The Outbound Investment Net Widens: Treasury’s COINS Act Proposal Raises the Stakes for Investors

Overview

The OISP has been in effect since January 2, 2025, prohibiting or requiring notification of certain U.S. person investments in China-linked semiconductor, quantum, and AI businesses. Treasury reports receiving approximately 100 notifications since then. Congress subsequently codified and expanded the program through the COINS Act, enacted on December 18, 2025, as part of the Fiscal Year 2026 National Defense Authorization Act. We discussed that legislation in our prior OnPoint, U.S. Outbound Investment Goes Hypersonic: Congress Codifies and Expands the Outbound Regime.

The Proposed Rule reflects the America First Investment Policy, which directed consideration of outbound restrictions in additional sectors, including biotechnology and hypersonics.

The Proposed Rule retains many definitions and concepts from 31 C.F.R. Part 850 while substantially expanding technology coverage. It would not apply retroactively; Part 850 would continue to govern activities from January 2, 2025 until the final rule's effective date, which Treasury has not yet set.

How the OISP Works

In its current form, the OISP applies to "covered transactions" by "U.S. persons," defined to include U.S. citizens and lawful permanent residents anywhere in the world; entities organized under U.S. law and their foreign branches; and any person in the United States. Whether an investment is covered depends on the technology activities involved and the foreign person's ties to a "country of concern" (currently defined to include China, Macau, and Hong Kong), including through its organization, operations, ownership, or control.

Depending on the technology, a covered investment is prohibited or notifiable. A notifiable transaction may proceed, but the U.S. person must file a notification with Treasury after closing. Before investing, the investor must determine whether the transaction is prohibited, notifiable, excepted, or outside the rules.

Key Changes for the Investment Community

1. "Knowingly Directing" Reaches Notifiable Transactions

The OISP also reaches U.S. persons who "knowingly direct" investments on behalf of non-U.S. persons, even if they do not themselves invest. Under current rules, U.S. persons may not use their decision-making authority to direct, order, decide upon, or approve a transaction by the non-U.S. person that would be prohibited if undertaken by a U.S. person. The Proposed Rule would extend this "knowingly directing" concept to notifiable transactions, requiring U.S. portfolio managers, investment committee members, and other investment decisionmakers at non-U.S. funds and companies to assess notification obligations as well as prohibitions. Recusal requires more than abstaining from the final vote: proposed § 851.209(a)(6) also addresses making investment recommendations, relevant work on transaction documents, and negotiations.

2. Adviser and Fund-Level Obligations

Under the OISP, U.S. persons also have obligations for investments by non-U.S. entities they control ("controlled foreign entities"). They must take all reasonable steps to prohibit and prevent those entities' prohibited transactions and must notify Treasury of their notifiable transactions.

For fund managers, the treatment of investment advisers is particularly relevant. The Proposed Rule would continue to treat a pooled investment fund's investment adviser as the fund's "parent," meaning non-U.S. funds advised by a U.S. adviser would remain controlled foreign entities. The Proposed Rule would also clarify that the controlled foreign entity's own knowledge is relevant to notification obligations. Treasury is considering whether to extend the parent definition to certain sub-advisers of non-U.S. funds.

Treasury explains that investing in funds with pre-existing covered investments may itself be an indirect covered transaction, independently of the limited partner ("LP") investment provision. The Proposed Rule also addresses structures that obscure a U.S. person's role. Managers should assess both issues when structuring fund secondaries, continuation vehicles, and other investments in existing portfolios.

3. Passive Investment Exceptions Largely Preserved

The OISP's passive investment exceptions reflect its concern with intangible benefits accompanying U.S. capital, such as managerial assistance and access to networks. The Proposed Rule would largely preserve those exceptions: Treasury views the publicly traded securities exception as substantively equivalent to the current exception and would retain the registered investment company exception. Qualifying LP investments would remain excepted if committed capital does not exceed $2 million, aggregated across the fund's investment and co-investment vehicles, or the investor obtains a binding assurance that its capital will not fund prohibited or notifiable transactions, as applicable.

These exceptions and the derivatives exception would not cover investments conferring governance rights beyond standard minority shareholder protections with respect to the covered foreign person. The LP exception applies only to the specified LP-investment provision; a fund investment with pre-existing holdings may still be covered under another provision, even if it meets the LP exception's conditions.

Not every existing exception would carry over. The Proposed Rule would remove the separate exception for business development companies ("BDCs"). It would also remove the provision that currently excludes derivatives conferring rights to acquire equity from the derivatives exception. Treasury has not proposed an exception for certain foreign-registered investment companies but invites comment on that question and the other changes.

4. Diligence and Notification Requirements

The OISP expects U.S. persons to conduct a reasonable and diligent inquiry before investing. Obligations generally turn on whether they know or have reason to know the relevant facts; failure to make that inquiry may support a finding of reason to know even without actual knowledge. The Proposed Rule would largely preserve this standard but expressly include consideration of Treasury-provided information, including target assessments, in the diligence analysis. Treasury recognizes potential diligence limits in secondary market transactions and would assess the totality of the circumstances.

Notifications would require additional information that Treasury now typically requests through follow-up questions. Under the Proposed Rule, eligible parties could also seek confidential, non-binding Treasury feedback on potentially prohibited transactions; however, Treasury need not respond, and any feedback would neither authorize a transaction nor preclude later enforcement.

5. A Prohibition Covering Any Super Intelligence Development

Part 850 distinguishes between prohibited, notifiable, and uncovered AI investments based on computing power used for training and designed or intended end uses. Treasury now considers that no single threshold reliably distinguishes advanced models. Following Executive Order 14434's direction to use "super intelligence" ("SI") instead of "artificial intelligence" in specified documents, the Proposed Rule would classify development of any SI system as prohibited technology and eliminate the notifiable AI category. Despite the name, SI would not be limited to frontier models: the definition also covers applications, tools, harnesses for agentic capability, and embodied systems such as robotics.

For businesses using third-party systems, the distinction between use and development would matter. Enhancing or extending a system's capabilities, including through an agentic harness, can constitute development. By contrast, qualifying use of an off-the-shelf third-party system strictly for internal, non-commercial purposes would not, on its own, amount to development. Even where development is involved, applicable transaction exceptions would remain relevant.

6. Biotechnology as a New Prohibited Technology Category

Treasury would use its COINS Act authority to prohibit covered investments involving specified biotechnology activities. The categories in the Proposed Rule span the use of biological systems to produce pharmaceutical compounds, biofuels, and certain controlled agents and materials, as well as specified sequencing technology, bioinformatics tools, laboratory automation, and brain-computer interfaces. Recognizing potential public-health and commercial costs, Treasury seeks comments on whether several categories should be narrowed.

7. Hypersonics, High-Performance Computing, and Other Technology Changes

The COINS Act adds hypersonics and high-performance computing to the program's three existing technology categories. The Proposed Rule would classify hypersonic systems, propulsion, fuels, and specified materials as prohibited technology; the system definition expressly includes civilian uses such as spaceflight. Specified sensors, guidance, navigation and control equipment, software, and additional dual-use materials for hypersonic systems would be notifiable rather than prohibited. For high-performance computing, the Proposed Rule would retain Part 850's supercomputer prohibition and make specified high-bandwidth, low-latency interconnects notifiable technology.

The Proposed Rule would also expand existing semiconductor and quantum restrictions, including prohibitions involving specified radiation-hardened integrated circuits, photonic integrated circuits, high-bandwidth memory, and the development of algorithms or applications for quantum computers.

8. Expanded Countries of Concern

As required by the COINS Act, the Proposed Rule would expand coverage beyond China, including Hong Kong and Macau, to Cuba, Iran, North Korea, and Russia. The statutory and proposed definitions also include Venezuela under the Maduro regime. Treasury’s accompanying FAQs (available here) explain that Venezuela does not currently meet that definition because the Maduro regime no longer exists, although particular investments in Venezuelan entities could still be covered through other jurisdictional connections. We expect China to remain the main focus for many asset managers, given the breadth of existing U.S. sanctions on the other jurisdictions. A separate OISP assessment would still be needed where applicable; sanctions and outbound investment compliance are not interchangeable.

9. Broader Coverage of Targets

Whether an investment is covered depends on both the relevant country-of-concern connection and technology activities. The definitions addressing those connections largely determine the program's reach. "Principal place of business" would expressly include headquarters and main business locations, alongside management-based criteria. A U.S.-incorporated and headquartered company primarily managed by its chief executive officer from a country of concern could therefore have a principal place of business in both jurisdictions. The Proposed Rule would also expressly extend covered foreign person status to entities subject to the direction or control of specified country-of-concern persons, including through contractual rights, even without 50 percent ownership. It would also clarify that "develop" includes high-level oversight, direction, approval, and strategic planning, as well as activities undertaken through or in collaboration with affiliates.

An otherwise notifiable transaction could become prohibited if the target, an affiliate, or a subsidiary appears on specified U.S. government lists or meets specified restricted-party criteria. The Proposed Rule would add the Section 1260H Chinese military companies list and the BIOSECURE Act biotechnology companies list, subject to its other requirements and applicable exceptions.

Enforcement Begins

The Proposed Rule comes as Treasury begins enforcing the existing rules. On October 7, 2026, Treasury announced its first OISP civil penalty, a $200,000 penalty imposed in July against Amidi, LLC. Amidi had failed to notify Treasury of an approximately $92,478 investment by its controlled foreign entity, a Chinese fund, in a Chinese company developing AI, robotics, and embodied intelligence. Treasury identified the transaction through its own compliance and market monitoring. The resulting penalty was more than twice the amount invested.

The case shows why fund managers need to identify and escalate even modest portfolio-level investments. On comparable facts and assuming no applicable exception, a similar investment would likely be prohibited under the Proposed Rule because SI development would become prohibited technology. The Proposed Rule's $50,000 de minimis exception would not cover that amount and would relieve only notification obligations, not prohibitions.

Next Steps

The Proposed Rule was published in the Federal Register on October 26, 2026. Comments are due December 7, 2026. The COINS Act requires Treasury to issue or update implementing regulations within 450 days of enactment, by March 2027. The final rule will establish its effective date. Treasury seeks views on the breadth of the SI prohibition and biotechnology categories, the treatment of foreign-registered investment companies and BDCs, and potential expansion of the parent definition.

Investors should assess the Proposed Rule's implications for existing portfolios and planned investments, particularly in AI applications, life sciences, and aerospace. Fund sponsors and investors should identify where LP assurances, side letters, and recusal protocols for U.S. personnel may need adjustment.

The Proposed Rule would except qualifying transactions under binding, uncalled capital commitments entered into before the final rule's effective date. Treasury cautions that Part 850 may still apply, so investors should not assume blanket grandfathering when planning transactions or fundraising.

How We Can Assist

Dechert advises clients on outbound investment structuring, diligence, notification filings, and engagement with Treasury. We can help assess the Proposed Rule's impact on your organization and prepare and submit comments before the December 7, 2026 deadline.