U.S. Outbound Investment Rule Finalized, Set To Take Effect January 2025

The Biden administration has finalized a widely anticipated measure to curb U.S. investments in China, which will go into effect in January 2025.

The rule from the Treasury Department, issued October 28, follows President Joe Biden’s August 2023 executive order on outbound investment. It aims to restrict American companies from indirectly supporting China’s military advancements and targets investments in high-tech sectors like semiconductors, quantum technology and artificial intelligence.

U.S. policy for screening inbound foreign investment has moved toward tighter oversight in recent years, especially with regard to China, and this trend will likely continue regardless of the winner of the presidential election November 5. Inbound screenings are handled by the Committee on Foreign Investment in the United States, a federal interagency committee which is tasked with evaluating the national security implications of foreign investments in the U.S. and which will also handle the outbound screenings.

A notice of proposed rulemaking issued by Treasury in June 2024 clarified the scope of the new restrictions, which will apply to greenfield investments, joint ventures and U.S.-controlled foreign subsidiaries. Legal experts have warned of uncertainties in how the criteria around outbound investment could be applied and of unintentionally negative effects on U.S. businesses or investors that could fall afoul of the restrictions.

“Most of the final regulations are consistent with the language in June’s draft regulations, but that is often to be expected — so much interagency work goes into drafting regulations that bureaucratic inertia can prevent a lot of changes after the public’s comments are received,” says Jonathan Gafni, senior counsel and head of the U.S. foreign investment practice at law firm Linklaters in Washington.

In its NPRM, Treasury sought input on exempting certain limited partnership investments from the program. The department initially proposed two options: passive LP investments below 50% of a fund’s assets under management or those under $1 million. Treasury revised its approach based on public feedback. The new option would exempt LP investments either below $2 million (including parallel or co-investments) or where the fund provides assurances that capital won’t be used in restricted transactions, so long as the LP’s rights are limited to a narrow set of minority protections.

“I suspect that the latter option will become more popular with investors — assuming they are willing to give up rights beyond the enumerated minority investor protections, but perhaps less so with financial sponsors who will have to narrow the investment guidelines and conduct more diligence,” Gafni says.

Gafni also notes there are some instances in the final regulations — including application of the definition of “U.S. person” to non-U.S. entities with unincorporated U.S. branch offices and application to certain indirect investments — for which Treasury plans to post illustrative examples on its website.

This is consistent with CFIUS’ increasing practice of providing guidance to the private sector via posts on its website, as opposed to guidance documents formally published, and therefore formally notified to the public, via the Federal Register.

“Along with others, I’ve been questioning the extent to which parties can and should rely on these web posts for legal guidance, and the expansion of this practice to the outbound foreign investment program is not a good sign,” Gafni says. “Moreover, to the extent that parties will need time to prepare for the new program, it will be important for Treasury to post the examples and other guidance well before the program’s January 2 effective date.”

The restrictions come at a time when industry groups have expressed worries about growing protectionism and the impact on U.S. competitiveness.

The 2024 Inbound Investment Survey, released in June, polled members of the Global Business Alliance, an advocacy group for international companies doing business in the U.S. Thirty-six percent of respondents believe the U.S. business climate is worsening, with only 5% seeing improvement. This dip in confidence is attributed to several factors, including regulatory changes and protectionism.

Among the top concerns highlighted in the survey was the perceived politicization of cross-border investment reviews, which companies fear could adversely affect their operations and future investment decisions.