An overview of the U.S. outbound screening program and considerations for private and public actors

On October 28, 2024, the U.S. Department of the Treasury finalized its highly anticipated regulations to implement Executive Order 14105, Regulating outbound U.S. investments in countries and sectors that may pose national security concerns for the United States. The regulations finalize the draft regulations published June 21, 2024 and took effect January 2, 2025 and target investments by U.S. persons into companies in the People’s Republic of China (PRC) engaged in certain semiconductor, artificial intelligence or quantum computing activities.

Overview

At times referred to as “outbound screening” and “reverse CFIUS,” the program is in fact neither; but although relatively narrow in its initial scope, the program will have a broad effect in a variety of areas including cross-border securities offerings, the actions of individual employees in multinational companies, nominally passive investments into investment funds—to say nothing of the regulation of capital flow to a broad swath of companies from the PRC.

At its core, the program covers (i) US persons (ii) knowingly directing (iii) investments (iv) into persons from a “country of concern” (v) if the person is engaged in activities relating to specified National Security Technologies and Products. To summarize each of these prongs:

1. “US persons” includes US citizens, US permanent residents, US-domiciled entities and their non-US branches, and “any person in the United States” (such as students or persons residing in the US under work visas). Also within scope are “controlled foreign entities,” which are entities formed outside the U.S. in which a U.S. person is a majority owner of voting interests, a general partner or equivalent, or investment adviser to a pooled investment fund;
2. “Knowingly directing” means that the U.S. person has actual knowledge that a fact or circumstance exists or is substantially certain to occur, an awareness of a high probability of a fact or circumstance’s existence or future occurrence, or could have possessed such knowledge through reasonable inquiry; reasonable and diligent inquiry;
3. “Investments” include equity investments, contingent equity investments, certain debt investments, certain greenfield/brownfield transactions, joint ventures and certain limited partnership (or other pooled capital investments);
4. Foreign persons from a country of concern include Chinese entities, citizens and permanent residents and individuals, as well as entities that hold interests in Chinese entities and derive 50% or more of any of several key financial metrics from Chinese entities and entities in which covered foreign persons hold 50% or more of the equity; and
5. National Security Technologies and Products includes those relating to semiconductors, certain artificial intelligence systems and quantum computing. In each relevant sector, the line distinguishing notifiable transactions from prohibited transactions relates to the application or technical performance of the technology of the covered foreign person/entity. Investments in technologies designed “exclusively for use” in military systems or exceeding designated performance thresholds are generally prohibited, while others require notification.

To qualify as a covered transaction, a prospective transaction must meet all of the prongs above and not qualify for one of the limited exceptions (e.g. investments by U.S. persons in publicly traded securities, investments in derivative securities, full buyouts of covered foreign persons from a company’s ownership or any specific instance where parties have applied for and obtained a “national interest” exemption).

Once covered, a prospective transaction can be regulated in one of two ways: either the transaction is prohibited or the transaction requires notification to the U.S. Department of the Treasury. Engaging in a prohibited transaction—of course—would result in a violation of applicable regulations. Engaging in a notifiable transaction is permissible so long as notice is properly provided within thirty (30) days after the transaction in question is consummated.

Private Impact of the Outbound Screening Program

What this program does not do is establish an actual screening body that reviews each potential investment and either approves, places conditions on, or prohibits the investment. In that very significant way, the program is markedly different from CFIUS and similar inbound review processes in other jurisdictions.

Other than the direct application of the program to covered transactions, the most important issues and questions around the program’s function include the following:

• Underwriters in IPOs: Because the securities initially purchased by underwriters in IPOs are not publicly traded, the program covers underwriting activities in IPOs of covered foreign persons;

• Indirect investments: The regulations cover direct and indirect transactions. Initially the reference to “indirect” transactions was thought to cover investments by subsidiaries ultimately controlled by U.S. persons. However, an investment by a U.S. person in a non-covered foreign person that itself has a subsidiary that would be a covered foreign person (e.g., an investment into a German multinational company that has a Chinese subsidiary that would qualify as a covered foreign person) may be covered by the program;

• US executives of multinationals: The regulations cover all U.S. persons, which would extend to a U.S. executive at a foreign company or foreign investment fund. Even if living and working abroad, if a U.S. citizen knowingly directs a foreign company to engage in a covered transaction, that transaction is covered by the program. To avoid violating the regulations, U.S. persons in this situation must recuse themselves from the relevant transaction and have no involvement.

• Limited partners: Limited partners are exempt from the program only in instances where their aggregate commitment to a fund is less than USD $2 million or the limited partner receives a “binding” assurance that the fund will not engage in notifiable or prohibited transactions.

Policy Considerations

The arrival of the U.S. outbound screening program has been anticipated for quite some time. The version that is ultimately being enacted is relatively narrow in scope, in that it applies only to PRC targets and only those operating in certain areas of three designated sectors. Like many tools that broaden the authority of the executive branch, this program is likely to expand over time to cover countries beyond the PRC and sectors beyond AI, quantum computing and semiconductors. Additionally, Treasury has been clear that is working with allies and partner nations to encourage them to establish their own outbound screening mechanisms.

While the appetite for U.S. allies and partners to enact similar programs remains to be seen—and surely will be the subject of a sustained diplomatic push in the next U.S. presidential administration—non-U.S. companies are likely to experience an impact sooner than they might expect: The outbound screening program is run by the U.S. Department of the Treasury, and many officials who worked on the program have deep experience with CFIUS. When investing in U.S. targets, non-U.S. companies should expect that their broader investment activity will be the subject of inquiry by CFIUS, and a pattern of substantial investment in covered sectors by the outbound screening program will be viewed as a concern by CFIUS.

Separate from the direct effects of the program, possibly the most important aspect of the program is simply the signal that it sends. Administration officials have consistently maintained that the dollar value impact of the program is far less significant than articulating the policy that, so long as the PRC is viewed as a threat to the global order, U.S. investors should not be funding industries critical to the PRC’s military development. Historically, the U.S. has sought to avoid the explicit disparate treatment of particular foreign countries under its varying regulatory regimes. The outbound screening program is a marked shift away from a general policy of neutrality. Companies and policymakers should expect this trend to continue into the foreseeable future, consistent with the tightening of virtually all investment, trade control and sanctions regimes applicable to the PRC.