The U.S. Government has long regulated inbound investment. Now, a final rule that became effective on January 2, 2025 formalizes the U.S. government’s authority to regulate outbound investments by U.S. persons, primarily targeting investments in countries of concern, particularly China. The government’s goal with the U.S. Outbound Investment Security Program (Program) is to prevent these countries from advancing in technologies critical to their military, such as semiconductors, quantum information technologies, and AI systems (together, “covered activities”).

The Program is administered by the U.S. Treasury Department (Treasury) and is the first of its kind in a major Western economy. It includes prohibitions and notification obligations for U.S. persons involved in certain outbound investments involving “covered foreign persons” engaging in a “covered activity”. 

Key Points

  1. Broad Definition of U.S. Persons: The Program applies to U.S. citizens, lawful permanent residents, entities organized under U.S. laws, and any person in the U.S., regardless of their location. U.S. persons must also prevent controlled foreign entities from engaging in prohibited transactions and avoid directing non-U.S. persons in such transactions.
  2. Covered Foreign Persons: A “covered foreign person” includes persons from countries of concern (e.g., Hong Kong, Macau, and China) engaged in covered activities, and third parties with significant relationships to these persons. U.S. persons must conduct due diligence to determine whether a proposed transaction involves a covered foreign person and the extent of engagement in covered activities (i.e., related to the national security technologies described above).
  3. Covered Transactions: To take the pieces above, certain transactions by U.S. persons involving a covered foreign person engaging in a covered activity will be subject to the outbound regime (“covered transaction”). Covered transactions include direct or indirect acquisitions of equity interests, loans, and certain real estate transactions involving covered foreign persons. Important exceptions exist for certain limited partner investments, investments in publicly traded securities, and debt financing arrangements.
  4. Notice Requirements: U.S. persons must notify Treasury of covered transactions within 30 days of completion or acquiring knowledge of a covered transaction. 
  5. Enforcement: Treasury has the authority to nullify prohibited transactions and impose civil penalties for non-compliance, including material misstatements and omissions in notices.

Next Steps

Private credit firms and asset managers with exposure to potential national security technologies in China should develop compliance plans for the Program. This involves improved due diligence to assess whether potential transactions will be impacted by the new regime and an action plan to manage compliance with the regime when investment activity is impacted. Dechert is available to assist in developing these compliance strategies and ensuring effective controls are in place.