On December 13, 2024, the US Treasury Department (“Treasury”) issued 35 new questions and answers (“FAQs”) providing guidance on the November 17, 2024 final rule outlining the US government’s Outbound Investment Security Program (“Outbound Investment Rules”). These Outbound Investment Rules, which become effective January 2, 2025, implement a targeted outbound investment compliance regime called for by Executive Order (EO) 14105 issued by President Biden on August 9, 2023. The full list of published FAQs can be found here.
The Outbound Investment Rules apply to investments by, or in some circumstances directed by, US Persons in Chinese businesses involving specified categories of technologies including semiconductors and microelectronics, quantum information technologies and artificial intelligence. Theses Outbound Investment Rules can apply to a broad range of transactions, including acquisitions of equity, conversions of a contingent equity interest into an equity interest, joint ventures, certain acquisitions of interest by limited partners, certain debt financing transactions by US Persons, as well as certain greenfield and brownfield investments. Please see our previous blog post on the November 17, 2024 final rule on the Outbound Investment Rules here and our blog post on the August 2023 advanced notice for proposed rulemaking (ANPRM) and the June 2024 notice of proposed rulemaking (NPRM) related to the Outbound Investment Rules here and here.
Overview of the Outbound Investment Rules FAQs
The FAQs issued by Treasury address several key elements of the Outbound Investment Rules, including certain defined terms, examples of covered transactions and notifiable and prohibited transactions. The FAQs also provide guidance on a number of specific issues critical to compliance with the Outbound Investment Rules, such as due diligence requirements, certain excepted transactions, and the national interest exemption, which we highlight below.
US Person Due Diligence
The Outbound Investment Rules require US persons to perform due diligence on potential transactions, including transactions engaged in by their controlled foreign entities. Specifically, US persons are required to take “all reasonable steps” to prohibit and prevent controlled foreign entities from engaging in transactions that would be prohibited if engaged in by a US person. FAQ #24 explains that Treasury considers such “reasonable steps” to include the implementation of:
- Contractual language outlining the applicability and requirements of the Outbound Rules between a US person and its controlled foreign entity;
- Governance / shareholder rights by the US person with respect to the controlled foreign entity, (where applicable);
- Periodic training and internal reporting by the US person and its controlled foreign entity to address compliance requirements with the Outbound Investment Rules;
- Appropriate and documented internal compliance controls, including internal policies, procedures, or guidelines that are periodically reviewed internally, by the US person and its controlled foreign entity; and
- Documented auditing processes of internal policies, procedures, or guidelines.
FAQ #25 further provides that what constitutes a “reasonable and diligent inquiry” under the applicable knowledge standard will be determined based on an assessment of the totality of relevant facts and circumstances, which will include the factors set forth in 31 C.F.R. 850.104(c). A transaction may generally proceed if, at the time of a transaction, the US person does not have relevant facts that would render a transaction a covered transaction under the regulations. That said, Treasury expects a US person to make efforts to acquire knowledge and documentation about a proposed transaction as part of robust pre-transaction due diligence (FAQ #26).
Excepted Transactions
FAQs #29 and 30 provide examples of excepted intracompany transactions and an example of an excepted syndicated debt financing.
National Interest Exemption
Thee Outbound Investment Rules set forth a “national interest exemption,” pursuant to which the Secretary of the Treasury, in consultation with the Secretaries of Commerce and State, and the heads of relevant agencies, as appropriate, may exempt a transaction from the prohibition or notification requirement on the basis that the transaction would be in the national interest of the United States. FAQ #31 provides that a US person may request that Treasury review a potential transaction under the national interest exemption on behalf of itself or on behalf of its controlled foreign entity. Such a review will be based on the totality of all relevant facts and circumstances, and it is anticipated that an exemption will only be granted in exceptional circumstances. Considerations and guidelines for requesting a national interest exemption have been published by Treasury and can be found here. Some considerations Treasury will consider in its determination as to whether a transaction will receive a national interest exemption include, among others:
- The transaction’s potential effect on critical US supply chain or critical infrastructure needs;
- Domestic production needs in the United States for projected national defense requirements;
- The United States’ technological leadership globally in areas affecting US national security; and
- The impact on US national security from prohibiting a given transaction.
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For more information on the Outbound Investment Rules, please contact a member of the outbound trade team.
