EU, “do not appear anywhere close” to creating their own outbound investment restrictions, the Semiconductor Industry Association said in comments released by Treasury last week. SIA said it recognizes the administration’s “well-meaning efforts to engage with U.S. allies and partners, and appreciate that such engagement is a complex and ongoing diplomatic process.”

But “the results of these efforts so far fall well short of multilateral alignment,” it said.

The EU is still studying whether to impose outbound investment prohibitions. A recent survey of European businesses showed that a majority are in favor of new measures to monitor EU outbound investments (see 2407250013), though the Biden administration is hoping to finalize actual prohibitions by the end of the year (see 2405080039).

SIA said Europe is still in an “exploratory phase,” noting that the bloc’s yearlong monitoring effort is expected to end in late 2025. After that, the EU plans to first address risks related to export controls and foreign direct investment screening mechanisms “before designing any new policy mechanism specific to outbound investment,” the association said.

Other U.S. trading partners are “even less further along” than the EU, SIA said. “SIA observes that references to outbound investment are notably absent from the joint statements of recent economic security dialogues with key allies, such as Japan and Korea, including at the Leaders level.”

Because of this, the group is expecting American companies, including advanced chip firms, to face outbound investment restrictions long before its competitors. “Even in the most optimistic scenario, U.S. companies will face restrictions for a significant period of time while companies headquartered in these allied countries will be largely unencumbered and free to pursue business transactions in countries of concern,” SIA said. “This will lead to further economic integration and commercial ties with countries of concern that will complicate those governments’ efforts to establish regimes similar to the” U.S. rules.

Other commenters asked Treasury to tweak the rules to make it easier for investors to work with U.S. allies while still meeting their compliance obligations. The International Law Section of the American Bar Association said the rule’s definition for “covered foreign person” should exclude citizens or permanent residents of allied countries, including members of the Global Export Controls Coalition, a group of countries that have imposed broad sanctions on Russia.

“Close collaboration with key allies is imperative for the U.S. to retain preeminence in industry,” the ABA said.

The U.S.-China Business Council described a host of “serious concerns” it has with the proposed rules, saying they could place unfair compliance burdens on companies’ ability to do business in China. It specifically said Treasury should provide “greater detail” about what kind of due diligence companies need to undertake to satisfy the rule’s knowledge standard, “such as by providing examples of red flags and examples of due diligence documentation.”

The council also said Treasury should create a clear definition for the term “relevant counterparty” in the context of an investment transaction; limit the definition of covered investments involving integrated circuits within notifiable transactions only to chips and chip equipment on the Commerce Control List; and clarify the technical scope of artificial intelligence systems within notifiable transactions to “avoid unintentionally including diverse, non-military end uses." Treasury also should create a way for companies to obtain an outbound investment license, the council said, which would authorize “otherwise prohibited transactions” if the company can demonstrate the deal won’t benefit a Chinese military end user.

The Information Technology Industry Council also said it’s “concerned with the breadth of the proposed rule,” saying it would force U.S. companies to undertake “challenging if not impossible” due diligence. It said Treasury should narrow and clarify a range of “provisions affecting U.S. persons, entities, and reporting thresholds to align the draft rules with stated national security objectives,” and the agency should include “practical examples in the final rule" to "provide clearer guidance on interpreting specific provisions, assessing investment risks, and ensuring compliance.”

Other commenters said the fact that Congress is also drafting outbound investment legislation is confusing some companies. One bill calls for prohibitions and notification requirements for U.S. outbound investments in certain technology sectors of several "countries of concern" -- China, North Korea and Iran (see 2403040084). That’s beyond the scope of Treasury's proposed rule, which targets American investments in the semiconductor, quantum and artificial intelligence industries of mainland China, Hong Kong and Macau.

The administration shouldn’t finalize its rules “until after the legislative process has run its course,” the American Investment Council said. It added that House Speaker Mike Johnson, R-La., hopes to pass a comprehensive China bill later this year (see 2407080046), “including additional legislation focused on outbound investment to China.”

“As a result, U.S. investors and U.S.-based asset managers face the real prospect that the [U.S. rules] if adopted, may impose obligations and burdens that are later superseded by legislation,” the council said. “Indeed, U.S. persons may be taking steps to ensure compliance with a program that may be significantly altered before or after the final regulations are issued, which presents an undue burden and unnecessary costs.”

Rep. Patrick McHenry of North Carolina, the top Republican on the House Financial Services Committee, said Treasury should “change course” and rethink its rulemaking, again arguing that a list-based sanctions approach would be more effective than broad, sectoral prohibitions (see 2309130055).

He also criticized the rule’s proposed “knowledge standard,” which pulls from the Export Administration Regulations. Under that standard, companies could face penalties if they follow through with a transaction when they know there's a "high probability" it will violate the EAR.

“Adopting a knowledge standard from the Export Administration Regulations underscores why the [rule] is misguided and ineffective,” he said. “Asking investors to meet these standards is unrealistic when Treasury itself reports, on an annual basis, that it lacks visibility into basic elements of Chinese economic governance.”

Treasury “can neither specify a measure defining ‘high probability,’ nor can it assess how an investor should update probabilities based on changing information in China,” McHenry said. “At a time when the Chinese government is making investor due diligence more difficult, the NPRM would also threaten Americans with prison time for failing to obtain information that [China] prevents them from having.” He called this an “appalling misuse” of the International Emergency Economic Powers Act.

The China Council for International Investment Promotion also gave its input, saying the rule will lead to “discriminatory treatment against China and suppression of the normal development of China’s industries.” Among several suggestions, the council asked Treasury to change the definitions of the proposed technologies that would be subject to the restrictions, calling the definitions “so obscure that it could affect companies across different industrial chains, impacting an uncontrollable scope of businesses.”

It also asked Treasury to expand the deadline by which investors would have to file certain investment notifications with the agency. The rule proposes to require investors to file a notification within 30 calendar days "following the earliest date of the pooled fund's investment in a covered foreign person," but the council said that should instead be 90 or 180 days.

The current “schedule is too tight for investors,” it said, and a longer timeline will lessen their compliance “burden.”