Following a series of public reports, the United States appears close to announcing a new regulatory process to scrutinize US “outbound” investment to countries presenting national security challenges. Although the precise scope of such a new regime remains unclear and initial reports may not reflect the final regime that could emerge, this new regulatory process could have dramatic implications for multinational firms and funds—including foreign firms or funds with US operations—engaged in cross-border trade and investment.

The new regulatory review process for outbound investment would subject certain types of outbound flows of capital, goods and/or services from the United States or by US persons to new restrictions and/or disclosure requirements. Over the past several years, the US Congress has considered various competing legislative proposals to create such a process, which we previously analyzed. Recent reports suggest that the Biden Administration is prepared to release an executive order that would create this review regime within two months and without new legislation—likely directing key federal agencies to promulgate regulations to give effect to the concept.     

Often referred to as a “reverse-CFIUS process”—in reference to the current national security review process for inbound US investment used by the Committee on Foreign Investment in the United States, or CFIUS—the new outbound review regime would likely reflect certain hallmarks of US economic sanctions and export control restrictions, which already limit to varying degrees the export of categories of US capital, goods or services to specially restricted foreign persons, industrial sectors or countries.

As details of this reported executive order continue to be developed over the next weeks, US and multinational firms and funds should take account of how this new regime could affect their trade and investment activities in China and other foreign countries that could be included within the scope of the regime.  

The precise implications of this new regime will likely turn on the scope of several fundamental concepts:

• Who Must Comply. A key definitional concept will be what types of persons will have compliance obligations under the new regime. It will likely capture, at the least, “US persons,” including US citizens, permanent resident aliens and corporations organized under US law. It may also capture their foreign branches.¹ A 2022 executive branch counterproposal (hereinafter, the 2022 Proposal) to legislative efforts to craft an outbound investment review regime may provide a glimpse into current executive branch thinking on this topic. In defining “US persons,” that draft text also covered “any subsidiary entity in which any such person or organization has a majority voting interest.” If this concept is retained, the test would appear to focus on control, not necessarily ownership, of foreign-registered subsidiaries or affiliates. Depending on how the executive branch defines the scope of this concept, it could sweep in the activities of not only US-registered firms or funds but also foreign-registered entities or funds that are controlled (or owned) by US persons, as well as non-US-person-owned/controlled funds that are either registered in the United States or direct investment operations from the United States. 
• What Types of Investment or Trade Flows Would Be Covered. Defining the scope of covered trade and investment activity will also be crucial to understanding the new regime’s implications. Certain reporting suggests that it will focus on restricting “US dollar” flows, but this may simply be imprecise shorthand. The 2022 Proposal included a more expansive definition by defining “investment” as “any acquisition of an equity interest or contingent equity interest in, and any monetary capital contribution or other payment to, a covered person, directly or indirectly, with the goal of generating income or gain.” Moreover, a previous legislative proposal set forth an even broader definition by covering “any transaction” that “shifts or relocates…or transfers” certain US critical capabilities, suggesting that it could cover not only investments and mergers but also technology licensing or even exports of US-origin goods. These possible definitions could cover R&D activities and follow-on transactions for sustainment of non-US facilities.  
• Restricted Industrial Sectors. Another key scope issue is what industrial sectors or subsectors will be subject to the new review regime. For example, one recent report suggested that there may be an outright ban on investment in “quantum computing, advanced semiconductors and certain artificial intelligence capabilities with military or surveillance applications.” By contrast, biotechnology would reportedly be excluded from an outright ban (but could be subject to other restrictions). A 2021 report by the US National Counterintelligence and Security Center identified the following sectors that “produce technologies that may determine whether America remains the world’s leading superpower or is eclipsed by strategic competitors”: artificial intelligence, bioeconomy, autonomous systems, quantum and semiconductors. One US lawmaker suggested that the executive branch proposal would cover “AI, quantum, cyber, 5G, and, of course, advanced semiconductors.” 

How the new outbound review regime will define covered sectors or subsectors will be critical and may create unique compliance challenges. For example, in a similar effort several years ago, CFIUS attempted to create heightened requirements for the review of inbound investment in certain high-technology sectors based on their North American Industry Classification System (NAICS) code. CFIUS ultimately shifted away from this concept in favor of adopting entirely different standards derived from the US export control regime, given the practical difficulties of applying NAICS codes. 

WilmerHale will continue to monitor developments on this important new regulatory regime and advise clients on prudent measures to prepare for its implementation.