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If enacted, the law could be a precursor to more robust restrictions

The US Senate has passed legislation that, if enacted would require US companies and investors to notify the US Government in advance of investments in certain sensitive technology businesses in “countries of concern,” including China and Russia. While the legislation would only require notification of certain investments and stops short of imposing restrictions on outbound US investment to such countries, President Biden is reportedly considering an Executive Order that would restrict US investors’ ability to invest in specific technologies that have national security implications.


Momentum for an outbound investment notification and screening regime has been building in the US for several years. In 2018, the US Congress enacted the Foreign Investment Risk Review Modernization Act (FIRRMA), which expanded the jurisdiction of the Committee on Foreign Investment on the United States (CFIUS), the US Government’s foreign direct investment regulator, most notably to impose a mandatory filing regime for both controlling foreign acquisitions of, as well as certain non-controlling foreign investments in, US businesses dealing in critical export controlled technologies, critical infrastructure and sensitive personal data.

Jettisoned from the final version of FIRRMA was a proposal to bring certain outbound investments under CFIUS jurisdiction.  Since then, various versions of an outbound investment regime have been introduced in the US Congress. The National Critical Capabilities Defense Act (NCCDA), initially proposed as part of other legislation in 2021 and then revised in 2022, would have established a Committee on National Critical Capabilities to act as a “reverse CFIUS” and screen investments in countries of concern involving a “national critical capability,” which broadly would have included sectors such as semiconductors, artificial intelligence, defense, aerospace, medical, and the like, as well as related areas and supply chains. 

While not enacted, the NCCDA foreshadowed the current US Senate action, which injects into the National Defense Authorization Act (NDAA), which is renewed annually to among other things authorize defense funding levels and set critical defense priorities,, an outbound investment notification regime.  More information follows.

Proposed outbound investment Notification Regime

The outbound investment notification regime was added to the NDAA by amendment to reflect the terms of the Outbound Investment Transparency Act. In relevant part, the amendment (approved July 25, 2023 by an overwhelming 91-6 Senate vote), would require a US investor to notify the US Treasury Department at least 14 days before undertaking a “covered activity,” meaning certain outbound investments in entities operating in “covered sectors” and located in “countries of concern,” which countries are defined to include China, Iran, North Korea and the Russian Federation.  Secured transactions would be notified within 14 days of completion.

The investments by US persons (which includes US-established corporations, partnerships or other entities) covered by the amendment include:

  1. acquisition of a covered foreign entity;
  2. establishing a US-owned subsidiary in the relevant country for the purpose of production, design, testing, manufacture, fabrication, or development of items related to a covered sector;
  3. forming a joint venture for the same purposes, or other contractual commitments involving a covered foreign entity to jointly research and develop “new innovation,” including through the transfer of capital or intellectual property or other business proprietary information;
  4. arranging for interest in short- or long term debt obligations of a covered foreign entity that includes governance rights more characteristic of an equity investment; and
  5. acquisition with a covered foreign entity of operational cooperation that would include technology transfers, board or other formal governance representation, and business services including financial and marketing services and maintenance/assembly functions.

The covered sectors specifically targeted by the amendment are advanced semiconductors and microelectronics; artificial intelligence; quantum information science and technology; hypersonics; satellite-based communications; and networked laser scanning systems with dual-use applications.

Like the FIRRMA legislation, the amendment authorizes US Government agencies (including the Treasury, State and Commerce Departments) to engage with US “allies and partners” and help establish similar outbound notification regimes.

The US Treasury Department is tasked with drafting regulations to implement this notification regime, which regulations must be finalized within 360 days of the legislation’s enactment.  Those regulations are expected to establish the contours of the notifications and the attendant process, and to clarify the investments that are currently exempted from this regime, at present broadly described as investments that are “de minimis,” “in the national interest of the United States,” or “any ordinary or administrative business transaction.”

The Senate voted to approve the entire NDAA, including the amendment, on July 27. With Senate passage, under US legislative procedures the Senate bill now heads to the House of Representatives, where it will need to be reconciled with the NDAA passed earlier month by the House of Representatives.  Prospects for passage of a final NDAA with outbound restrictions is by no means certain, given prior opposition for such regime by prominent House members.  Thus, the NDAA that emerges from those negotiations may reflect the same outbound notification regime, or a revised one, or even forego it entirely.

Presidential Action Anticipated

While the Senate’s NDAA does not impose restrictions on outbound investments, reports indicate that since at least last year, the Biden Administration has been considering an Executive Order (EO) to restrict US investments in foreign entities operating in sensitive technology areas.  The focus and breadth of any eventual EO is not clear, but reports indicate that the Administration may be focusing more on restrictions in respect of semiconductors, artificial intelligence, and quantum technology.

President Biden has previously used the EO process to address intersecting issues of technology and national security. In September 2022, for example, the President issued an EO (which we previously addressed here) directing CFIUS to give increased scrutiny to foreign acquisitions and investments in what the US Government has deemed particularly sensitive sectors of the US economy. Thus, from most reports, it seems it is a question of when, rather than whether, an outbound investment EO will issue.

US investors, and recipients of US investment, will need to watch this space to see what restrictions any Presidential action may impose via an EO, and how that EO may co-exist with or impact the proposed US Senate outbound screening regime.

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We continue to monitor developments in this area. Please contact the authors or your usual Herbert Smith Freehills contact for more information.

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