On June 21, 2024, the U.S. Department of the Treasury (Treasury) issued the long-awaited Notice of Proposed Rulemaking (NPRM). This is the next phase in implementing Executive Order 14105 and establishing the Outbound Investment Security Program.  

What is the Outbound Investment Security Program?

The Outbound Investment Security Program is a targeted national security measure aimed at monitoring and prohibiting investments in certain technology sectors—semiconductor/microelectronics, quantum information technology and artificial intelligence (AI)—by U.S. persons involving a country of concern, which at the present is the People’s Republic of China, along with the Special Administrative Regions of Hong Kong and Macau. The targeted approach and absence of a review process confirm that this is not a “reverse CFIUS” program. 

This comprehensive set of proposed rules in the NPRM requires businesses to proactively conduct due diligence to determine if the rules apply to their investment activities. Non-compliance or failure to conduct a reasonable and diligent inquiry can result in severe penalties, including potential forced divestment and civil and criminal penalties, such as imprisonment for up to 20 years.

Currently, the NPRM is open for public comment. Treasury is seeking feedback on various aspects, including the scope of covered transactions, definitions of key terms, notification requirements, and penalty and enforcement processes. 

While it will be some time before the final rule takes effect, businesses, particularly private equity and venture capital firms investing in the impacted sectors, should be aware of several key points and their impact on future diligence plans.

Covered transactions

Unlike the case-by-case national security reviews conducted by the Committee on Foreign Investment in the United States (CFIUS), the Outbound Investment Security Program prohibits or requires notification of specific transactions, deemed “covered transactions,” in the impacted sectors. 

A transaction is considered a covered transaction if a U.S. person, directly or indirectly: 

  • Acquires an equity interest or contingent equity interest in a “covered foreign person.
  • Provides a loan or similar debt financing arrangement to a covered foreign person, where such financing is convertible to an equity interest or affords the U.S. person management rights.
  • Converts a contingent equity interest or debt to an equity interest in a covered foreign person.
  • Acquires, leases, or develops operations, land, property, or assets in a country of concern that results in the establishment of a covered foreign person or the engagement of a person of a country of concern in a covered activity (i.e., greenfield investments).
  • Enters a joint venture with a person of a country of concern that will engage in a covered activity.
  • Acquires an interest in an investment fund that is likely to invest in a person of a country of concern in the specified technology sectors

A company that engages in one or more of these activities may be subject to the Outbound Investment Security Program. These rules will impact private equity and venture capital firms investing in Chinese companies, including those in Hong Kong and Macau, in the targeted technology sectors.

Knowledge standard

The NPRM clarifies that certain provisions only apply if a U.S. person knows of relevant facts or circumstances, such as whether an activity is a “covered activity” or involves a “person of a country of concern.” Treasury defines three types of knowledge: actual knowledge, awareness of a high probability, and reason to know. 

Treasury will assess whether a person had knowledge of relevant facts and circumstances at the time of the transaction by examining whether a U.S. person conducted a reasonable and diligent inquiry. Failure to conduct such an inquiry may lead to a determination that the person had reason to know. 

Factors considered when evaluating the diligence of an inquiry conducted by a U.S. person or its representatives include: 

  • The inquiry made into an investment target or relevant counterparty.
  • Contractual representations or warranties obtained or attempted to be obtained regarding the target or counterparty’s status.
  • Effort to obtain available non-public information.
  • Effort to obtain and review available public information.
  • Whether the U.S. person or its representatives avoided learning or sharing relevant information.
  • The presence or absence of warning signs.
  • Use of public and commercial databases to identify and verify relevant information.

This list is not exhaustive, and Treasury reserves the right to consider other relevant factors. 


The NPRM establishes significant penalties for violations, including civil and criminal penalties. Civil penalties can reach the maximum amount specified in the International Emergency Economic Powers Act (IEEPA) for any violations. Criminal penalties for willful violations can include fines up to USD $1,000,000 imprisonment for up to 20 years, or both, with penalties adjustable for inflation.

Additional penalties under other applicable laws may also apply, including property forfeiture and penalties for false statements. Moreover, Treasury, in consultation with the relevant agencies, may compel the divestment of any prohibited transactions.

Preparing for the final rule 

While the proposed rule is subject to a comment period, its intent and purpose will remain unchanged. Treasury's NPRM makes it clear that businesses must conduct thorough diligence inquiries. To prepare for the final rule, businesses should develop a focused diligence plan incorporating Treasury's factors and a process for documenting their inquiries for each transaction.

Businesses should screen potential transaction partners to understand their organizational structure, including their ultimate beneficial owner. Businesses engaging in transactions  in the targeted sectors must address key jurisdictional questions, such as whether a “US person” is engaged in a “covered transaction” involving a “covered activity” with a “person of a country of concern.” Understanding these definitions will be critical for ensuring compliance.

Control Risks can help your business prepare for the Outbound Investment Security Program. Contact us to speak to an expert.  

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