Towards a “Reverse CFIUS”? President Biden’s Executive Order on Outbound Investment and Related Congressional Proposals
Should the U.S. government regulate U.S. investments in other countries?
The Biden Administration resoundingly answered that question in the affirmative on August 9, 2023, when the President issued an executive order (EO) providing for official oversight of certain U.S. tech-related investments in China and Chinese-linked companies. The EO followed years of national security experts and congressional leadership calling for the regulation of U.S. investment in China and other countries of concern, and came amidst intensive efforts by Congress to legislate in the area.
However, while the EO marked an unprecedented foray into regulating outbound investment and capped years of anticipation, the order only established a framework for future regulation that could take months or even years to implement, sparking dialogue over whether more can be done. Notably, Congress remains quite interested in passing legislation on the issue, and there is a robust policy debate over whether the EO went far enough. It seems likely there will be further twists and turns along the way, with profound implications for the tech industry, U.S.-China relations, and the broader geopolitical risk landscape.
This article will describe the policy interests underpinning the EO and legislative proposals; trace the limited efforts at regulating outbound investment to date; summarize the EO, the advance notice of proposed rulemaking that accompanied the EO, and two significant pieces of proposed legislation—the National Critical Capabilities Defense Act and the Outbound Investment Transparency Act; describe key themes and interpretational points across the EO and legislative proposals; and discuss possible next steps.
Policy Reasons for Regulating Outbound Investment
The policy case for oversight of outbound investment may not be immediately apparent, as compared to, for example, review of inbound investment or export controls. In the case of inbound investment, the Committee on Foreign Investment in the United States (CFIUS) reviews transactions to assess the national security implications of foreign investment in U.S. businesses, reviewing factors such as the impacts on U.S. domestic production, technological leadership, access to critical materials, and critical infrastructure. U.S. export controls similarly focus on national security, with an emphasis on the possible diversion of sensitive U.S. technology to end-uses and end-users that threaten U.S. interests.
So why regulate outbound investment?
The August 2023 EO sets out a cogent policy statement that summarizes U.S. concerns in this area that have persisted for years. Specifically, according to the EO,
“[C]ountries of concern are exploiting or have the ability to exploit certain United States outbound investments, including certain intangible benefits that often accompany United States investments and that help companies succeed, such as enhanced standing and prominence, managerial assistance, investment and talent networks, market access, and enhanced access to additional financing.”
Therefore, the notion is that U.S. investment can support the development of strategic capabilities in “countries of concern” (such as China) that jeopardize U.S. national security. According to this line of reasoning, such investment not only infuses capital into sensitive industries in countries of concern, but also contributes know-how and managerial expertise, and legitimizes such industries in capital markets and the on the broader world stage.
Previous Regulation of Outbound Investment
Despite the concerns noted above, prior to issuance of the EO, the United States had only regulated outbound investment under very limited circumstances, as follows:
- Under economic sanctions regulations administered by the U.S. Department of the Treasury (Treasury), U.S. persons are prohibited from investing in certain countries and territories subject to sweeping sanctions, specifically Cuba, Iran, North Korea, Russia, Syria, and the Crimea, Donetsk, and Luhansk regions of Ukraine.
- Treasury sanctions regulations also prohibit U.S. person investments in the publicly traded securities of designated “Chinese Military-Industrial Complex” companies.
These measures, while notable, do not have the same implications for global trade and investment as the EO and legislative proposals discussed herein, which target the development of advanced technologies in the course of the world’s largest trading relationship.
August 2023 EO and Treasury Advance Notice of Proposed Rulemaking (ANPRM)
August 2023 EO
The EO directs Treasury to develop regulations providing for the prohibition (in certain cases) or notification of certain U.S. person investments in Chinese and Chinese-owned companies with certain connections to semiconductors, quantum technology, and artificial intelligence.
Notably, the EO does not establish any immediately binding regulation of outbound investment but rather sets up a framework for future regulatory action.
Along these lines, the EO tasks Treasury with fleshing out various aspects of the outbound investment program, including:
- Which technologies trigger scrutiny
- What investment types are covered
- Which investments are:
- Prohibited outright (based on posing “a particularly acute national security threat”)
- Subject to a notification requirement
- Whether the requirements apply to:
- Foreign entities owned or controlled by U.S. persons
- U.S. persons involved in the activities of non-U.S. persons
- Exemptions from the requirements
Treasury, in its ANPRM, has begun to address the various interpretational points delegated to it under the EO, initiating what could be a lengthy regulatory process. Notably, the ANPRM, as an “advance notice,” is an especially preliminary form of administrative rulemaking and only addresses the key points at a high level. As such, the ANPRM does not include a fully-formed set of proposed regulations.
The ANPRM sketches out the following, to be elaborated upon in subsequent rounds of rulemaking following a public comment period:
- The types of China-related entities triggering the requirements to the extent involved in covered activities concerning subject technologies, including:
- entities organized in China
- Chinese-owned entities outside of China
- parent entities with Chinese subsidiaries engaged in relevant activity
- The types of investments subject to the rules, including equity investments, acquisition of contingent interests, convertible debt, greenfield investments, and joint ventures
- Excluded transactions, including IP licensing arrangements, bank lending, and underwriting services
- “Excepted transactions” that otherwise would be covered, including investments in publicly traded securities and index funds, and passive private equity investments below a “de minimis” threshold
- The types of technologies triggering the requirements, including technologies relating to semiconductors, quantum information, and artificial intelligence
- Application of the rules outside the United States, under certain circumstances, to:
- U.S. persons directing the activities of non-U.S. entities
- non-U.S. entities owned or controlled by U.S. persons
Members of Congress have introduced various pieces of proposed legislation seeking to regulate U.S. outbound investment. This article focuses on two especially notable proposals: the National Critical Capabilities Defense Act and the Outbound Investment Transparency Act.
National Critical Capabilities Defense Act (NCCDA)
The U.S. House of Representatives passed the NCCDA in February 2022 as part of the America COMPETES Act, a broader package focused on domestic semiconductor production, which included elements that eventually became part of the CHIPS and Science Act (CHIPS Act) that President Biden signed into law—minus the NCCDA. After consideration of the NCCDA dropped out of the CHIPS Act discussions, a bipartisan, bicameral group of lawmakers released a discussion draft revising the House’s version of the NCCDA.
The signature aspect of the updated NCCDA is that it would establish a Committee on National Critical Capabilities, an interagency body similar to CFIUS, with authority to review—and, as warranted mitigate or block—covered outbound investments. Based on this mechanism, many commentators referred to the proposal as establishing a “reverse CFIUS.”
As set out in the discussion draft, the NCCDA would provide for review of covered transactions involving “countries of concern” (China, Russia, Iran, North Korea, Cuba, and Venezuela) in “national critical capabilities,” defined to include
- Semiconductor manufacturing
- Large-capacity batteries
- Critical minerals
- Artificial intelligence
- Quantum technology
- Sectors listed in the Critical and Emerging Technologies List Update of the National Science and Technology Council, which include:
- advanced computing
- advanced manufacturing
- advanced sensing and signature management
- autonomous systems
- communication technologies
- financial technologies
- renewable energy generation
Notably, the NCCDA would provide for review not only of outbound investment but also transactions involving shifting of production or know-how regarding critical capabilities to countries of concern.
The bill would require notification of covered activities to the newly established interagency committee forty-five (45) days before completion. The bill purports to apply not only to U.S. persons and affiliates of U.S. entities but also extraterritorially to all entities worldwide, although the wording is not clear on this point.
In July 2023, the U.S. Senate passed the OITA 91-6 as an amendment to the National Defense Authorization Act (NDAA) for Fiscal Year 2024, reflecting deep bipartisan support for the outbound investment legislation, which was co-sponsored by Senators Cornyn (R-TX) and Casey (D-PA).
The OITA would require U.S. persons to notify Treasury with respect to investments involving “countries of concern” (China, Russia, North Korea, and Iran) pertaining to the following sectors:
Advanced semiconductors and microelectronics
Quantum information science and technology
Networked laser scanning systems with dual-use applications
Similar to the August 2023 Biden EO, the OITA establishes a notification regime without empowering Treasury to mitigate or block transactions, and directs Treasury to issue regulations implementing the OITA. Unlike the EO, however, the OITA does not prohibit any investments.
Given the broad bipartisan support in the Senate for the OITA and its attachment to the NDAA, an omnibus defense spending bill that Congress passes every year, it seems reasonably likely that the OITA will be the subject of further attention before the year is out.
Key Points Regarding EO and Legislative Proposals
While all of the measures described above are directionally similar in addressing national security issues related to outbound investment, there are key differences and interpretational points that are worth noting, including:
- Notification? Review? Prohibition? Each of the measures described above requires notification to the U.S. government of certain outbound investments. Beyond that point, however, differences emerge. The NCCDA provides for a CFIUS-type review of a covered transaction, with an interagency body empowered to review and mitigate or block transactions. The EO and the OITA require only notification of transactions, with the EO taking the added step of prohibiting certain investments.
- Who is subject to the requirements? A foundational principle in this context is that “U.S. persons”—i.e., persons in the United States, U.S. citizens and permanent residents wherever located, and U.S. entities and their foreign branches—investing in other countries are subject to the relevant requirement. From there, however, the scope can differ among the various measures, possibly to include U.S.-owned foreign entities and U.S. persons working for foreign entities.
- What technologies trigger the requirements? Consistent with the Biden Administration’s “small yard, high fence” approach to protecting U.S. technology in the national security context, the EO and the ANPRM cover narrow categories of semiconductor, artificial intelligence, and quantum technology. The other proposals, however, apply to a broader range of industries.
- What activities trigger the requirements? Mileage can vary regarding whether and to what extent the various measures apply to equity investments, convertible debt, greenfield investments, joint ventures, offshoring of production, and transfer of know-how.
- What is the scope of covered foreign entities? The touchstone in this context is that certain U.S. investments in China should be subject to scrutiny. From that point, however, there are important questions, such as whether the requirements will apply to investments in Chinese-owned entities outside of China, non-Chinese entities that own Chinese entities, non-Chinese entities traded on Chinese securities exchanges, or countries other than China.
The August 2023 EO, while noted by commentators as a significant development, has not necessarily been met with universal praise, as critics highlight the narrow scope of the order, the lack of any immediately binding provisions, and the perceived slow pace of implementation.
This may create an opening for Capitol Hill to become involved in the matter. As described above, the major legislative proposals in this context have attracted significant bipartisan support, and the EO appears to have done little to dampen enthusiasm to legislate in this area; although it is possible that Democrats could cool towards passing a bill if the Biden Administration is strongly opposed. Notably, since the Senate passed the OITA as an amendment to the NDAA, the annual defense omnibus bill that will receive intense scrutiny this December, there is a reasonable chance that the issue will be the subject of close attention later this year.
In any event, it would be reasonable to expect the Biden Administration to take a measured, deliberate approach in implementing the order. The ANPRM is open for public comment through September 28, 2023, after which Treasury will synthesize and assess the (probably numerous) comments received, and then likely proceed with subsequent rounds of rulemaking, possibly in the form of a proposed rule open to another round of comment. It is possible that political pressure could drive the Administration to speed up the timeline, perhaps by issuing an interim rule that is immediately effective or effective after a short period.
Overall, while the August 2023 EO will be remembered as a turning point in U.S. government regulation of outbound investment, it is but the opening chapter. There are many twists and turns yet to come, as a lengthy regulatory process plays out and Congress seeks to legislate on a key national security issue.
“Towards a “Reverse CFIUS”? President Biden’s Executive Order on Outbound Investment and Related Congressional Proposals,” by Anthony Rapa was published in the PLI Chronicle: Insights and Perspectives for the Legal Community (September 2023) on September 22, 2023.