The US’s landmark new outbound investment restrictions catch non-US investors and allows the government to “reach into” foreign firms, lawyers have warned, with scope for the regime to be further expanded under future governments.

After a years-long effort, on October 28 the Treasury department released the first-of-its kind Outbound Investment Security Programme which monitors, and in some cases bans, US investments that allegedly threaten national security by aiding China’s development of critical technologies. 

The rules take effect on January 2 — just weeks before Donald Trump enters the White House on January 20 — and target US investments (including greenfield and joint ventures) into mainland China, Hong Kong and Macau in the fields of artificial intelligence, semiconductors and quantum computing technologies with dual-use applications. 

But legal experts warn the regime captures deals involving other countries too.

“A fallacy about this rule is that it just affects bilateral investments from the US into China,” Jonathan Gafni, head of US foreign investment at law firm Linklaters, explained. “In fact, it covers transactions in which neither the investor nor the investment target is in China.”

Foreign companies majority-owned by a US firm or individual, and those with Americans in senior positions — such as an officer, director or senior advisor — who ‘substantially participate’ in investment decisions are also caught by the new regime. 

“It’s concerning that the US can reach directly into a company and regulate people within [it], even if they’re working abroad under another country’s jurisdiction,” national security lawyer John Kabealo, founder of Kabealo Law in Washington DC, said.

As for capturing investments outside of China, Mr Gafni warned both US and non-US investors of the so-called 50% rule which extends the regime to investment targets around the world that earn more than half their revenues, or spend more than half their capital or operating expenditure, through a Chinese entity otherwise captured by the rules.

Reverse Cfius?

The mechanism had been dubbed ‘reverse Cfius’, after the Committee on Foreign Investment in the United States which, for decades, has screened inbound investments for national security risks. But while both regimes aim to stop investments that pose the same risks, their processes are different. 

The outbound programme will be operated by a new Office of Global Transactions, to sit within the Treasury. It will not  screen outbound transactions, as Cfius does, before blocking or approving them. Instead, the onus is on investors to conduct this review, requiring them to abort deals that fall into the ‘prohibited’ category of technologies that pose the biggest national security threats, and simply alert the Office of those falling into the less serious ‘notifiable’ category. Penalties range from up to $1m in fines and and forced divestiture of prohibited transactions to 20 years in prison. 

Despite the outbound programme’s ability to catch foreign investors, and the due diligence obligations it imposes on them, its coverage of just three sectors means lawyers do not expect a large number of investments to be notified or prohibited.

That is in part because of the slowdown in US-to-China investments in these areas, following other policies over the past eight years that have prompted American investors to de-risk from these markets. fDi Markets data shows that greenfield project numbers in these sectors have been low — and non-existent in the case of quantum computing — over the past decade.  

Mr Kabealo believes that rather than curbing actual dealflow, the regime is intended more as a “signal” to investors that “the US is willing to adopt new tools … as technology becomes more central to national security”. 

Tipping point

While Mr Biden’s administration has focused the programme on just three sectors, Mr Trump’s government — and those that follow — have a new policy tool that can be expanded without going through Congress, because it is based on an executive order, rather than legislation. 

“I don’t think that this is the end stage,” Mr Kabealo said. “Presumably, the way [the framework] looks five or 10 years from now is going to be a lot different. It’s always going to be tempting for the next [administrations] to look to expand the covered sectors and ultimately the countries” to tackle what it considers problematic industries abroad, he added. 

Lawyers agree that requiring investors to notify deals that are not prohibited is a way to monitor whether the programme should be strengthened.  

“President-elect Trump has not commented on the rules, but certain Republican members of US Congress have stated their belief that the rules are inadequate,” John Beahn, Cfius partner at Milbank in DC, noted.

Republicans have sponsored several bills working their way through Congress that seek to expand the sectors covered by outbound restrictions. “The Trump administration thus may decide to further enhance the regulations in the future,” Mr Beahn added. 

Now the US restrictions are finalised, other countries may hasten their efforts to introduce similar regimes. That includes the European Commission, which since mid-2023 has mooted a mechanism to minimise risks emanating from outbound investment into China. “The finalisation of the US’s rule will encourage the EU and member states respectively to progress their thinking and initiative,” Alexander Rinne, Milbank partner in Munich, said.

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