After many months of rumor and speculation about an outbound investment review process, commonly referred to as “reverse” CFIUS, it is finally here. On August 9, 2023, President Biden issued Executive Order 14105, Addressing United States Investments in Certain National Security Technologies and Products in Countries of Concern. The EO outlines a strategic approach to manage U.S. investments in sensitive sectors while safeguarding national security interests. Below, we highlight four key points from the EO that are of interest to businesses and firms:
1. Targeted Regulations on Notifiable and Prohibited Transactions
The Secretary of the Treasury, in consultation with relevant departments, will issue regulations requiring U.S. persons to notify the Department of the Treasury about specific transactions involving covered foreign individuals or entities. Additionally, certain transactions involving covered foreign individuals or entities, or involving certain entities located in or subject to the jurisdiction of a country of concern will be prohibited. These regulations aim to ensure better oversight and control over investments that may contribute to national security risks. For now, the only country the President has identified as a country of concern is the People’s Republic of China, along with the Special Administrative Regions of Hong Kong and Macau.
2. Impact on Sensitive Technologies and Products
The EO identifies three categories of national security technologies and products for the new program — 1) semiconductors and microelectronics; 2) quantum information technologies; and 3) certain artificial intelligence systems. These categories were selected due to their critical role in accelerating the development of advanced military, intelligence, surveillance, and cyber-enabled capabilities. The EO seeks to mitigate risks associated with accelerated development of these technologies by certain countries identified by the President.
3. “Reverse” CFIUS?
Like CFIUS, the Secretary of the Treasury will play a central role in implementing the EO. This includes communication with Congress and the public, consultation with other CFIUS-member departments (including Commerce, State, Defense, and Energy), engagement with allies and partners, and investigation of potential violations. Collaborative efforts among these agencies aim to ensure a comprehensive approach to addressing national security risks.
While this EO and the CFIUS process share the goal of safeguarding U.S. national security interests, they differ in terms of scope, emphasis, and process. The EO reflects the U.S. government's proactive stance and focus on managing investments in critical national security technologies. Once Treasury releases the draft regulations, we will see if the Outbound Investment Program keeps its narrow scope or expands jurisdiction to become more CFIUS-like.
4. Implementation and Ongoing Review
The EO emphasizes a commitment to ongoing assessment and adaptation. This process begins with Treasury’s issued Advance Notice of Proposed Rulemaking (ANPRM). Treasury’s ANPRM is meant to provide transparency and clarity about the intended scope of the program, and to solicit comments on the development and implementation of the program. Following the ANPRM, Treasury will issue draft regulations. The EO provides that within a year of the regulations' enactment, the Secretary will review the effectiveness of the measures and consider amendments, potentially expanding or refining the scope of covered national security technologies and products.
Outbound investment screening is coming. While the EO provides a basic framework for what will become the Outbound Investment Program, there are still many unanswered questions. For now, it’s unclear what the final program will look like and whether more countries will be added as countries of concern. However, we will have a better picture once the ANPRM process is complete, and Treasury releases the draft regulations. This is a developing area of national security policy that, like CFIUS, will require a variety of businesses and firms, including those in the Asset/Wealth Management, Private Equity, Venture Capital space, and broader corporates with China exposure, to stay informed. Control Risks will be here every step of the way to help businesses and firms adapt to navigate the everchanging U.S. national security regulatory landscape.