New Restrictions on U.S. Outbound Investment in National Security Sectors in China

Two recent developments in the U.S. will affect persons investing in specific sectors in China:

  • On July 25, the U.S. Senate approved a measure to screen U.S. investments in national security sectors in China (and other “countries of concern”); and
  • On August 9, President Biden issued an executive order (EO) that outlines controls on U.S. investments in sensitive technologies. While the EO targets investment in “countries of concern,” the only countries listed are China and the Special Administrative Regions of Hong Kong and Macau.

Both initiatives are designed to restrict capital flows into Chinese companies developing advanced/sensitive technologies. Along with export controls on semiconductors and advanced computing, this has been part of a continuing trend to reduce the risk of providing key technologies to a country of concern.

Outbound Investment Transparency Act

The Senate approved an amendment to the National Defense Authorization Act (NDAA) to regulate a range of investments in China and other countries of concern and mandate notifications of specific investments. However, this bill still has to be reconciled with the version of the NDAA bill passed by the House of Representatives in June (and which did not contain any provisions on outbound investment) to create a final version. The NDAA that emerges may be unchanged, revised or omitted. 

The Outbound Investment Transparency Act would require U.S. companies to notify the Treasury Department in advance of investment in sectors relating to national critical capabilities. The disclosure requirement is just that—a tool to give the government better insight into outbound investment in targeted sectors, but the legislation would not create a full investment ban. Sectors that would be targeted include advanced semiconductors, microelectronics, large capacity batteries with dual use applications, artificial intelligence, quantum information technology, satellite-based communications, hypersonics, network laser scanning systems with dual use applications and any other export-controlled technology.  

A notification would also be required for the establishment of subsidiaries and joint ventures in China for the purpose of production, design, testing, manufacturing, fabrication or research involving one or more national critical capabilities sectors.

Executive Order 

The EO targets three categories of “national security technologies and products”: (1) semiconductors and microelectronics; (2) quantum information technologies; and (3) artificial intelligence.

The EO directs the Secretary of the Treasury to issue regulations that will either: (1) require U.S. persons to notify Treasury of covered transactions or (2) prohibit U.S. persons from undertaking other covered transactions, in either case involving certain entities located in, subject to the jurisdiction of, or owned by, persons in a “country of concern,” engaged in activities related to the technology and product areas identified in the EO. Treasury is charged with investigating violations of the order or any implementing regulations, which can result in civil and criminal penalties. In addition, Treasury has the power to nullify, void or otherwise compel the divestment of any prohibited transaction entered into after the effective date of the implementing regulations.

Treasury released an Advance Notice of Proposed Rulemaking on August 14 to solicit comments from the public on the intended scope and implementation of the initiative. The comment period ended on September 28. After receiving and reviewing comments, Treasury may make changes to the proposed rules before publishing final rules (no timeframe for the final rules has been announced). 

The proposed rules request comments on:

  • How penalties and enforcement mechanisms, if any, should be tailored to the size, type or sophistication of the U.S. person and the nature of the violation;
  • The factors that should be taken into account when considering whether to impose penalties;
  • The data sources Treasury should use to monitor compliance; and 
  • The process Treasury should institute in the event of a required divestment order.

Based the information presented, the upcoming regulations will allow the government to prevent transactions from being entered into/executed and to force divestitures and nullify investments, as is the case with the rules governing the Committee on Foreign Investment in the United States (CFIUS). Additionally, both the regulations and the EO mention civil penalties for violations of the EO, as well as prohibiting any conspiracy formed to violate the EO.


These are the latest actions taken by the U.S. government to restrict China and other countries of concern from access to key technologies such as semiconductors and microchips. Both measures will result in a new level of scrutiny of investments in China. In practice, the legislation and the EO will function as a “reverse-CFIUS,” in that they target outbound investment into China as opposed to inbound investment from China, but with the same end goal. The legislation approved by the Senate, in of itself, does not grant power to the authorities to prevent a proposed investment, but merely requires notification for covered investments. In contrast, the regulations to be issued under the EO will have an enforcement mechanism, including forcing divestments and the imposition of civil penalties. 

Companies undertaking investment in China will need to fully understand the scope of the legislation and the EO, as well as the compliance obligations. Potentially affected companies should begin now to review any planned investments and take steps to be in compliance with the new measures once they are effective. 

How BDO can help

BDO’s customs and international trade team has prior experience with CFIUS and can help clients assess their planned investments to determine whether they are compliant with both new and upcoming laws and regulations both inside and outside the United States.