[Federal Register Volume 89, Number 129 (Friday, July 5, 2024)]
[Proposed Rules]
[Pages 55846-55881]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-13923]
[[Page 55845]]
Vol. 89
Friday,
No. 129
July 5, 2024
Part IV
Department of the Treasury
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Office of Investment Security
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31 CFR Part 850
Provisions Pertaining to U.S. Investments in Certain National Security
Technologies and Products in Countries of Concern; Proposed Rule
Federal Register / Vol. 89, No. 129 / Friday, July 5, 2024 / Proposed
Rules
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DEPARTMENT OF THE TREASURY
Office of Investment Security
31 CFR Part 850
RIN 1505-AC82
Provisions Pertaining to U.S. Investments in Certain National
Security Technologies and Products in Countries of Concern
AGENCY: Office of Investment Security, Department of the Treasury.
ACTION: Proposed rule.
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SUMMARY: This proposed rule sets forth regulations that would implement
Executive Order 14105 of August 9, 2023, ``Addressing United States
Investments in Certain National Security Technologies and Products in
Countries of Concern,'' which declares a national emergency to address
the threat to the United States posed by countries of concern, which
seek to develop and exploit sensitive technologies or products critical
for military, intelligence, surveillance, or cyber-enabled
capabilities. The proposed rule would require United States persons to
provide notification to the U.S. Department of the Treasury regarding
certain transactions involving persons of a country of concern who are
engaged in activities involving certain national security technologies
and products that may contribute to the threat to the national security
of the United States; and prohibit United States persons from engaging
in certain other transactions involving persons of a country of concern
who are engaged in activities involving certain other national security
technologies and products that pose a particularly acute national
security threat to the United States. This notice of proposed
rulemaking (NPRM) seeks public comment on various topics related to the
implementation of Executive Order 14105. In accordance with 5 U.S.C.
553(b)(4), a summary of this rule may be found at https://www.regulations.gov.
DATES: Written comments must be received by August 4, 2024.
ADDRESSES: Written comments on this proposed rule may be submitted
through one of two methods:
Electronic Submission: Comments may be submitted
electronically through the Federal Government eRulemaking portal at
https://www.regulations.gov. Electronic submission of comments allows
the commenter maximum time to prepare and submit a comment, ensures
timely receipt, and enables the Department of the Treasury to make the
comments available to the public.
Mail: Send to U.S. Department of the Treasury, Attention:
Meena R. Sharma, Director, Office of Investment Security Policy and
International Relations, 1500 Pennsylvania Avenue NW, Washington, DC
20220.
The Department of the Treasury encourages comments to be submitted
via https://www.regulations.gov. Please submit comments only and
include your name and organization name (if any) and cite ``Provisions
Pertaining to U.S. Investments in Certain National Security
Technologies and Products in Countries of Concern'' in all
correspondence. All comments submitted in response to this NPRM,
including attachments and other supporting material, will be made
public, including any personally identifiable or confidential business
information that is included in a comment. Therefore, commenters should
submit only information that they wish to make publicly available.
Commenters who wish to remain anonymous should not include identifying
information in their comments.
FOR FURTHER INFORMATION CONTACT: Meena R. Sharma, Director, Office of
Investment Security Policy and International Relations, at U.S.
Department of the Treasury, 1500 Pennsylvania Avenue NW, Washington, DC
20220; telephone: (202) 622-3425; email:
[email protected].
SUPPLEMENTARY INFORMATION:
I. Background
On August 9, 2023, the President issued Executive Order 14105,
``Addressing United States Investments in Certain National Security
Technologies and Products in Countries of Concern'' (the Outbound
Order), pursuant to his authority under the Constitution and the laws
of the United States, including the International Emergency Economic
Powers Act (IEEPA), the National Emergencies Act, and section 301 of
title 3, United States Code (U.S.C.). In the Outbound Order, the
President found that the advancement by countries of concern in
sensitive technologies and products critical for the military,
intelligence, surveillance, or cyber-enabled capabilities of such
countries constitutes a threat to the national security of the United
States, which has its source in whole or substantial part outside the
United States, and that certain U.S. investments risk exacerbating this
threat. In response, the President declared a national emergency to
deal with this threat.
The Outbound Order identifies three sectors of national security
technologies and products to be covered by the program: semiconductors
and microelectronics, quantum information technologies, and artificial
intelligence. As described in the Outbound Order, countries of concern
are exploiting or have the ability to exploit certain U.S. outbound
investments, including certain intangible benefits that often accompany
U.S. investments and that help companies succeed. In an Annex to the
Outbound Order, the President identified one country, the People's
Republic of China (PRC), along with the Special Administrative Region
of Hong Kong and the Special Administrative Region of Macau, as a
country of concern. The President may modify the Annex to the Outbound
Order and update the list of countries of concern.
Advanced technologies and products that are increasingly developed
and financed by the private sector form the basis of next-generation
military, intelligence, surveillance, or cyber-enabled capabilities. As
stated in the Outbound Order, advancements in sensitive technologies
and products in the areas of semiconductors and microelectronics,
quantum information technologies, and artificial intelligence will
accelerate the development of advanced computational capabilities that
will enable new applications that pose significant national security
risks, such as the development of more sophisticated weapons systems,
breaking of cryptographic codes, and other applications that could
provide a country of concern with military advantages. The potential
military, intelligence, surveillance, or cyber-enabled applications of
these technologies and products pose risks to U.S. national security,
particularly when developed in or by a country of concern in which the
government seeks to (1) direct entities to obtain technologies to
achieve national security objectives; and (2) compel entities to share
or transfer these technologies to the government's military,
intelligence, surveillance, or security apparatuses.
U.S. investments are often more valuable than the capital alone
because they can also include the transfer of intangible benefits.
Intangible benefits that often accompany U.S. investments and help
companies succeed include: enhanced standing and prominence, managerial
assistance, access to investment and talent networks, market access,
and enhanced access to additional financing. Certain investments by
United States persons into a country of concern can be
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exploited to accelerate the development of sensitive technologies or
products--including military, intelligence, surveillance, or cyber-
enabled capabilities--in ways that negatively impact the national
security of the United States. Such investments, therefore, risk
exacerbating this threat to U.S. national security.
The Outbound Order has two primary components that serve distinct
but related objectives with respect to the relevant technologies and
products. The first component requires notification to the Secretary of
the Treasury (the Secretary) regarding certain types of investments by
a United States person in a covered foreign person engaged in covered
activities pertaining to specified categories of technologies and
products. The second component requires the Secretary to prohibit
certain types of investment by a United States person in a covered
foreign person engaged in covered activities pertaining to other
specified categories of advanced technologies and products. Both
components focus on investments that could enhance a country of
concern's military, intelligence, surveillance, or cyber-enabled
capabilities through the advancement of technologies and products in
particularly sensitive areas.
The Outbound Order directs the Secretary, in consultation with the
Secretary of Commerce and, as appropriate, the heads of other relevant
agencies, to issue, subject to public notice and comment, regulations
that, among other things, require U.S. persons to submit information to
the Department of the Treasury regarding notifiable transactions and
prohibit U.S. persons from engaging in prohibited transactions. Under
section 10(a) of the Outbound Order, the President authorizes the
Secretary to promulgate rules and regulations, including elaborating
upon the definitions contained in the Outbound Order. The Secretary's
promulgation of regulations under the Outbound Order is consistent with
the President's authority to ``issue such regulations, including
regulations prescribing definitions, as may be necessary for the
exercise'' of authorities granted under IEEPA (50 U.S.C. 1704) and the
President's authority to designate and empower the head of any
department or agency in the executive branch to perform any function
which is vested in the President by law (3 U.S.C. 301).
The Outbound Order instructs the Secretary to identify in such
regulations categories of notifiable transactions that involve covered
national security technologies and products that the Secretary, in
consultation with the Secretary of Commerce and, as appropriate, the
heads of other relevant agencies, determines may contribute to the
threat to the national security of the United States identified in the
Outbound Order. The Outbound Order also instructs the Secretary to
identify categories of prohibited transactions that involve
technologies and products that the Secretary, in consultation with the
Secretary of Commerce and, as appropriate, the heads of other relevant
agencies, determines pose a particularly acute national security threat
to the United States. Consistent with the Outbound Order, the Secretary
may exempt from the notification requirement or prohibition any
transaction determined by the Secretary, in consultation with the heads
of relevant agencies, as appropriate, to be in the national interest of
the United States. Additionally, the Outbound Order requires the
Secretary to investigate, in consultation with the heads of relevant
agencies, as appropriate, violations of the Outbound Order or the
regulations and pursue civil penalties for such violations.
II. Advance Notice of Proposed Rulemaking
Concurrent with the issuance of the Outbound Order, on August 9,
2023, the Department of the Treasury issued an Advance Notice of
Proposed Rulemaking, 88 FR 54961 (August 14, 2023) (ANPRM), to provide
transparency and clarity about the intended scope of the program and
solicit early stakeholder participation in the rulemaking process. The
ANPRM outlined key concepts under consideration and sought public
comment on a range of topics related to the implementation of the
Outbound Order.
The Department of the Treasury received 60 public comment letters
in response to the ANRPM, many from business associations that
represent a wide variety of stakeholders across industries as well as
from individuals and companies in the financial services, legal, and
technology sectors. These comments are available on the public
rulemaking docket at https://www.regulations.gov (Docket TREAS-DO-2023-
0009). The Department of the Treasury considered each comment in
developing this proposed rule. In general, comments focused on
enhancing the clarity of the scope of the program and the definitions
under consideration, aligning the program where possible with other
relevant U.S. Government programs, and supporting program development
in a targeted manner to reduce unintended consequences for U.S.
competitiveness. The key issues raised in the comments are discussed in
the next section within the discussion of the proposed rule.
III. The Proposed Rule
A. Scope and Structure of the Proposed Rule
The United States has long maintained an open investment policy and
supports cross-border investment where consistent with the protection
of United States national security interests. As discussed in the
Outbound Order, certain United States investments may accelerate the
development of sensitive technologies and products in countries that
develop them to counter United States and allied capabilities. The
Department of the Treasury has scoped the proposed rule to focus on the
types of U.S. investments that present a likelihood of conveying both
capital and intangible benefits that can be exploited to accelerate the
development of sensitive technologies or products critical for
military, intelligence, surveillance, or cyber-enabled capabilities of
such countries in ways that negatively impact the national security of
the United States. With an interest in minimizing unintended
consequences and addressing the national security risks posed by
countries of concern developing technologies that are critical to the
next generation of military, intelligence, surveillance, or cyber-
enabled capabilities, the proposed rule includes detailed definitions
and descriptions of terms and elements to appropriately scope coverage
and facilitate compliance by United States persons. At the same time,
the proposed rule seeks to avoid loopholes that could undermine the
national security objectives of the Outbound Order. The Department of
the Treasury seeks public input on how the proposed rule can best meet
these important objectives.
Consistent with the Outbound Order, the proposed rule would place
certain obligations upon any U.S. person in connection with a covered
transaction involving or resulting in the establishment of a covered
foreign person. The proposed definition of covered foreign person
focuses on the person's relationship to a country of concern and
involvement in one or more covered activity related to certain national
security technologies and products. A covered transaction may be a
prohibited transaction, meaning it could not legally be undertaken, or
it may be a notifiable transaction, meaning that it would be permitted
under the proposed rule, but a U.S.
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person would need to submit specified information about the transaction
to the Department of the Treasury. A U.S. person would also have
certain obligations under the proposed rule in connection with certain
transactions undertaken by any non-U.S. person entity that it controls,
referred to as a controlled foreign entity. Additionally, under the
proposed rule, a U.S. person would be prohibited from knowingly
directing a transaction that would be prohibited if undertaken by a
U.S. person. These and other terms are defined in Subpart B of the
proposed rule.
The Outbound Order and the proposed rule seek to complement
existing authorities and tools of the U.S. Government, including export
controls and inbound investment reviews. However, the proposed rule
would not entail a case-by-case review by the Department of the
Treasury of covered transactions or any other transactions, nor would
it establish a licensing process where a U.S. person would seek prior
authorization for a covered transaction. The proposed rule would not
establish comprehensive sanctions with respect to a particular
jurisdiction or an entire sector. Nor would the proposed rule treat
transactions as within its scope solely because they are denominated in
U.S. dollars. Rather, as proposed, the relevant U.S. person undertaking
a transaction would have the obligation to determine whether the given
transaction is prohibited, permissible but subject to notification, or
not covered by the rule because either it is an excepted transaction or
it is not within the jurisdiction set forth under the proposed rule. A
U.S. person could seek a national interest exemption from the
notification requirement or prohibition set out in this rule by
following the process described in Sec. 850.502 and further discussed
below.
As noted in the ANPRM, it is not proposed that the program provide
for retroactive application of the provisions related to the
prohibition of certain transactions and the notification of others.
However, the Department of the Treasury may, after the effective date
of the regulations, request information about transactions by U.S.
persons that were completed or agreed to after the date of the issuance
of the Outbound Order to better inform the development and
implementation of the program.
In section IV, the Department of the Treasury seeks comment from
stakeholders with respect to the proposed rule, accompanied by
empirical data or other specific information wherever possible. The
Department of the Treasury invites comments on the range of proposals
in the proposed rule, and particularly as related to the specific
provisions discussed in this section III.
B. Discussion of the Proposed Rule
Subpart A--General
This subpart includes a general discussion of the proposed rule's
scope, how the proposed rule relates to other laws and regulations,
proposed guidance on how to interpret and apply certain terms and
provisions, the application of the knowledge standard in certain
circumstances, and, consistent with the Outbound Order, the role of the
heads of other relevant agencies in the implementation and
administration of the proposed rule.
With respect to the knowledge standard specifically, because a U.S.
person must determine whether a transaction is a prohibited
transaction, a notifiable transaction, or not covered under the
proposed rule, the standard by which a U.S. person's knowledge of the
relevant facts and circumstances is assessed is an important aspect of
the rule. The ANPRM discussed that the Department of the Treasury was
considering adopting a knowledge standard across this program, which
would have meant that for a transaction potentially to be covered by
the regulations, a U.S. person would need to know, or reasonably should
know, based on information publicly available or available through
reasonable and appropriate due diligence, that it is undertaking a
transaction involving a covered foreign person and that the transaction
is a covered transaction. Some commenters to the ANPRM stated that it
would be difficult to ascertain when a U.S. person should know that a
transaction is a covered transaction. At the same time, to reduce the
risk of circumvention or evasion, the Department of the Treasury seeks
to preserve flexibility to inquire into the facts and circumstances of
a U.S. person's transaction, for example if a U.S. person failed to
undertake due diligence or deliberately avoided learning certain facts.
In light of these considerations, the proposed rule specifies that
certain provisions, including in the definition of covered transaction,
would apply only if a U.S. person has knowledge of the relevant facts
or circumstances at the time of a transaction. The proposed definition
of knowledge would include any the following: 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 reason to know of a fact or circumstance's
existence. The proposed definition of covered transaction would
generally require the U.S. person to know (or in some circumstances, to
intend) at the time of a transaction that the transaction involves a
covered foreign person, will result in the establishment of a covered
foreign person (in the case of a greenfield, brownfield, or a joint
venture investment), or will result in a person of a country of
concern's engagement in a new covered activity (in the case of a
business pivot). The Department of the Treasury is not proposing to
hold a U.S. person liable for a transaction that has all of the other
attributes of a covered transaction but that the U.S. person did not
know at the time (which includes not having reason to know at the time)
was involved with or would result in a covered foreign person. If a
U.S. person failed to conduct a reasonable and diligent inquiry at the
time of a transaction and undertook the transaction where a particular
fact or circumstance indicative of a covered transaction was present,
the Department of the Treasury may find in the course of determining
compliance with the proposed rule that the U.S. person had reason to
know of such fact or circumstance (and therefore, for purposes of the
proposed rule, knew). To provide clarity, the proposed rule includes
some of the factors that the Department of the Treasury will consider
in assessing whether a U.S. person undertook such an inquiry, as
applicable. These include efforts to obtain information and contractual
assurances that should be obtainable through a reasonable transactional
due diligence process with respect to the determination of a
transaction's status as a covered transaction or relevant entity's
status as a covered foreign person.
The Department of the Treasury has considered the practical
application of this approach. More specifically, if a U.S. person has
undertaken a reasonable and diligent inquiry and still does not have
knowledge of a fact or circumstance relevant to whether a transaction
involves or would result in a covered foreign person in a way that
would render the transaction a covered transaction, the Department of
the Treasury ordinarily (absent other circumstances) would not
attribute knowledge of that fact or circumstance to such U.S. person
even if the transaction has all of the other attributes of a covered
transaction. Additionally, if a U.S. person failed to undertake a
reasonable and diligent inquiry but the
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transaction in question does not involve a covered foreign person, the
Department of the Treasury would not hold the U.S. person liable for
the lack of a reasonable and diligent inquiry.
Commenters to the ANPRM requested a range of additional items from
the Department of the Treasury that would assist a U.S. person in
complying with the program such as including examples, making available
answers to frequently asked questions, and publishing a list of
entities designated as a covered foreign person. To illustrate the
application of certain terms and facilitate understanding of this
proposed rule, the Department of the Treasury has included a number of
examples in the discussion section at Subpart B below, which are
numbered sequentially to facilitate public comment. These examples are
provided for informational purposes and should not be construed to
alter the meaning of the text of the proposed regulations.
Additionally, the Department of the Treasury anticipates making
available answers to certain frequently asked questions as the program
is implemented.
Subpart B--Definitions
Sec. 850.202--AI System
One of the categories of covered national security technologies and
products in the Outbound Order is sensitive technologies and products
in the artificial intelligence (AI) sector. As discussed in the ANPRM,
the U.S. Government is concerned with the development of AI systems
that enable the military modernization of countries of concern--
including weapons, intelligence, and surveillance capabilities--
including those that have applications in areas such as cybersecurity
and robotics. The policy objective is to cover U.S. investment into
entities that develop AI systems that have applications that pose, or
have the potential to pose, significant national security risks without
broadly capturing investments into entities that develop AI systems
intended only for consumer applications or other civilian end uses that
do not have potential national security consequences. To address these
concerns, the proposed rule would have a notification requirement (see
the definition of notifiable transaction) and a prohibition (see the
definition of prohibited transaction) with respect to investments in
entities engaged in certain covered activities involving AI systems.
The ANPRM provided an initial definition for ``AI system'' as ``an
engineered or machine-based system that can, for a given set of
objectives, generate outputs such as predictions, recommendations, or
decisions influencing real or virtual environments. AI systems are
designed to operate with varying levels of autonomy.''
Commenters to the ANPRM requested that the Department of the
Treasury align terms with other U.S. Government programs where
possible. After the Outbound Order and ANPRM were published, the
President issued Executive Order 14110, ``Safe, Secure, and Trustworthy
Development and Use of Artificial Intelligence'' on October 30, 2023
(the AI Order), which, among other things, establishes new standards
for AI safety and security. The AI Order provides definitions for the
terms ``artificial intelligence'' and ``AI system'' which this proposed
rule incorporates in the definition of AI system. The Department of the
Treasury invites comments on the proposed definition of AI system.
Sec. 850.206--Controlled Foreign Entity
The proposed rule would define controlled foreign entity as an
entity of which a U.S. person is a parent, meaning a U.S. person
directly or indirectly holds more than 50 percent of the outstanding
voting interest or voting power of the board of the entity; is a
general partner, managing member, or equivalent of the entity; or, if
the entity is a pooled investment fund, is an investment adviser to any
such fund. The proposed rule would place obligations on a U.S. person
to take all reasonable steps to prohibit and prevent its controlled
foreign entity from undertaking a transaction that would be a
prohibited transaction if undertaken by a U.S. person, and to notify
the Department of the Treasury if the controlled foreign entity
undertakes a transaction that would be a notifiable transaction if
undertaken by a U.S. person. This approach is intended to address a
potential loophole whereby a U.S. person that is a parent of a non-U.S.
person entity could use such an entity to undertake an investment that
would otherwise be a covered transaction if undertaken by the U.S.
person directly. Additionally, this approach is aimed at increasing
U.S. Government visibility into these transactions or in some cases,
limiting the flow of capital and intangible benefits through an entity
closely tied to and often influenced by a U.S. person that is a parent,
which would be contrary to the objectives of the Outbound Order. In
assessing whether the parent has taken all reasonable steps, the
Department of the Treasury would consider certain factors with respect
to a U.S. person and its controlled foreign entity, including the
existence and implementation of periodic training and reporting
requirements with respect to compliance with the proposed regulations
and the implementation of internal controls. The Department of the
Treasury would assess compliance based on a consideration of the
totality of relevant facts and circumstances, including whether such
steps were reasonable given the size and sophistication of the parent.
Generally, if the U.S. person has taken steps, including those
described in Sec. 850.302(b), that were reasonable given, for example,
the size and sophistication of the U.S. person, the U.S. person would
be found in compliance with the proposed rule.
The definition of controlled foreign entity is intended to draw a
bright line so that a U.S. person could easily ascertain whether an
entity is its controlled foreign entity. In determining whether a U.S.
person indirectly holds voting interest or voting power of the board
via a tiered ownership structure for purposes of this provision, where
the relationship between an entity and another entity is that of a
parent and subsidiary, the voting interest or voting power of the board
of a subsidiary would be fully attributed to the parent. By contrast,
if an entity holds 50 percent or less of another entity's voting
interest or voting power of the board--that is, if the relationship is
not a parent-subsidiary relationship--then the indirect downstream
holdings of voting interest or voting power of the board, as
applicable, attributed to the first entity would be determined
proportionately.
If a U.S. person holds both direct and indirect holdings in the
same entity, the direct and indirect holdings of the U.S. person's
voting interest or voting power of the board, as applicable, would be
aggregated. For the avoidance of doubt, each of these metrics (voting
interest or voting power of the board) would be evaluated independently
from the other. For example, if an entity has 20 percent of its voting
interest and 15 percent of its voting power of the board each held by a
U.S. person, these percentages would not be combined to equal 35
percent.
The following examples illustrate the application of the proposed
definition of controlled foreign entity:
(1) Example 1. A U.S. person holds more than 50 percent of the
voting interest of the non-U.S. person Company A, and Company A holds
more than 50 percent of the voting interest of the non-U.S. person
Company B. Each of Company A and
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Company B would be a controlled foreign entity of the U.S. person,
because the U.S. person directly holds more than 50 percent of Company
A's voting interest, so Company A's holding of more than 50 percent of
Company B is fully attributed to the U.S. person.
(2) Example 2. A U.S. person holds a 25 percent voting interest of
the non-U.S. person Company C, and Company C holds 60 percent of the
voting interest of the non-U.S. person Company D. The U.S. person
indirectly holds 15 percent of the voting interest of Company D.
Company D would not be a controlled foreign entity of the U.S. person
because the U.S. person only indirectly holds 15 percent of the voting
interest of Company D.
(3) Example 3. A U.S. person holds more than 50 percent of the
voting interest of non-U.S. person Company E and 10 percent of the
voting interest of the non-U.S. person Company F. Company E also holds
41 percent of the voting interest of Company F. Companies E and F would
each be a controlled foreign entity of the U.S. person because the U.S.
person directly holds more than 50 percent of Company E and has an
aggregated voting interest (direct and indirect) of more than 50
percent of Company F (10 percent directly and 41 percent indirectly).
(4) Example 4. A U.S. person holds 49 percent of the voting
interest of Company G; Company G holds 52 percent of the voting
interest in Company H; and Company H holds 30 percent of the voting
interest of non-U.S. person Company I. Since Company G holds more than
50 percent of the voting interest in Company H, Company G is a parent
of Company H and Company H's 30 percent interest in Company I is fully
attributed to Company G. The U.S. person's indirect interest in Company
I is therefore 14.7 percent, which is calculated by multiplying the
U.S. person's 49 percent interest in Company G and Company G's 30
percent interest in Company I. Company I is not a controlled foreign
entity of the U.S. person.
The Department of the Treasury invites comments regarding this
definition, including considerations with respect to coverage of
entities established outside of the United States.
Sec. 850.208--Covered Activity
The proposed rule identifies activities that would provide the
relevant nexus between the covered foreign person and the covered
national security technologies and products described in the Outbound
Order. The Outbound Order defines the term ``covered national security
technologies and products'' to mean sensitive technologies and products
in the semiconductors and microelectronics, quantum information
technologies, and AI sectors that are critical for the military,
intelligence, surveillance, or cyber-enabled capabilities of a country
of concern, as determined by the Secretary of the Treasury in
consultation with the Secretary of Commerce and, as appropriate, the
heads of other relevant agencies. The Outbound Order further states
that, where applicable, ``covered national security technologies and
products'' may be limited by reference to certain end uses of those
technologies or products.
The three primary definitions in the proposed rule implementing the
term ``covered national security technologies and products'' are
covered activity, notifiable transaction, and prohibited transaction.
The term covered activity would mean, in the context of a particular
transaction, any of the activities referred to in the definition of
notifiable transaction in Sec. 850.217 or prohibited transaction in
Sec. 850.224. The Department of the Treasury invites comments on the
approach in the proposed rule to incorporating specific covered
national security technologies and products in the definitions of
notifiable transaction and prohibited transaction based on a
description of the technology or product and the relevant activities,
capabilities, or end uses of such technology or product, as applicable,
and any alternative approaches that should be considered.
The proposed definitions of notifiable transaction and prohibited
transaction would identify specific covered activities relevant to the
technology or product within each category. Some such covered
activities would relate to semiconductors and microelectronics
technology, equipment, and capabilities that enable the production and
certain uses of integrated circuits that underpin current and future
military innovations that improve the speed and accuracy of military
decision-making, planning, and logistics, among other things; as well
as that enable mass surveillance or other cyber-enabled capabilities.
The proposed rule would also address covered activities related to
quantum information technologies and products that enable capabilities
that could compromise encryption and other cybersecurity controls and
jeopardize military communications, among other things. In the case of
a quantum sensing platform or quantum network, the end-use provision
avoids covering use cases in strictly civilian fields. Finally, the
proposed rule would address covered activities related to certain AI
systems that have applications that pose or have the potential to pose
significant national security risk. The proposed rule would not seek to
broadly capture AI systems intended only for commercial applications or
other civilian end uses and that do not have potential national
security consequences, as discussed further below.
Those covered activities with respect to technologies and products
that pose a particularly acute national security threat are
incorporated into the definition of prohibited transaction. Those
covered activities with respect to technologies and products that may
contribute to the threat to the national security of the United States
are incorporated into the definition of notifiable transaction. The
scope of prohibited transaction and the scope of notifiable transaction
are intended to be distinct and not overlap. The Department of the
Treasury intends that the notification requirement will increase the
U.S. Government's visibility into U.S. person transactions involving
the relevant technologies and products and that these notifications
will be helpful in highlighting aggregate sector trends and related
capital flows as well as informing future policy development. The
proposed prohibitions would be tailored restrictions on specific,
identified areas to prevent U.S. persons from investing in the
development of technologies and products that pose a particularly acute
national security threat. Both the specific covered activities as well
as the technical descriptions in the proposed rule were crafted with
these objectives in mind. A more detailed discussion of specific
covered activities and proposed technical descriptions is below under
the sections on notifiable transaction and prohibited transaction. The
Department of the Treasury invites comments on alternative approaches
that would meet the stated objectives.
Sec. 850.209--Covered Foreign Person
The Outbound Order requires the Department of the Treasury to
prohibit or require notification of certain transactions involving a
covered foreign person and defines the term as ``a person of a country
of concern who or that is engaged in activities, as identified in the
regulations issued under [the Outbound Order], involving one or more
covered national security technologies and products.'' The definition
of covered foreign person in the proposed rule describes three sets of
circumstances that would cause a person to be a covered foreign person.
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Sec. 850.209(a)(1)
First, a person would be a covered foreign person if it is a person
of a country of concern that is engaged in a covered activity.
Sec. 850.209(a)(2)
Second, a person would be a covered foreign person even if it is
not itself a person of a country of concern or engaged in a covered
activity but has a particular relationship with a person of a country
of concern that is engaged in a covered activity. The relationship
would have to meet two conditions. First, the relevant person would
have to hold a specified interest in the person of a country of
concern. That interest could take the form of a voting interest, board
seat (voting or observer), equity interest, or the power to direct or
cause the direction of the management or policies of the person of a
country of concern through contractual arrangement(s) (including, for
the avoidance of doubt, any contractual arrangement with respect to a
variable interest entity). The exact size of this interest--such as the
percentage of voting interest or the number of board seats (voting or
observer)--is not determinative as long as there is some interest of
the nature described. The policy objective is to cover situations where
a vested interest between the two persons exists. Second, if there is
such an interest, then more than 50 percent of the first person's
revenue, net income, capital expenditure, or operating expenses would
need to be attributable to the person of a country of concern and that
person must be engaged in a covered activity. The first person also
would meet this condition if that person holds an interest in more than
one person of a country of concern engaged in a covered activity, and
more than 50 percent of the first person's revenue, net income, capital
expenditure, or operating expenses is attributable to such persons of a
country of concern, in aggregate. The Department of the Treasury
intends the threshold of more than 50 percent of any of the financial
metrics to be evaluated independently, not in combination. For example,
assuming no other relevant circumstances, if a person's interest in a
person of a country of concern represents 20 percent of the first
person's revenue and 31 percent of its capital expenditures, these
metrics would be evaluated independently and not combined to equal 51
percent.
Under this second set of circumstances, the Department of the
Treasury intends to capture those entities that, while not directly
engaged in a covered activity themselves, are significantly financially
connected to entities that are engaged in a covered activity. The
Department of the Treasury considers that if more than 50 percent of an
investment target's revenue, net income, capital expenditure, or
operating expense is attributable to one or more persons of a country
of concern that are engaged in a covered activity, the intangible
benefits associated with a U.S. person's investment in the target are
likely to be conveyed to such persons of a country of concern.
Accordingly, the Department of the Treasury considers that the
investment target itself should be treated as a covered foreign person.
Consistent with the policy objectives of the Outbound Order, this
approach seeks to focus on transactions where there is a likelihood of
the transfer of intangible benefits to a person of a country of concern
engaged in a covered activity. Moreover, in setting the relevant
threshold for financial metrics between the investment target and
persons of a country of concern engaged in a covered activity at more
than 50 percent, the Department of the Treasury expects that through
reasonable and diligent inquiry a U.S. person would be able to
determine whether a potential investment target meets the applicable
conditions. In capturing certain U.S. person transactions with entities
that have a vested interest in, as well as a significant financial
relationship with, a covered foreign person, this approach is intended
to, among other things, address a common transaction structure whereby
investments are made into parent companies or holding companies. Under
these circumstances, a U.S. entity or an entity in a third country
could be considered a covered foreign person.
Sec. 850.209(a)(3)
Lastly, a person of a country of concern would be a covered foreign
person by virtue of its participation in a joint venture with a U.S.
person if such joint venture is engaged in a covered activity. That is,
even though the person of a country of concern may not be engaged in a
covered activity itself, the fact of its participation in a joint
venture that is engaged in a covered activity would cause the person to
be a covered foreign person. Consistent with the policy objectives of
the Outbound Order, this approach seeks to focus on transactions where
there is a likelihood of the transfer of intangible benefits from a
U.S. person to a person of a country of concern in connection with a
covered activity.
The following examples illustrate the application of the proposed
definition of covered foreign person:
(5) Example 5. Company J holds a 10 percent equity interest in
Company K, which is a person of a country of concern engaged in a
covered activity, and income from Company K comprises 30 percent of
Company J's net income for the most recent year for which audited
financial statements are available. In addition, Company J holds a 10
percent equity interest in Company L, which is a person of a country of
concern engaged in a covered activity, and income from Company L
comprises 21 percent of Company J's net income for the most recent year
for which audited financial statements are available. Therefore,
Company J would be a covered foreign person under Sec. 850.209(a)(2),
because income from Company K and income from Company L, which are both
persons of a country of concern that are engaged in covered activities
in which Company J holds an equity interest, together comprise 51
percent of the net income of Company J for the most recent year for
which audited financial statements are available.
(6) Example 6. Assume the same facts as Example 5, except that none
of Company J's net income is attributable to Company K, and instead, 30
percent of Company J's capital expenditures for the most recent year
for which audited financial statements are available at the time of a
given transaction is attributable to Company K. Company J would not be
a covered foreign person under Sec. 850.209(a)(2), because the
percentage of capital expenditures attributable to Company K and the
percentage of net income attributable to Company L would not be
aggregated, and neither the percentage of capital expenditures
attributable to Company K nor the percentage of net income attributable
to Company L is more than 50 percent for Company J.
The Department of the Treasury invites comments regarding this
definition, including its application to a U.S. entity or a third-
country entity.
In response to the ANPRM, some commenters requested that the
definition of covered foreign person include a de minimis threshold
below which a person of a country of concern's activity involving a
covered technology or product would not trigger the definition of
covered activity, meaning the person would not be a covered foreign
person. The Department of the Treasury declines to propose a de minimis
threshold for this definition. A de minimis threshold based on the
financial significance of a covered
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activity in relation to any particular entity does not necessarily
correspond to the national security significance of such activity.
Setting a de minimis threshold based on the level of activity involving
a covered technology or product would be challenging and would not
effectively respond to the national security objectives of the Outbound
Order.
In response to the ANPRM, some commenters requested that the
Department of the Treasury maintain a publicly available list of
covered foreign persons. The Department of the Treasury declines to
adopt that suggestion in the proposed rule. Compiling a list of covered
foreign persons would be challenging given that any such list would
likely be subject to frequent change and likely underinclusive, which
would undermine the national security goals of the Outbound Order.
Limiting the definition of covered foreign person to persons included
on such a list would risk excluding certain persons that should be
covered in order to accomplish the objectives of the Outbound Order,
including early-stage companies that may not have come to the attention
of the Department of the Treasury. Providing a list of covered foreign
persons could also result in attempts to evade the rule through
corporate restructuring and would be overly burdensome to maintain for
the reasons listed above. Rather, under the proposed rule, the
Department of the Treasury would expect a U.S. person to conduct a
reasonable and diligent inquiry to determine whether a transaction is
covered under the proposed rule, including whether any covered foreign
person is involved.
Sec. 850.210--Covered Transaction
As discussed in greater detail below, the definition of covered
transaction would include a U.S. person's direct or indirect:
Acquisition of an equity interest or contingent equity
interest in a covered foreign person;
Provision of debt financing convertible to an equity
interest in a covered foreign person or provision of debt financing
that affords the lender certain management or governance rights in a
covered foreign person;
Conversion of a contingent equity interest or convertible
debt in a covered foreign person;
Greenfield investment or certain other corporate
expansions that either will establish a covered foreign person, or will
cause an existing person of a country of concern to pivot into a new
covered activity;
Entrance into a joint venture, wherever located, with a
person of a country of concern where the joint venture will undertake a
covered activity; and
Investment as a limited partner or equivalent (LP) into a
non-U.S. person pooled investment fund that invests in a covered
foreign person.
Each of the above transaction types includes a specific requirement
for what a U.S. person would need to know or intend for a transaction
to be a covered transaction. Further detail on each of these
transaction types is provided below.
The definition of covered transaction notes that it does not
include an excepted transaction or, consistent with the Outbound Order,
a transaction for the conduct of the official business of the United
States Government by employees, grantees, or contractors thereof.
Acquisition of Equity Interest or Contingent Equity Interest
The definition of covered transaction would include the acquisition
of an equity interest (or equivalent) in a covered foreign person and
the acquisition of a financial instrument that does not constitute an
equity interest at the time of the covered transaction but is
convertible into, or provides the right to acquire, an equity interest
in a covered foreign person upon the occurrence of a contingency or
defined event. While the issuance of debt secured by equity in a
covered foreign person would not, absent other circumstances, be a
covered transaction, foreclosure on collateral that constitutes an
equity interest in a covered foreign person would constitute the
acquisition of an equity interest under the proposed rule and would be
a covered transaction.
Convertible Debt; Debt With Special Rights
The definition of covered transaction would include the provision
of debt financing that is convertible by the U.S. person into equity of
a covered foreign person. Additionally, the provision of debt financing
that affords or will afford the U.S. person the right to make
management decisions on behalf of a covered foreign person or to
appoint members of the board of a covered foreign person would also be
a covered transaction. The intent is to capture lending by a U.S.
person lender only where such lending involves the acquisition of
equity or equity-like rights by the U.S. person lender with respect to
a covered foreign person.
Conversion of Contingent Interest or Convertible Debt
The definition of covered transaction includes as a separate basis
of coverage the conversion of a contingent equity interest or
convertible debt in a covered foreign person. As stated above, in
addition to the conversion, the original acquisition of either such
interest is a covered transaction. With respect to a notifiable
transaction, the policy objective of including the conversion of a
contingent equity or convertible debt in the definition of covered
transaction is to gain visibility into the circumstances in which
contingent interests in a covered foreign person convert. Including the
conversion of a contingent equity interest or convertible debt in the
scope of covered transaction would also address circumstances where the
investment target or borrower is not a covered foreign person at the
time of acquisition of the relevant interest but is a covered foreign
person at the time of conversion of such interest (e.g., as a result of
newly engaging in a covered activity or the target's relationship with
a person of a country of concern engaged in a covered activity). The
Department of the Treasury anticipates that if the original acquisition
was a notifiable transaction and was timely notified, the second
notification submitted with respect to the conversion would likely be
similar to the first notification and thus less time-consuming to
prepare. The Department of the Treasury considered alternative
approaches such as covering only the acquisition and not the conversion
of contingent interests or covering only the conversion. However, each
alternative could be either over- or under-inclusive in situations
where an investment target has pivoted away from, or into, a covered
activity in the interim between acquisition and conversion.
Greenfield or Brownfield Investment
The definition of covered transaction would include a U.S. person's
acquisition, leasing, or development of operations, land, property, or
other assets in a country of concern when the U.S. person knows that
such acquisition, leasing, or development will, or the U.S. person
intends it to, either (1) establish a covered foreign person, such as
the acquisition of land in a country of concern with the intent to
convert it into a facility that designs an integrated circuit or (2)
pivot an existing entity's operations into a new covered activity, such
as the acquisition of a factory with the intent to retrofit it to
produce equipment for performing
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volume advanced packaging. A U.S. person's intent (as distinct from
knowledge) would be sufficient in these cases for the transaction to be
a covered transaction. This is because in the greenfield and brownfield
context, a U.S. person may not know at the time of the transaction that
the investment will result in a covered activity, yet the Department of
the Treasury nevertheless seeks to cover activities intended to bring
about the establishment of a covered foreign person or a person of a
country of concern's engagement in a new covered activity, since such a
situation is likely to convey intangible benefits from the U.S. person
to a covered foreign person. That a covered foreign person ultimately
results from a greenfield or brownfield investment would not be
necessary for coverage under the proposed rule, as long as the intent
to establish a covered foreign person is present at the time of the
transaction. The Department of the Treasury has assessed that requiring
a greenfield or brownfield investment to result in the establishment of
a covered foreign person or a person of a country of concern's
engagement in a new covered activity before triggering obligations
associated with covered transaction status risks undermining the
national security goals of the program. For the avoidance of doubt, the
Department of the Treasury does not intend to scope in a real estate
transaction where the U.S. person does not have the requisite knowledge
or intent.
Joint Venture Investment
The definition of covered transaction would include a U.S. person's
entrance into a joint venture, wherever located, with a person of a
country of concern where the U.S. person either knows or intends that
the joint venture will engage in a covered activity. Like the
greenfield or brownfield investment prong above, this is intended to
cover situations in which a covered foreign person does not exist at
the time of a transaction, but the transaction structure presents the
opportunity and incentive for the transfer of intangible benefits from
a U.S. person to a person of a country of concern through the joint
venture. Similar to a greenfield or brownfield transaction, a U.S.
person's intent (as distinct from knowledge) would be sufficient for
coverage in the joint venture context because a U.S. person may not
know at the time of the transaction that the joint venture will engage
in a covered activity, yet the Department of the Treasury seeks to
capture transactions likely to convey intangible benefits to a covered
foreign person. Also similar to a greenfield or brownfield transaction,
the joint venture would need not engage in a covered activity for the
establishment of the joint venture to be a covered transaction under
the proposed rule, as long as the U.S. person intends for it to do so.
Investment Made as an LP
The definition of covered transaction would include U.S. person
investments made as an LP into certain pooled funds. This approach
would differ from other prongs of the definition of covered transaction
in the ways described below.
First, it would cover only an investment into a non-U.S. person
pooled investment fund because the activities of such a fund that is a
U.S. person would be directly addressed by other prongs of this
definition.
Second, it would cover an investment only when the U.S. person
knows at the time of the investment that the pooled fund likely will
invest in a person of a country of concern engaged in one or more of
the three sectors of covered national security technologies and
products identified in the Outbound Order. The Department of the
Treasury has assessed that when a pooled fund is soliciting
investments, it may not yet have identified specific targets in which
it seeks to make investments. Therefore, it may not be practicable for
an LP to know where its investment is going, via the pooled fund, in
terms of a specific target entity even following a reasonable and
diligent inquiry at the time of its LP investment. However, it is
possible for an LP to know, through a reasonable and diligent inquiry,
where a pooled fund is likely to invest at a higher level in terms of
geography and sector. For example, a U.S. person could know that a
pooled fund is likely to invest in PRC AI companies based on
researching past investments made by a pooled fund's manager, engaging
with the pooled investment fund's general partner, or reviewing such
fund's prospectus or other documentation.
Third, this approach would cover an LP investment only when the
pooled investment fund undertakes an investment that would be a covered
transaction if made by the U.S. person directly, to avoid regulating
transactions by U.S. person LPs that do not ultimately result in
investments into a covered foreign person. In other words, in order to
meet the criteria of a covered transaction, (1) the U.S. person LP
would need to invest in a pooled fund that the U.S. person knows is
likely to invest in a person of a country of concern that is in any of
the three specified sectors in the Outbound Order; and (2) such pooled
fund would need to actually undertake a transaction that would be a
covered transaction if undertaken by a U.S. person. If the transaction
is a notifiable transaction, this would mean that the U.S. person would
be required to file the relevant notification no later than 30 calendar
days following the earliest date of the pooled fund's investment in a
covered foreign person. If the investment ultimately made by the pooled
fund would have been a prohibited transaction if made by a U.S. person
and the U.S. person knew at the time of its LP investment in the pooled
fund that the pooled fund likely would invest in a person of a country
of concern engaged in any of the three specified sectors in the
Outbound Order, then such investment made by the pooled fund in a
covered foreign person would result in the U.S. person having made a
prohibited transaction, which would be a violation of the proposed
rule. On the other hand, a U.S. person's investment as an LP into a
pooled fund would not be a covered transaction if the U.S. person does
not know at the time of its investment that the pooled investment fund
likely will invest in a person of a country of concern that is in any
of the three relevant sectors, even when such fund subsequently
undertakes an investment that would be a covered transaction if made by
a U.S. person.
Indirect Covered Transaction
To address a potential loophole, a U.S. person's transaction that
is indirect, as well as direct, would be a covered transaction
regardless of the number of intermediary entities involved in such
transaction if it meets the elements of the definition. For example, if
a U.S. person purchased shares in a special purpose vehicle, wherever
located, that in turn acquired an equity interest in a covered foreign
person, and the U.S. person knew at the time of its transaction that
the special purpose vehicle would be acquiring an equity interest in a
covered foreign person, that transaction would be a covered
transaction.
Knowledge Requirement for a Covered Transaction
As set forth in the proposed rule, a transaction that otherwise has
the attributes of a covered transaction ordinarily would be treated as
a covered transaction only if the relevant U.S. person knows at the
time of the transaction that the transaction involves, or will result
in the establishment of, a covered foreign person (or will result in a
person of a country of concern's engagement in a
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new covered activity). As discussed with respect to Subpart A,
knowledge for this purpose includes both actual knowledge and reason to
know of the relevant facts or circumstances--that is, a U.S. person
that had reason to know of the relevant facts or circumstances would
not be excused from obligations or liability associated with entering
into a covered transaction due to its alleged lack of actual knowledge
of those facts or circumstances. Please see the discussion in Subpart A
above for further information on how knowledge, which includes reason
to know, would be assessed.
The following examples illustrate the application of the proposed
definition of covered transaction:
(7) Example 7. A U.S. person acquires an existing manufacturing
facility in a country of concern that does not, at the time of the
acquisition, engage in a covered activity. Prior to the transaction,
the U.S. person extensively researches the feasibility of retrofitting
the facility to undertake a covered activity and secures financing on
the basis of future cash flows from the facility's undertaking of such
covered activity. The acquisition would therefore be a covered
transaction under Sec. 850.210(a)(4)(i) because it is the acquisition
of assets in a country of concern that the U.S. person intends at the
time of the transaction to result in the establishment of a covered
foreign person.
(8) Example 8. A U.S. person invests as an LP in Company M, a
pooled fund which is not a U.S. person. At the time of the U.S.
person's investment, Company M has not undertaken any investments.
However, Company M's manager has an extensive track record of investing
predominantly in the artificial intelligence sector in a country of
concern. Company M's prospectus states that Company M will invest in
entities that are leading AI technology advancements including those
with a principal place of business in a country of concern. One year
following the conclusion of fundraising, Company M undertakes a
transaction that would be a covered transaction if undertaken by a U.S.
person. The U.S. person's investment as an LP would therefore be a
covered transaction under Sec. 850.210(a)(6), because the U.S. person
had reason to know (and therefore is deemed to have known) that Company
M was likely to invest in a person of a country of concern engaged in
one of the sectors enumerated in Sec. 850.210(a)(6), and Company M
subsequently undertook a transaction that would be a covered
transaction if undertaken by a U.S. person. More specifically, if
Company M's transaction would be a prohibited transaction if undertaken
by a U.S. person, then the U.S. person's investment as an LP into
Company M would be a prohibited transaction; if Company M's transaction
would be a notifiable transaction if undertaken by a U.S. person, then
the U.S. person's investment as an LP into Company M would be a
notifiable transaction. The completion date of the transaction for the
purpose of the deadline for a submission of the required notification
would be the earliest date upon which any interest, asset, property, or
right in the relevant covered foreign person was conveyed, assigned,
delivered, or otherwise transferred to Company M. It would not be the
date of the U.S. person's original investment in Company M.
(9) Example 9. Assume the same facts as Example 8, except that
Company M never undertakes a transaction that would be a covered
transaction if undertaken by a U.S. person. As a result, the U.S.
person's LP investment in Company M would not be a covered transaction,
as Company M's undertaking of a transaction that would be a covered
transaction if undertaken by a U.S. person is a necessary element of
Sec. 850.210(a)(6) of the proposed rule.
Some commenters to the ANPRM requested that certain other
activities be either included in the definition of excepted transaction
or explicitly excluded from the definition of covered transaction.
These include university-to-university research collaborations; the
sale of goods and services; the purchase, sale, and licensing of
intellectual property; and a variety of financial and non-financial
services ancillary to a transaction such as the processing, clearing,
or sending of payments by a bank. The proposed definition of covered
transaction has been crafted to refer to a narrow set of specific
transaction types, and the proposed rule does not explicitly exclude a
list of other activities from this definition as it is not necessary
(for any transaction to be covered, the elements in the definition of
covered transaction need to be met).
Under Sec. 850.210(b)(ii), consistent with the Outbound Order, a
transaction undertaken for the conduct of the official business of the
United States Government by employees, grantees, or contractors thereof
would not be a covered transaction.
Sec. 850.214--Excepted Transaction
The proposed rule includes a definition of excepted transaction
that refers to a transaction that is not a covered transaction because
it meets specified conditions. See the discussion of Subpart E below
for more information.
Sec. 850.216--Knowledge
The proposed rule defines knowledge (which includes variants such
as ``know'') as actual knowledge that a fact or circumstance exists or
is substantially certain to occur, an awareness at the time of a
transaction of a high probability of a fact or circumstance's future
occurrence, or reason to know of a fact or circumstance's existence.
Consistent with commenter requests in response to the ANPRM that the
terms align with other U.S. Government programs where possible, this
language is similar to the definition of knowledge found in the Export
Administration Regulations at 15 CFR 772.1. See the above discussion of
Subpart A for more information on how this term would be applied in the
proposed rule.
Sec. 850.217--Notifiable Transaction
A notifiable transaction would be a covered transaction in which
the relevant covered foreign person undertakes (or in the case of
certain greenfield, brownfield, or joint venture investments, the U.S.
person knows will or intends to undertake) any of several specified
covered activities listed in the proposed definition of notifiable
transaction. At this time, the Department of the Treasury has
determined that the listed activities may contribute to the threat to
the national security of the United States identified in the Outbound
Order. Each of the technical descriptions and, where applicable,
references to end uses in the proposed definition, is designed to
achieve the national security policy objectives of the Outbound Order,
and the Department of the Treasury may consider further technical
refinements consistent with these objectives. Each covered activity for
purposes of a notifiable transaction is discussed below.
The submission of information to the Department of the Treasury
regarding a notifiable transaction would increase the U.S. Government's
visibility into a transaction involving technologies and products
relevant to the threat to the national security of the United States
identified in the Outbound Order. This information would be instructive
in identifying sectoral trends and related capital flows in the covered
activities. Additionally, it would inform future policy development
with respect to both implementation of the Outbound Order, as well as
the establishment or expansion of other U.S. Government programs
relevant to the covered
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national security technologies and products. It is expected that this
information would help policymakers determine whether any existing
legal authorities should be used, or new action should be taken to
address the threat to the national security of the United States
identified in the Outbound Order. The Department of the Treasury
invites comments on whether the proposed definition of notifiable
transaction meets these goals.
Integrated Circuit Design and Production
The covered activities set forth in the definition of notifiable
transaction would include the design, fabrication, or packaging of any
integrated circuit that is not covered by the prohibited transaction
definition (i.e., that does not meet the performance parameters and
criteria identified in Sec. 850.224(c), (d) and (e), as applicable).
The proposed rule separately defines the terms fabricate and package,
adding further technical detail as to both the notification and
prohibition provisions. The Department of the Treasury assesses that
the scope of this notification requirement would increase the U.S.
Government's visibility into the volume and nature of investments of
U.S. person transactions involving the defined technologies and
products that may contribute to the threat to the national security of
the United States.
AI Systems
The covered activities set forth in the definition of notifiable
transaction would include the development of an AI system that is not
covered by the prohibited transaction definition (i.e., that does not
meet the criteria identified in Sec. 850.224(j) or (k)) and that is:
(1) Designed to be used for any government intelligence or mass-
surveillance end use (e.g., through mining text, audio, or video; image
recognition; location tracking; or surreptitious listening devices) or
military end use (e.g., for weapons targeting, target identification,
combat simulation, military vehicle or weapons control, military
decision-making, weapons design, or combat system logistics and
maintenance);
(2) Intended by the relevant covered foreign person to be used for
cybersecurity applications, digital forensics tools, and penetration
testing tools, or the control of robotic systems; or
(3) Trained using a quantity of computing power greater than a
certain level of computational operations (e.g., integer or floating-
point operations). The Department of the Treasury is considering three
potential alternates for the level of computational operations:
10[caret]23, 10[caret]24, or 10[caret]25.
This approach to covering the development of an AI system for
purposes of a notifiable transaction reflects further consideration
since the end-use qualification discussed in the ANPRM and focuses on
the AI system's design in some cases and its intended use by the
relevant covered foreign person in other cases. Additionally, the
proposed rule would include a technical parameter based on the amount
of compute used to train an AI system. Commenters to the ANPRM
recommended, in the context of prohibited transactions, adding coverage
of transactions involving frontier AI models, defined based on a set of
technical parameters. Given the approach related to the development of
an AI system for purposes of a prohibited transaction (discussed
below), the proposed rule offers for comment specific technical
parameters in the definition of notifiable transaction as well. The
Department of the Treasury intends to select one of the compute power
alternates for purposes of the prohibited transaction definition and
would potentially set the relevant amount of compute power for the
corresponding provision in the definition of notifiable transaction
below the amount of compute power in the definition of prohibited
transaction (at Sec. 850.224(k)(1)). For the definition of notifiable
transaction as well as the definition of prohibited transaction, the
Department of the Treasury is interested in considering alternatives,
including whether the definition should account for (1) specialized AI
models trained on high-quality data that could require a lower amount
of compute power; (2) AI models that can be fine-tuned or retrained to
remove safety features; (3) other techniques (such as model scaling,
Monte Carlo Tree Search, pruning, chain of thought, that could be used
to increase performance); or (4) other relevant considerations,
including alternative language with respect to the definition of
covered activities relating to AI systems for purposes of notifiable
transactions to add clarity or more precisely capture activities giving
rise to the national security concerns related to the development of AI
systems.
Sec. 850.221--Person of a Country of Concern
This defined term is a component of the definitions of covered
foreign person and covered transaction. It would include an individual
who is a citizen or permanent resident of a country of concern and
exclude U.S. citizens and U.S. permanent residents. It would also
include an entity with a principal place of business in, headquartered
in, incorporated in, or organized under the laws of a country of
concern. The Department of the Treasury invites comments on the impact
of this definition as proposed, particularly whether other categories
of persons in addition to U.S. citizens and permanent residents should
be excluded from the definition of person of a country of concern.
The definition would also include the government of a country of
concern, persons acting on behalf of such a government, and persons
controlled by or directed by such a government. The Department of the
Treasury expects that, through a reasonable and diligent inquiry, a
U.S. person should be able to determine whether a potential investment
target involves a person of a country of concern as defined in the
proposed rule.
Finally, the definition would include any entity, wherever located,
in which one or more persons of a country of concern, individually or
in the aggregate, hold at least 50 percent of any outstanding voting
interest, voting power of the board, or equity interest, regardless of
whether the interest is held directly or indirectly. This is intended
to capture entities located outside of a country of concern that are
majority-owned by persons of a country of concern, because a U.S.
person investment into such an entity could result in the transfer of
intangible benefits to or for the benefit of one or more persons of a
country of concern. When evaluating a tiered ownership structure for
any given entity, a U.S. person would need to determine whether persons
of a country of concern, individually or in the aggregate, hold at
least 50 percent of the entity's voting interest, voting power of the
board, or equity interest, in which case, the entity would be
considered a person of a country of concern. If the entity meets this
criteria, another entity in which it holds at least 50 percent of the
entity's voting interest, voting power of the board, or equity interest
would also be a person of a country of concern, and so on. The
definition is intended to draw a bright line so that it is
straightforward for a U.S. person to ascertain whether an entity is a
person of a country of concern.
The following examples illustrate the application of the proposed
definition of person of a country of concern:
(10) Example 10. Company N has its principal place of business in a
country outside of a country of concern and is headquartered and
incorporated outside
[[Page 55856]]
of a country of concern. Six citizens of a country of concern, each of
whom is not a U.S. citizen or U.S. permanent resident, each hold 10
percent of Company N's equity interest. Company N would therefore be a
person of a country of concern under Sec. 850.221(d), because an
aggregate of 60 percent of the entity's equity interest is held by
persons of a country of concern.
(11) Example 11. Assume the same facts as Example 10. In addition,
Company N holds 60 percent of the voting power of the board of Company
O, which also has its principal place of business in a country outside
of a country of concern and is headquartered and incorporated outside
of a country of concern. Company O would therefore be a person of a
country of concern under Sec. 850.221(e), because 60 percent of
Company O's board voting power is held by Company N, which is a person
of a country of concern under Sec. 850.221(d).
Sec. 850.224--Prohibited Transaction
A prohibited transaction would be a covered transaction in which
the relevant covered foreign person undertakes (or in the case of
certain greenfield, brownfield, or joint venture investments, the U.S.
person knows will or intends to undertake) any of several specified
covered activities listed in the proposed definition of prohibited
transaction. At this time, the Department of the Treasury has
determined that the listed activities pose a particularly acute
national security threat to the United States identified in the
Outbound Order. Each of the technical descriptions and, where
applicable, references to end uses in the proposed definition, is
designed to achieve the focused national security policy objectives of
the Outbound Order, and the Department of the Treasury may consider
further technical refinements consistent with these objectives. Each
covered activity for purposes of a prohibited transaction is discussed
below.
Advanced Integrated Circuit Design and Equipment
The covered activities set forth in the definition of prohibited
transaction would include developing or producing any electronic design
automation software for the design of integrated circuits or advanced
packaging. The proposed rule separately defines the terms advanced
packaging, develop, and produce, adding further technical detail to the
prohibition provision. Additional covered activities included in the
definition of prohibited transaction would include developing or
producing any of the following: certain front-end semiconductor
fabrication equipment designed for performing the volume fabrication of
integrated circuits, equipment for performing volume advanced
packaging, or other items designed exclusively for use in or with
extreme ultraviolet lithography fabrication equipment.
Advanced Integrated Circuit Design and Production
The covered activities set forth in the definition of prohibited
transaction would include designing any integrated circuit that meets
or exceeds certain advanced technical thresholds identified by the
Bureau of Industry and Security of the Department of Commerce, or
integrated circuits designed for operation at or below 4.5 Kelvin. The
term would also include the fabrication of advanced integrated circuits
that meet the technical criteria specified in the proposed rule.
Additionally, the term would include the packaging of any integrated
circuit using advanced packaging techniques.
Supercomputers
The covered activities set forth in the definition of prohibited
transaction would include developing, installing, selling, or producing
any supercomputer enabled by advanced integrated circuits that can
provide a theoretical compute capacity of 100 or more double-precision
(64-bit) petaflops or 200 or more single-precision (32-bit) petaflops
of processing power within a 41,600 cubic foot or smaller envelope. The
Department of the Treasury invites comments on the scope of covered
activities involving supercomputers in the definition of prohibited
transaction including whether any adjustments or clarification should
be made.
Quantum Computers and Components
The covered activities set forth in the definition of prohibited
transaction would include developing a quantum computer or producing
any of the critical components required to produce a quantum computer
such as a dilution refrigerator or two-stage pulse tube cryocooler. The
proposed rule separately defines the term quantum computer, adding
further technical detail to the prohibition provision. The Department
of the Treasury invites comments regarding this prong of the definition
including input on how further clarity might be provided with respect
to what is meant by critical components, and the extent to which
dilution refrigerator or two-stage pulse tube cryocooler can be further
defined in terms of critical performance or otherwise.
Quantum Sensors
The covered activities set forth in the definition of prohibited
transaction would include developing or producing any quantum sensing
platform designed for, or which the relevant covered foreign person
intends to be used for, military, government intelligence, or mass-
surveillance end uses. The proposed rule includes an end-use limitation
to appropriately scope this activity to circumstances that could give
rise to a particularly acute national security threat, recognizing that
similar technologies could have important civilian purposes.
Quantum Networking and Quantum Communication Systems
The covered activities set forth in the definition of prohibited
transaction would include developing or producing any quantum network
or quantum communication system designed for, or which the relevant
covered foreign person intends to be used for: (1) networking to scale
up the capabilities of quantum computers; (2) secure communications,
such as quantum key distribution; or (3) any other application that has
military, government intelligence, or mass-surveillance end use. The
proposed rule includes an end-use limitation to appropriately scope
this activity to circumstances that could give rise to a particularly
acute national security threat, recognizing that similar technologies
could have civilian purposes.
AI Systems
Some commenters to the ANPRM noted that the AI definitions under
consideration in connection with a prohibited transaction could apply
broadly and potentially sweep in civilian uses of an AI system
unnecessarily. As noted above, the policy objective is to cover U.S.
investment into entities that develop AI systems that have applications
that pose a particularly acute national security threat without broadly
capturing investments into entities that develop AI systems intended
only for consumer applications or other civilian end uses that do not
have potential national security consequences. To make sure the scope
of prohibited transactions related to the development of any AI system
appropriately addresses the national security threat identified in the
Outbound Order, the covered activities would include any AI system that
is designed to be exclusively used for, or which the relevant covered
foreign
[[Page 55857]]
person intends to be used for, any military end use (e.g., for weapons
targeting, target identification, combat simulation, military vehicle
or weapon control, military decision-making, weapons design, or combat
system logistics and maintenance); or government intelligence or mass
surveillance end use (e.g., through mining text, audio, or video; image
recognition; location tracking; or surreptitious listening devices).
Additionally, as discussed above in connection with notifiable
transactions involving the development of AI systems, commenters to the
ANPRM recommended, among other things, adding coverage of transactions
involving frontier AI models and defined based on a set of technical
parameters. The proposed rule offers for comment specific technical
parameters in describing any AI system that is trained using a certain
quantity of computing power generally and separately, any AI system
that is trained using a certain quantity of computing power using
primarily biological sequence data. The Department of the Treasury is
considering setting the general computing power threshold for a
prohibited transaction at one of three levels: 10[supcaret]24,
10[supcaret]25, or 10[supcaret]26 computational operations (e.g.,
integer or floating-point operations). As discussed above in connection
with notifiable transactions involving the development of AI systems,
the Department of the Treasury intends to select one of the general
compute power alternates for purposes of the prohibited transaction
definition and would potentially set the relevant amount of compute
power for the corresponding provision in the definition of notifiable
transaction (at Sec. 850.217(d)(3)) below the amount of compute power
in the definition of prohibited transaction. With respect to AI systems
trained primarily using biological sequence data, the Department of the
Treasury is considering setting the computing power threshold at one of
two levels: 10[supcaret]23 or 10[supcaret]24 computational operations.
As noted below, the Department of the Treasury is considering whether
this approach with respect to biological sequence data should be
utilized for the definition of a notifiable transaction rather than the
definition of a prohibited transaction. Regardless, the Department of
the Treasury invites comments on the impacts of setting the computing
power threshold at the various levels proposed as alternates.
The Department of the Treasury, in consultation with other
departments and agencies, has determined that the covered activities
described in connection with AI systems pose a particularly acute
threat to the national security of the United States and thus are
appropriate for the definition of prohibited transaction. The specified
end uses relate directly to the national security threats identified in
the Outbound Order, and the Department of the Treasury, in consultation
with other departments and agencies, has determined that transactions
involving either an AI system exclusively designed to be deployed for
such an end use or the relevant covered foreign person's intent to use
an AI system for such an end use present a particularly acute threat to
U.S. national security. Meanwhile, the general computing power
thresholds set forth for consideration would cover powerful AI models,
which could enable potential applications of concern, such as the
design, synthesis, acquisition, or use of chemical, biological,
radiological, or nuclear weapons; powerful offensive cyber operations;
or the evasion of human control or oversight through deception or
obfuscation. Such models can also enable next-generation military
capabilities through improving the speed and accuracy of military
decision-making and intelligence capabilities. Models trained using a
quantity of computing power greater than 10[supcaret]23 or
10[supcaret]24 computational operations using primarily biological
sequence data could enable potential biotechnology applications of
concern, including for the design of biological weapons. The Department
of Treasury welcomes comments on whether any transactions involving AI
systems that could pose a threat to U.S. national security as
identified in the Outbound Order would not be covered by the
definitions of a notifiable transaction or a prohibited transaction.
The Department of the Treasury invites comments on the impacts of each
of these computing power threshold alternates. The Department of the
Treasury is also interested in comments on whether and why this
approach to biological sequence data should instead be considered for
the notification requirement rather than the prohibition.
Cross-Reference to U.S. Government Lists
The definition of prohibited transaction would also provide that
any covered transaction is prohibited when it is with or involves a
covered foreign person undertaking any covered activity--whether
referred to in the definition of prohibited transaction or in the
definition of notifiable transaction--if the covered foreign person is
included on one of several U.S. Government lists, such as the Entity
List maintained by the Bureau of Industry and Security within the
Department of Commerce. Because the United States has already
determined that the inclusion of a person on such a list evidences a
threat to the interests of the United States, such as the foreign
policy or national security of the United States, if a listed person is
a covered foreign person engaged in any covered activity, then a U.S.
person's covered transaction with such covered foreign person and the
transfer of capital and U.S. person intangible benefits to them would
pose a particularly acute risk to U.S. national security even when such
listed person is engaged in what would otherwise qualify as only a
covered activity under the notifiable transaction definition.
Sec. 850.229--U.S. Person
The proposed rule would apply to the conduct of a U.S. person only.
In the proposed rule, a U.S. person would include any United States
citizen or lawful permanent resident, as well as any entity organized
under the laws of the United States or any jurisdiction within the
United States, including any foreign branch of any such entity, or any
person in the United States. This would mean that an entity organized
in the United States would be considered a U.S. person for purposes of
the proposed rule even if its parent is a non-U.S. person.
Some commenters to the ANPRM raised questions about the potential
extraterritorial reach of the proposed rule as it relates to this term.
Depending on how U.S. person is defined, these commenters noted that
the proposed rule could purport to restrict activity taking place
outside of the United States. In response to these comments, the
Department of the Treasury clarifies two points. First, a non-U.S.
person that happens to be a parent of a U.S. person would not be
treated as a U.S. person for the purposes of this proposed rule solely
because of its relationship to the U.S. person. Second, while any
person in the United States, including personnel of a non-U.S. person
entity working in a branch office of that entity or otherwise, would be
considered a U.S. person under the proposed rule based on their
presence in the United States, such person's non-U.S. person employer
would not be considered a U.S. person solely because of an employee's
presence in the United States. The Department of the Treasury invites
comments regarding this proposed approach.
[[Page 55858]]
Some commenters to the ANPRM noted that the potential inclusion of
``any person in the United States'' in this definition could scope in a
non-U.S. person in transit through the United States that takes an
action during this transit that could constitute a covered transaction,
such as signing investment paperwork, and therefore this portion of the
definition should be scaled back or removed. However, the inclusion of
``any person in the United States'' mirrors the language used in the
definition of ``United States person'' in the Outbound Order. The
Department of the Treasury is concerned with persons who are neither
citizens nor permanent residents and who are nevertheless able to
accrue knowledge, experience, networks, and other intangible assets
while they are in the United States that could convey valuable benefits
to a covered foreign person. The circumstance of a non-U.S. citizen or
permanent resident individual in transit through the United States who
wishes to enter into a transaction that could trigger program coverage,
while possible, is not likely to be a frequent occurrence and can be
reasonably managed with advance planning.
Subpart C--Prohibited Transactions and Other Prohibited Activities
This subpart of the proposed rule describes activities that would
be prohibited. Such activities would include a U.S. person engaging in
a prohibited transaction unless an exemption has been granted and would
include a U.S. person knowingly directing an otherwise prohibited
transaction, as described below. A U.S. person would also be required
to take all reasonable steps to prohibit and prevent any transaction by
its controlled foreign entity that would be a prohibited transaction if
engaged in by a U.S. person.
Sec. 850.303--Knowingly Directing an Otherwise Prohibited Transaction
Subpart C includes a prohibition on a U.S. person that possesses
authority at a non-U.S. person entity from knowingly directing a
transaction by that non-U.S. person entity that would be a prohibited
transaction if undertaken by a U.S. person. This provision is intended
to address a potential loophole, such as a U.S. person senior manager
at a foreign fund that invests in a covered foreign person or otherwise
directs a transaction that would be prohibited if engaged in by a U.S.
person.
In the ANPRM, the Department of the Treasury noted that it was
considering applying this provision to situations where a U.S. person,
with knowledge, ``orders, decides, approves, or otherwise causes to be
performed a transaction that would be prohibited under these
regulations if engaged in by a U.S. person.'' Commenters to the ANPRM
sought clarity on this language, including at what stage of an
investment such ``directing'' would occur, what level of involvement or
responsibility would be required to trigger the definition, and through
what types of entities such ``knowingly directing'' would need to occur
to be covered. Commenters to the ANPRM also asked for clarification
that ordinary banking activities would not be scoped into this
definition.
The Department of the Treasury's proposed approach to this
provision is guided by several goals: (1) establishing a clear standard
so a U.S. person (or a non-U.S. person employing such U.S. person) can
determine whether its (or its employee's) conduct is covered; (2)
limiting the reach of the provision to minimize the potential impact on
non-senior U.S. person employees, including administrative staff and
individuals not playing a substantial role in an investment decision;
and (3) capturing concerning U.S. person activities in a targeted
manner.
Under the proposed rule, a U.S. person ``knowingly directs'' a
transaction when such U.S. person has authority to make or
substantially participate in decisions on behalf of a non-U.S. person
entity and exercises that authority to direct, order, decide upon, or
approve a transaction that would be a prohibited transaction if engaged
in by a U.S. person. The proposed provision specifies that a U.S.
person would have authority if such U.S. person is an officer,
director, or senior advisor, or otherwise possesses senior-level
authority. The Department of the Treasury requests comments on the
impacts of the proposed approach as well as any alternatives that
commenters consider appropriate.
In response to commenter questions on the ANPRM about whether this
provision would apply only to the activity of U.S. persons at non-U.S.
person funds, or to non-financial entities as well, the proposed rule
clarifies that this provision would prohibit a U.S. person from
knowingly directing a transaction via any type of non-U.S. person
entity if the subject transaction would be a prohibited transaction if
undertaken by a U.S. person. In response to commenter questions on the
ANPRM about whether ordinary banking activities would be included in
the definition of knowingly directing, the Department of the Treasury's
proposed approach to this provision is intended to avoid scoping in the
provision of third-party services such as banking services, as well as
routine administrative work by a U.S. person who lacks substantial
involvement in an investment decision. Rather, the Department of the
Treasury's objective is to address a potential loophole that could
otherwise permit a U.S. person to transfer capital and intangible
benefits to a covered foreign person via a non-U.S. person entity.
The following example illustrates the application of the proposed
definition of knowingly directing:
(12) Example 12. A U.S. person is a senior executive at Company P,
a non-U.S. person operating company. The U.S. person's role includes
substantial participation in investment decisions related to Company
P's strategic acquisitions. The U.S. person participates in
deliberations among Company P's leadership about whether to undertake a
share purchase in Company Q, a privately-held covered foreign person
that develops a quantum computer. Following these deliberations, the
U.S. person votes in favor of the share purchase and knows at the time
of the vote that the share purchase would be a prohibited transaction
if undertaken by a U.S. person. Therefore, the U.S. person would have
knowingly directed an otherwise prohibited transaction under the
proposed rule.
Wherever possible, consistent with national security objectives,
the Department of the Treasury seeks to avoid broad implications on the
employment of U.S. persons. As a result, the proposed approach would
carve out a U.S. person who recuses themself from an investment even if
that person has the authority to make or substantially participate in
decisions on behalf of a non-U.S. person entity. The Department of the
Treasury invites comments regarding the proposed approach, particularly
to what stage of an investment this recusal carveout should apply
(e.g., negotiation of a transaction, the decision to undertake the
transaction, and/or overseeing the investment after the completion
date).
Subpart D--Notifiable Transactions and Other Notifiable Activities
This subpart of the proposed rule would require a U.S. person to
notify the Department of the Treasury in any of the following
circumstances:
If it undertakes a notifiable transaction (Sec. 850.401);
If its controlled foreign entity undertakes a transaction
that would be notifiable if undertaken by a U.S. person (Sec.
850.402), or;
[[Page 55859]]
If the U.S. person acquires actual knowledge following the
completion date of a transaction that the transaction would have been a
covered transaction if the U.S. person had known of relevant facts or
circumstances as of the completion date (Sec. 850.403).
In each of the above circumstances, the U.S. person would be
required to follow specified procedures that include requirements to
submit detailed information to the Department of the Treasury according
to set timeframes and to certify as to the completeness and accuracy of
the information submitted, as well as to maintain relevant records. A
U.S. person would also be required to promptly notify the Department of
the Treasury of any material omission or inaccuracy that the U.S.
person learns about following any information submission.
The requirement to notify the Department of the Treasury in Sec.
850.403 would apply to circumstances in which a U.S. person acquires
actual knowledge after the window in which a Sec. 850.401 notification
could have been timely submitted. Specifically, the Sec. 850.403
notification requirement would apply to situations where a U.S. person
did not possess knowledge at the time of the transaction of a fact
that, if known at the time of the transaction, would have made the
transaction a covered transaction (such as, for example, the investment
target's engagement in a covered activity). The information
requirements for a Sec. 850.403 notification include an explanation by
the U.S. person as to why it did not possess or obtain such knowledge
at the time of the transaction and to describe any pre-transaction
diligence.
Some commenters stated that certain of the information considered
in the ANPRM as elements of a complete notification could be difficult
to obtain or burdensome to provide and cautioned that certain
information requirements could have an unintended chilling effect on
transactions in the relevant activities described in the ANPRM. The
proposed rule seeks to address the national security threat described
in the Outbound Order while minimizing unintended consequences. In
light of this, the proposed rule contains information requirements for
a notifiable transaction that would provide important details regarding
a transaction, but are more focused than those listed in the ANPRM. The
proposed rule also would require the U.S. person to maintain a copy of
the notification and supporting documentation for ten years (consistent
with the 21st Century Peace through Strength Act of 2024 (Sec. 3111,
Pub. L. 118-50), which amended section 206 of IEEPA and extended the
statute of limitations for violations of IEEPA from five years to ten
years), during which period the Department of the Treasury could
request such documents.
In response to comments to the ANPRM that a requirement to submit a
notification before the completion date of a transaction could have the
effect of delaying the transaction, the proposed rule would allow a
notification to be submitted no later than 30 calendar days following
the completion date of a notifiable transaction. In other words, the
U.S. person could submit the notification at any point prior to the
completion date of the notifiable transaction or within 30 calendar
days following the completion date.
The following example illustrates the application of the proposed
definition of completion date and the submission of a notification in
the context of an acquisition of a contingent equity interest:
(13) Example 13. A U.S. person acquires a contingent equity
interest in a covered foreign person in a transaction that is a
notifiable transaction. One year later, the contingent equity interest
converts into an equity interest. The U.S. person's acquisition of a
contingent equity interest and subsequent conversion into an equity
interest each constitute a separate covered transaction under Sec.
850.210(a)(1) and Sec. 850.210(a)(3), respectively. Under Sec.
850.204, Sec. 850.401, and Sec. 850.404, the U.S. person would be
required to file the first notification with the Department of the
Treasury no later than 30 calendar days following the completion date
of the first covered transaction, which would be the earliest date upon
which the contingent equity interest is conveyed, assigned, delivered,
or otherwise transferred to the U.S. person. Likewise, the U.S. person
would be required to file the second notification with the Department
of the Treasury no later than 30 calendar days following the completion
date of the second covered transaction, which would be the earliest
date upon which the equity interest (resulting from the conversion of
the contingent equity interest) is conveyed, assigned, delivered, or
otherwise transferred to the U.S. person.
Subpart E--Exceptions and Exemptions
This subpart of the proposed rule specifies particular factors that
would cause an otherwise covered transaction to be treated as an
excepted transaction. This subpart also specifies provisions that would
apply when a transaction is a covered transaction but a party to that
transaction seeks an exemption from certain applicable rules on
national interest grounds (which, if granted, would cause the
transaction to be an exempted transaction).
Sec. 850.501--Excepted Transaction
In keeping with the goal of tailoring the proposed rule to address
the national security threat described in the Outbound Order while
minimizing disruptive effects on U.S. persons, the proposed rule would
define certain exceptions. A transaction that otherwise would qualify
as a covered transaction but meets one of the exceptions would be
referred to as an excepted transaction. The Department of the Treasury
considers that a transaction that would qualify as an excepted
transaction presents a lower likelihood of the transfer of intangible
benefits to the covered foreign person or is otherwise less likely to
present national security concern than a covered transaction.
As discussed in detail below, an excepted transaction would include
the following (subject to conditions in some instances, as explained
below):
An investment by a U.S. person in a publicly traded
security;
An investment by a U.S. person in a security issued by an
investment company, such as an index fund, mutual fund, or exchange
traded fund;
An investment of a certain size by a U.S. person LP in a
pooled investment fund;
A U.S. person's full buyout of all interests of any person
of a country of concern in an entity, such that the entity would not
constitute a covered foreign person following the transaction;
An intracompany transaction between a U.S. person parent
and its subsidiary to support ongoing operations (or other activities
that are not covered activities as defined in Sec. 850.208);
Fulfillment of a U.S. person's binding capital commitment
entered into prior to the date of the Outbound Order;
The acquisition of a voting interest in a covered foreign
person upon default or other condition involving a loan, where the loan
was made by a lending syndicate and a U.S. person participates
passively in the syndicate; and
Certain transactions that occur in a country or territory
outside the United States that has been designated by the Secretary in
accordance with provisions set forth in Sec. 850.501(f) of the
proposed rule.
To make sure these exceptions are consistent with the policy
objectives, certain of the transactions described
[[Page 55860]]
above would cease to qualify as an excepted transaction if a U.S.
person were to obtain certain investor rights beyond standard minority
shareholder protections (for example, in connection with publicly
traded securities or an LP investment).
The ANPRM proposed an exception for an investment into a publicly
traded security, with ``security'' defined as set forth in section
3(a)(1) of the Securities Exchange Act of 1934. In response to the
ANPRM, some commenters requested that the definition of ``publicly
traded security'' be broadened from the definition of ``security'' used
in the discussion of excepted transactions in the ANPRM to align with
the definition used by the Department of the Treasury's Office of
Foreign Assets Control in connection with the Non-SDN Chinese Military-
Industrial Complex Companies List. The proposed rule would effectively
broaden the carveout to include a security traded on a non-U.S.
exchange, or a security traded ``over-the-counter,'' in addition to a
security traded on a U.S. exchange. The proposed rule would adopt this
suggestion because a U.S. person's purchase of securities traded on a
public exchange, whether inside or outside the United States, presents
a lower likelihood of transferring intangible benefits to a covered
foreign person.
The proposed rule also would provide an exception for investment in
securities issued by an investment company, such as an index fund,
mutual fund, or exchange traded fund, as well as a business development
company under the Investment Company Act of 1940, as amended.
Similarly, a U.S. person making an LP investment under a specified
threshold into a pooled fund that then invests in a covered foreign
person would, subject to the specified criteria, constitute an excepted
transaction. The rationale for this approach is that LP transactions
above a certain threshold are more likely to involve the transfer of
intangible benefits such as those often associated with larger
institutional investors, including standing and prominence, managerial
assistance, and enhanced access to additional financing. When a U.S.
person's committed capital to a pooled investment fund as an LP exceeds
a certain threshold, the U.S. person may have greater incentive and
potentially greater ability to impact the success of a covered foreign
person in which the pooled fund invests. The proposed rule presents two
alternate approaches for defining the threshold beneath which a U.S.
person's LP investment into a pooled fund that then invests in a
covered foreign person would constitute an excepted transaction.
Under proposed Alternate 1, a U.S. person's investment made as an
LP in a pooled fund would constitute an excepted transaction if (1) the
LP's rights are consistent with a passive investment and (2) the LP's
committed capital is not more than 50 percent of the total assets under
management of the pooled fund. If the U.S. person LP's committed
capital were to constitute more than 50 percent of the total assets
under management of the pooled fund, its investment would qualify as an
excepted transaction only if the U.S. person secured a binding
agreement that the pooled fund would not use its capital for a
prohibited transaction. This approach was developed to address the
likelihood of intangible benefits being transferred by such an
investment if, for example, a U.S. person's LP investment is large
enough compared to the investable assets of the pooled fund such that
the U.S. person LP is an anchor investor or otherwise wields
substantial influence that would allow it to guide the pooled fund's
investment decisions or interact regularly with the pooled fund's
investment targets. This approach would also address situations where
the U.S. person's LP investment falls below the threshold but contains
one of several indicia of control or influence over the pooled fund or
the ultimate covered foreign person investment target by excluding such
an investment from the definition of excepted transaction.
Under proposed Alternate 2, a U.S. person's investment made as an
LP in a pooled investment fund would constitute an excepted transaction
if the LP's committed capital is not more than $1 million. The
rationale for this alternate approach is that if an LP investment is
above the $1 million threshold, a U.S. person's LP investment may be
large enough that its investment transfers intangible benefits, such as
standing and prominence that an underlying covered foreign person
investment target could exploit for legitimacy or for further
fundraising purposes. Although this alternate may scope in a greater
number of LP investments as covered transactions compared to Alternate
1, this bright-line approach may be easier to comply with while still
addressing the risk of intangible benefits being transferred by such an
investment.
An excepted transaction also would include a U.S. person's full
buyout of the interests of a person of a country of concern in an
entity, where the entity would not constitute a covered foreign person
following the transaction. As discussed in the ANPRM, the objective of
this exception is to carve out from coverage a transaction that
eliminates the likelihood that intangible benefits of a U.S. person
transfer to a covered foreign person, because following a full buyout,
a person of a country of concern will no longer have any interest in
the target of the buyout.
An excepted transaction would also include certain intracompany
transactions--that is, a transaction between a U.S. person and its
controlled foreign entity to support ongoing operations or other
activities that are not covered activities. The goal of this exception
is to avoid unintended interference with the ongoing operations of a
U.S. person's controlled foreign entity even when that controlled
foreign entity also meets the definition of covered foreign person. The
Department of the Treasury expects that the initial acquisition or
establishment of the subsidiary would already constitute a covered
transaction, and where it does not, the potential impacts on the U.S.
person from covering such intracompany transactions under the proposed
rule would likely outweigh the benefit in terms of the objectives of
the Outbound Order. Although the definition of covered transaction in
the proposed rule would not usually apply to most routine intracompany
activities such as the sale or purchase of inventory or fixed assets,
the provision of paid services, or the licensing of technology, the
intracompany transaction exception in the proposed rule nonetheless
excepts intracompany transactions that would be covered transactions
but support activities that are not covered activities. To avoid use of
the intracompany transaction exception to establish new covered foreign
persons or to pivot existing subsidiaries into a new covered activity,
the exception would not apply to greenfield investments, pivots of
existing entities' operations into covered activities, and joint
ventures.
Consistent with the ANPRM, the proposed definition of excepted
transaction would also include any transaction made in fulfillment of a
U.S. person's binding capital commitment entered into prior to the
effective date of the Outbound Order (August 9, 2023). A U.S. person
would not have been aware of the scope of the Outbound Order and
directive for the implementation of the prohibition and notification
requirement before the Outbound Order was issued, and this exception is
intended to avoid significant disruption to a U.S. person who entered
into a binding commitment prior to August 9, 2023. The ANPRM,
[[Page 55861]]
issued on the same day as the Outbound Order, also included discussion
of a possible exception for fulfillment of ``binding capital
commitments . . . made prior to the issuance of the [Outbound] Order.''
The Department of the Treasury proposes to specify that this proposed
exception applies to any transaction made in fulfillment of a binding
capital commitment entered into prior to the date of the Outbound
Order. The intent is to effectively address the national emergency
identified in the Outbound Order and avoid creating incentives for U.S.
persons to enter into new binding commitments for a covered transaction
after issuance of the proposed rule. The Department of the Treasury
requests comment on the scope of the exception, including how to
address the timing of binding capital commitments.
The definition of excepted transaction would also include the
acquisition of a voting interest in a covered foreign person by a U.S.
person upon default or other condition involving a loan or similar
financing arrangement where the U.S. person lender was part of a
syndicate of banks and cannot initiate action vis-[agrave]-vis the
debtor on its own and does not have a lead role in the syndicate.
Consistent with the objectives of the Outbound Order, it would except a
narrow set of circumstances in which a U.S. person lender has passively
received an interest in a covered foreign person and, even after
receiving such interest, lacks a role in the lending syndicate that
could create the opportunity for a U.S. person lender's intangible
benefits to transfer to the covered foreign person debtor.
The Department of the Treasury, together with the Departments of
State and Commerce and other agencies, recognize the importance of
working with our partners and allies and will continue coordinating
closely to address our shared national security concerns posed by
outbound investment. In recognition of the shared objectives and in
furtherance of the U.S. Government's efforts to encourage partners and
allies address risks posed by outbound investment, the proposed rule
would also provide for the potential application of the term excepted
transaction to certain transactions with or involving a person of a
country or territory outside of the United States designated by the
Secretary in accordance with certain criteria (to be developed) that
relate to that country or territory's own measures to address the
national security risk related to certain outbound investment. The
Department of the Treasury expects that any such country or territory
would be designated after accounting for factors such as whether the
country or territory is regulating outbound investment transactions
involving technologies critical to a country of concern's military,
intelligence, surveillance, or cyber-enabled capabilities, which
technologies are covered by such regulation, and whether such
regulation addresses national security concerns posed by outbound
investment similar to those addressed by the U.S. outbound program. The
Department of the Treasury is considering taking into account other
factors for purposes of designating a country or territory, including
the extent to which a country or territory cooperates with the United
States on issues of national security and whether it has in place and
is using related authorities and tools, such as export controls, to
protect sensitive technologies and products.
The proposed rule would provide for the application of this
exception only to certain types of transactions with or involving a
person of a designated country or territory. The proposed rule
anticipates that the Secretary would determine the types of
transactions for which the related national security concerns are
likely to be adequately addressed by measures taken or that may be
taken by the government of a country or territory outside the United
States. Once developed, the Department of the Treasury intends to make
factors for the designation of a country or territory as well as types
of transactions and/or activities that would be subject to the
exception publicly available on Treasury's Outbound Investment Security
Program website. The Department of the Treasury, along with the
Departments of State and Commerce, will continue to work with partners
and allies as they explore addressing the national security concerns
posed by certain outbound investments. The Department of the Treasury
invites comments and input on the proposed factors for the Secretary to
consider when designating a country or territory in this context as
well as comments on the types of transactions or activities that should
be excepted once a country or territory has been designated.
Additionally, the Department of the Treasury invites comments more
generally on efforts to engage internationally on outbound investment
security.
Sec. 850.502--National Interest Exemption
The Outbound Order authorizes the Secretary to ``exempt from
applicable prohibitions or notification requirements any transaction or
transactions determined by the Secretary, in consultation with the
heads of relevant agencies, as appropriate, to be in the national
interest of the United States.''
On a case-by-case basis, the Secretary, in consultation with the
Secretary of Commerce, the Secretary of State, and the heads of
relevant agencies, as appropriate, may determine that a covered
transaction is in the national interest of the United States and
therefore, exempt it from certain provisions of this proposed rule. The
Department of the Treasury anticipates that this exemption of a covered
transaction would be granted by the Secretary in exceptional
circumstances.
This section of the proposed rule describes the process and
considerations for such a determination. Any determination that a
covered transaction is in the national interest of the United States
and therefore exempt from certain provisions will be based on a
consideration of the totality of the facts and circumstances. The
Department of the Treasury anticipates that such determination may be
informed by, among other considerations, the transaction's effect on
critical U.S. supply chain needs, domestic production needed for
projected national defense requirements, the United States'
technological leadership globally in areas affecting U.S. national
security, and the impact on national security from prohibiting a given
transaction. The Department of the Treasury is not considering granting
retroactive waivers or exemptions (i.e., waivers or exemptions after a
prohibited transaction has been completed).
In order to request a national interest exemption, a U.S. person
would need to submit certain information to the Department of the
Treasury, including describing the scope of the relevant transaction,
the basis for the request, and an analysis of the transaction's
potential impact on the national interest of the United States. The
Department of the Treasury may request that a U.S. person submit
information that may include some or all of the information required by
Sec. 850.405, as well as additional details based on the facts and
circumstances.
Once developed, the Department of the Treasury anticipates
detailing the process and required information for any national
interest exemption request on the Department of the Treasury's Outbound
Investment Program website.
Subpart F--Violations
This subpart of the proposed rule describes conduct that would be
treated as a violation of the proposed rule. Such
[[Page 55862]]
conduct would include taking any action prohibited by the proposed
rule, failing to take any action required by the proposed rule within
the timeframe and in the manner specified, and making materially false
or misleading representations to the Department of the Treasury when
submitting any information required by the proposed rule. The proposed
rule would also prohibit any action that evades or avoids or has the
purpose of evading or avoiding any of the prohibitions of the proposed
rule.
Subpart G--Penalties and Disclosures
This subpart of the proposed rule describes the penalties that
would be applicable to violations of the proposed rule by any person
subject to the jurisdiction of the United States, which would include
civil and criminal penalties up to the maximum amount set forth in
section 206 of IEEPA. Under the proposed rule, the Department of the
Treasury may impose a civil penalty on any person that violates the
rule, and the Secretary may refer potential criminal violations under
the proposed rule to the Attorney General. Further, the proposed rule
states that the Secretary, in consultation with the heads of relevant
agencies, may take action to nullify, void, or otherwise compel
divestment of any prohibited transaction entered into after the
effective date of the rule. This subpart also describes the process for
a person that may have violated applicable rules to submit a voluntary
self-disclosure. A U.S. person could elect to make such a disclosure of
actual or possible violations. The Department of the Treasury would
take such disclosure into account as a mitigating factor in determining
the appropriate response, including the potential imposition of
penalties, if the Department of the Treasury determines that there was,
in fact, a violation.
Subpart H--Provision and Handling of Information
This subpart describes the Department of the Treasury's proposal to
treat as confidential, subject to limited exceptions, information and
documentary materials that are submitted pursuant to the regulations
and that are not otherwise publicly available. Except to the extent
required by law or in accordance with one of the enumerated exceptions,
the Department of the Treasury would not disclose such information
publicly.
However, consistent with the exceptions set forth in the proposed
rule, the Department of the Treasury would be permitted to disclose
information that would otherwise be treated as confidential in certain
limited circumstances; for example, the Department of the Treasury
could disclose information to U.S. partners and allies where the
information is important for the national security analysis or actions
of the Department of the Treasury or such partners and allies, and
subject to appropriate safeguards. Separately, under the proposed rule,
the Department of the Treasury could use information submitted to
fulfill its obligations under the Outbound Order, which include the
requirement to prepare annual reports to the President in coordination
with the Secretary of Commerce and in consultation with the heads of
other relevant agencies, as appropriate, and could include anonymized
data gathered pursuant to this part.
The Department of the Treasury is considering whether there are
additional circumstances where disclosure of otherwise confidential
information should be permitted. One proposal under consideration would
allow the Department of the Treasury to disclose such information to
the public as and when the Secretary determines that such disclosure is
in the national interest: for example, to promote compliance with the
proposed regulations by sharing with the public information about the
activities of particular persons of a country of concern. The
Department of the Treasury expects that such an exception would be
subject to a high bar and limited to circumstances in which the
Secretary identifies a pressing national interest that disclosure could
help to address. This exception would not supersede any applicable
statutory restrictions that may constrain the sharing of certain
categories of information, such as information that a party has
identified as protected trade secrets information. The Department of
the Treasury invites comments on the considerations that it should take
into account in identifying the scope of this potential additional
exception to confidential treatment, the standard that should apply to
the Secretary's determination, and what safeguards may be applicable to
disclosure when such an exception applies.
Subpart I--Other Provisions
This subpart of the proposed rule contains provisions related to
the delegation of the Secretary's authorities under the Outbound Order,
any amendment to or modification of the proposed rule, and a
requirement for certain information regarding any transaction to be
furnished upon demand. The proposed rule states that, consistent with
the statutory authority on which the Outbound Order and the proposed
rule are based, the Department of the Treasury has the power to
investigate conduct that may constitute a violation, hold hearings,
call witnesses, and require in-person testimony or production of
documents, among other powers listed in Sec. 850.904.
Subpart I would also establish, in Sec. 850.903, that the
provisions of the rule are severable from one another. If any of the
provisions of this rule as finalized, or the application thereof to any
person or circumstance, were to be held invalid, such invalidity would
not affect other provisions or application of such provisions to other
persons or circumstances that can be given effect without the invalid
provision or application.
IV. Request for Comment
The Department of the Treasury invites comments on any and all
aspects of the proposed rule, including and on the specific provisions
discussed above in section III and the questions below. The Department
of the Treasury invites comments accompanied by empirical data or other
specific information wherever possible.
1. Are there areas where the proposed rule is broader than
necessary to address the national security concerns identified in the
Outbound Order? Are there areas where it is narrower than necessary or
contains loopholes? If so, where and what adjustments should be made?
2. How could the knowledge standard in the proposed rule be
clarified? What, if any, alternatives should be considered? What other
factors should be considered to assess whether a person conducted a
reasonable and diligent inquiry?
3. What considerations should the Department of the Treasury take
into account with respect to the ease or difficulty with which a U.S.
person will be able to comply with the proposed rule, particularly with
respect to ascertaining whether an investment target or relevant
counterparty is a person of a country of concern and engaged in a
covered activity?
4. Are there adjustments to the scope of covered activities
identified in the definition of either notifiable transaction or
prohibited transaction in the proposed rule (including addition(s),
removal(s), or elaboration(s)) that should be made to help ensure that
the definition addresses the national security concerns identified in
the Outbound Order and discussed above while minimizing
[[Page 55863]]
unintended consequences? If so, what are they?
5. Is the line between the covered activities identified in the
definition of notifiable transaction and those in the definition of
prohibited transaction (with respect to the products and technologies
in the semiconductors and microelectronics and the AI sectors)
appropriately drawn? What are the potential consequences of the
proposed scope of covered activities in the definition of notifiable
transaction and prohibited transaction and how should the distinction
between the two be adjusted, if at all?
6. How do U.S. persons anticipate ascertaining the information
necessary to comply with paragraph (a)(2) of the definition of covered
foreign person at Sec. 850.209? How, if at all, should this definition
be adjusted for a situation in which no financial statement (audited or
otherwise) is available for a covered foreign person?
7. Are there adjustments to the types and scope of covered
transactions identified in the proposed rule (including addition(s),
removal(s), or elaboration(s)) that should be made to help ensure it
addresses the national security concerns identified in the Outbound
Order and discussed above while minimizing unintended consequences? If
so, what are they?
8. How, if at all, should the definition of covered transaction be
modified with respect to the conversion of a contingent equity interest
or convertible debt? What are the considerations as to the balance
among minimizing compliance costs, avoiding over- or under-
inclusiveness, while maintaining U.S. Government visibility into the
instances of conversion?
9. How, if at all, should the definition of covered transaction be
modified with respect to LP investments? What considerations should the
Department of the Treasury take into account with respect to a U.S.
person's LP investment qualifying as a covered transaction when the
relevant pooled investment fund actually undertakes a transaction that
would be a covered transaction if undertaken by a U.S. person?
10. Could the proposed approach to defining an indirect controlled
foreign entity be further refined to enhance clarity and facilitate
compliance, and if so, how?
11. The definitions of controlled foreign entity and person of a
country of concern discuss application of such terms in the case of a
tiered ownership structure. Could either of these definitions be
further refined to enhance clarity and facilitate compliance with
respect to their application in a tiered ownership structure, and if
so, how?
12. The proposed definition of person of a country of concern (in
Sec. 850.221(d)) and the proposed definition of covered foreign person
(in Sec. 850.209(a)(2)) could include a U.S. person entity. What
considerations should the Department of the Treasury take into account
with respect to an entity qualifying as a U.S. person and also as a
covered foreign person or person of a country of concern? What are the
instances in, and what is the frequency with which, this may occur?
13. What are the legal, commercial, practical or other consequences
of including in, or conversely excluding from, the definition of U.S.
person a person who is lawfully present in the United States? What are
the consequences of an individual simultaneously being both a person of
a country of concern and a U.S. person? Under what circumstances, and
with what frequency, may this occur?
14. What are the considerations for U.S. person due diligence
related to the specified end uses and computing thresholds in the
different alternates for an AI system in the definitions of notifiable
transaction and prohibited transaction? How would a U.S. person
investor determine the computational threshold levels of any AI system
of an investment target or relevant counterparty? What are the
considerations with respect to making such determinations related to an
entity of a country of concern specifically?
15. What would be the impact of a prohibition on U.S. person
transactions involving entities that develop an AI system trained using
a quantity of computing power greater than 10[supcaret]24,
10[supcaret]25, or 10[supcaret]26 computational operations? What, if
any, unintended consequences could result from adoption of the
alternate definitions of AI system?
16. What would be the impact of a prohibition on U.S. person
transactions involving entities that develop an AI system trained using
a quantity of computing power greater than 10[supcaret]23 or
10[supcaret]24 computational operations applied to biological sequence
data? What are the considerations or factors weighing in favor or
against requiring notification rather than a prohibition in this
instance?
17. How should the Department of the Treasury ensure the
regulations remain responsive to changes in the sectors identified in
the Outbound Order (i.e., the semiconductors and microelectronics,
quantum information technologies, and artificial intelligence sectors)?
18. How, if at all, could the prohibition on knowingly directing a
transaction be modified to best address national security concerns
identified in the Outbound Order and discussed above while maximizing
clarity and minimizing adverse impacts on U.S. persons, including their
employment at foreign companies? What, if any, alternatives should be
considered?
19. What is the practical utility of a recusal carveout from the
prohibition on knowingly directing a transaction? What stage(s) of an
investment should the recusal carveout from the prohibition on
knowingly directing apply to (for example, should it apply to
negotiating and decision-making related to an investment, management
and oversight of the investment after the completion date, or something
else), and why? In what ways could the recusal carveout's clarity or
usefulness be enhanced?
20. What challenges, if any, are anticipated in connection with the
information required to be submitted for a notifiable transaction? Are
they scoped appropriately to obtain information relevant to the
national security concerns identified in the Outbound Order and
discussed above, including increasing the U.S. Government's visibility
into U.S. person transactions involving the relevant technologies and
products and highlighting trends with respect to related capital flows?
If not, how should the information requirements be modified?
21. Are there categories of transactions that should be added to,
or removed from, the definition of excepted transaction in light of the
national security concerns identified in the Outbound Order? If so,
what are they and why? What potential consequences should the
Department of the Treasury consider in limiting the applicability of
the definition of excepted transaction to a transaction made pursuant
to a binding, uncalled capital commitment entered into before August 9,
2023?
22. Which of the two proposed alternates for the exception for LP
investments in the definition of excepted transaction best addresses
national security concerns while minimizing disruptive effects? Should
either approach and corresponding threshold for the exception be
adjusted, and if so, why and how? What consequences could result from
basing an exception on either of the proposed thresholds? What are the
considerations related to compliance by U.S. persons? Where available,
please support your answer with data about the type, aggregate number,
or total dollar
[[Page 55864]]
equivalent amount of investments that would be excepted under each of
the two proposed alternates.
23. What adjustments, if any, should be made to the proposed rule
to clarify the coverage with respect to a greenfield investment,
brownfield investment, or joint venture that is a covered transaction
versus an intracompany transaction to support ongoing operations or
other activities in a country of concern that is an excepted
transaction?
24. What is the value to stakeholders of including a national
interest exemption for notifiable transactions, prohibited
transactions, or both? Under what circumstance might a U.S. person
request a national interest exemption in general? Specifically with
respect to a notifiable transaction, under what circumstance might a
U.S. person request a national interest exemption from the notification
requirement, while still needing to provide information about the
proposed transaction in the course of seeking the exemption?
25. What specific information should the Department of the Treasury
require from a U.S. person seeking a national interest exemption in
order to evaluate the transaction's potential impact on the national
interest of the United States and to substantiate the basis for
requesting an exemption from the prohibition or notification
requirement?
V. Rulemaking Requirements
This rulemaking pertains to a foreign affairs function of the
United States and therefore is not subject to the rulemaking
requirements of the Administrative Procedure Act (APA) (5 U.S.C. 553),
which exempts a rulemaking from notice and comment requirements ``to
the extent there is involved . . . a military or foreign affairs
function of the United States.'' 5 U.S.C. 553(a)(1). As required by the
Outbound Order, the proposed rule is being issued to assist in
addressing the national emergency declared by the President with
respect to the national security threat posed by countries of concern
developing technologies that are critical to the next generation of
military, intelligence, surveillance, or cyber-enabled capabilities. As
described in the Outbound Order, this threat to the national security
of the United States has its source in whole or substantial part
outside the United States. The proposed rule would have a direct impact
on foreign affairs concerns, which include the protection of national
security against external threats (for example, limiting investment in
specific sectors in designated countries of concern). Although the
proposed rule is not subject to the notice and comment requirements of
the APA, the Department of the Treasury is engaging in notice and
comment rulemaking for this proposed rule, consistent with section 1(a)
of the Outbound Order. In addition, the proposed rule was designated as
significant under Executive Order 12866, as amended, and was reviewed
by the Office of Information and Regulatory Affairs (OIRA) in the
Office of Management and Budget (OMB). The Department of the Treasury
has undertaken an analysis of the anticipated costs and benefits of the
proposed rule. Following the issuance of the ANPRM, a number of
stakeholders commented about the potential burden associated with this
program, which is novel in its approach to addressing the national
security concern posed by U.S. outbound investments involving a country
of concern. The Department of the Treasury, after taking into account
these comments and the novelty of the program, conducted an analysis of
the relative costs and benefits of the proposed rule. For purposes of
this analysis, the Department of the Treasury assessed the costs and
benefits of the proposed rule relative to a no-action baseline
reflecting U.S. person investment behavior in the absence of
regulations.
In addition, this section includes the required assessments of the
reporting and recordkeeping burdens under the Paperwork Reduction Act
of 1995 (PRA), 44 U.S.C. 3501 et. seq., and the potential impact on
small entities pursuant to the Regulatory Flexibility Act (RFA), 5
U.S.C. 601 et. seq., in each case as discussed below.
A. Executive Orders 12866, 13563, and 14094
Executive Orders 12866, 13563, and 14094 direct agencies to assess
the costs and benefits of available regulatory alternatives for certain
types of rulemaking in certain circumstances and, if regulation is
necessary, to select regulatory approaches that maximize net benefits.
The Department of the Treasury has conducted an assessment of the costs
and benefits of the proposed rule, as well as the costs and benefits of
available regulatory alternatives.
As noted above in section I, the Outbound Order directs the
Secretary to establish a program to prohibit U.S. persons from engaging
in certain transactions and require U.S. persons to submit
notifications of certain other transactions. These two primary
components of the program established by the Outbound Order would serve
distinct but interrelated objectives with respect to the relevant
technologies and products. The first component would require the
Secretary to prohibit certain types of investment by a U.S. person in a
covered foreign person engaged in certain categories of activities
related to technologies and products that pose a particularly acute
national security threat. The second component would require
notification to the Secretary regarding certain types of investments by
a U.S. person in a covered foreign person engaged in other categories
of activities related to technologies and products that may contribute
to the threat to national security. The focus of both components would
be on investments that could enhance a country of concern's military,
intelligence, surveillance, or cyber-enabled capabilities through the
advancement of technologies and products in particularly sensitive
areas. In an Annex to the Outbound Order, the President identified the
People's Republic of China, along with the Special Administrative
Region of Hong Kong and the Special Administrative Region of Macau, as
a country of concern.
As described above in section I, this proposed rule is consistent
with the President's mandate in the Outbound Order and prescribes
procedures and obligations governing the (1) prohibition of certain
types of investment by U.S. persons into certain entities located in or
subject to the jurisdiction of a country of concern, certain other
entities owned by persons of a country of concern, and certain entities
with an interest in and significant financial connection to a person of
a country of concern, with capabilities or activities related to
defined technologies and products; and (2) mandatory notification to
the Secretary by U.S. persons for certain types of investment into
certain entities located in or subject to the jurisdiction of a country
of concern, certain other entities owned by persons of a country of
concern, and certain entities with an interest in and significant
financial connection to a person of a country of concern, with
capabilities or activities related to defined technologies and
products. The implementation of the Outbound Order through this
proposed rule would advance the President's objective of regulating
certain investments from the United States into a country of concern.
The proposed rule would cover a defined set of transactions such as
certain acquisitions of equity interests (e.g., mergers and
acquisitions, private equity, and venture capital) and contingent
equity interests, certain debt financing transactions, greenfield and
[[Page 55865]]
brownfield investments, joint ventures, and certain LP investments by
U.S. persons. Given the focus on transactions that could aid in the
development of technological advances that pose a risk to U.S. national
security, the Department of the Treasury proposes to except from the
program certain transactions with a lower likelihood of having that
effect. The proposed exceptions extend to certain investments into
publicly traded securities or into securities issued by an investment
company, such as an index fund, mutual fund, or exchange traded fund.
B. Costs
The primary direct costs to the public associated with the proposed
rule would relate to (1) understanding the proposed rule; (2)
conducting the transaction-specific diligence that would be needed for
a U.S. person to determine whether a particular transaction would be
either a notifiable transaction or a prohibited transaction under the
proposed rule; and (3) if applicable, preparing and submitting a
mandatory notification of certain transactions or other information to
the Department of the Treasury pursuant to the proposed rule. The
Department of the Treasury invites comment on any of the assumptions
and estimates in this analysis.
The proposed rule would apply to all U.S. persons who undertake,
directly or indirectly, a covered transaction. Because of the tailored
scoping of the proposed rule, the Department of the Treasury estimates
that it would apply to a relatively modest volume of potential covered
transactions. While precise data that matches the scope of covered
transactions including the relevant technology and products in the
proposed rule is not available--and is one of the reasons for the
notification requirement which would increase the U.S. Government's
visibility into the relevant transactions--a review of available data
appears to support this estimate of a modest volume. For example, to
estimate the number of entities that would be potentially affected by
the proposed rule and would incur associated direct compliance costs,
the Department of the Treasury considered data available through
PitchBook from approximately 2021 to 2023.\1\ This data indicates that
over this three-year period, 180 unique U.S.-based investors made
around 318 equity and add-on investment transactions in the
semiconductor, AI, and quantum science sectors of the PRC (as defined
by PitchBook). This data suggests an annual average of 60 different
investors engaging in an annual average of 106 potentially covered
transactions. Since details of U.S. private investment overseas cannot
be determined with precision through the available data, and there are
limitations in any dataset based on the parameters set by the provider,
the Department of the Treasury has determined this figure to be a lower
bound. The Department of the Treasury also acknowledges that some U.S.
person investors may incur costs even where the rule does not appear to
apply directly to their transaction. To clarify, the figure used to
estimate the volume of potentially covered transactions may not capture
all instances of parties who may incur costs as a result of the
proposed rule. For example, a U.S. person may not always know in
advance of the due diligence process whether the U.S. person will want
or need to collect information related to the proposed rule and then
proceed to spend resources on diligence, only to confirm that the
relevant transaction is not a covered transaction.
---------------------------------------------------------------------------
\1\ PitchBook, https://pitchbook.com (last visited May 24,
2024).
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For purposes of this analysis, the Department of the Treasury
doubled the averages from the available data to account for the likely
underrepresentation of potentially relevant transactions. Thus, the
Department of the Treasury's analysis is based on the estimate of
approximately 120 entities and 212 transactions annually (based on an
assumption of an annual average of 1.77 transactions per entity) that
may be affected by the proposed rule. The Department of the Treasury is
soliciting comments on the reasonableness of this estimate (in terms of
the data source and analysis), and whether there are other sources of
data that the Department of the Treasury should consider for its cost
analysis. The Department of the Treasury also invites comments on
whether doubling the averages from publicly available data is a
reasonable way to account for any underrepresentation of potentially
relevant transactions, or whether a different methodology should be
used. For the remainder of this analysis, however, the Department of
the Treasury relied on the estimates as described above.
To derive an estimate for the costs related to the proposed rule,
the Department of the Treasury first estimated the associated labor
costs related to interpreting and applying the proposed rule. The
Department of the Treasury expects that individuals and entities
reviewing the proposed rule and engaging in potentially relevant
transactions would engage on their own and through their own employees
as well as hire lawyers or advisors from outside firms.
For a low-end estimate, the Department of the Treasury relied on a
figure from the Bureau of Labor Statistics (BLS), which reports the
mean hourly wage for Standard Occupational Classification System Code
(SOC Code) 231011--Lawyers to be $84.84 per hour and SOC Code 111021--
General and Operations Managers to be $62.18 per hour.\2\ In each
instance the Department of the Treasury tripled the BLS mean hourly
wage figure. This adjustment is intended to not only account for
employee benefits and overhead, but also to reflect the presumption
that hourly labor costs of the investors and their advisors likely to
be affected by the proposed rule will often be higher than the hourly
mean wage in these occupation categories across the United States.
Accordingly, the Department of the Treasury estimates that the impacted
entities will each incur costs of $187 per hour for managers and $255
for lawyers. The average of these figures is $221 per hour and, again,
this is a low-end estimate.
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\2\ Figures based on May 2023 data.
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For a high-end estimate, the Department of the Treasury
acknowledges that the hourly rate billed for a lawyer performing the
relevant type of work at a private firm may be significantly higher
than the average hourly wage of a lawyer from the BLS figure. The
global data and business intelligence platform Statista reports that
the average hourly attorney billing rate in Washington, DC, in 2023 was
$392.\3\ The average of the hourly cost of a manager at $187 per hour
and the Statista figure of the hourly rate of a lawyer at $392 per hour
is $290. The Department of the Treasury invites comments on whether
either of these figures (i.e., the low-end or the high-end estimate)
are reasonable benchmarks and estimates for this analysis or whether
there are other sources of data or estimates that should be considered.
---------------------------------------------------------------------------
\3\ Statista (Feb. 26, 2024), https://www.statista.com/statistics/941146/legal-services-hourly-rates-metropolitan-region-united-states/.
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Costs Associated With Understanding the Proposed Rule
Based on the above assumptions and estimates of affected entities,
number of transactions and labor costs, the Department of the Treasury
has estimated the annual time and cost that would be spent by affected
entities in understanding the proposed rule. While
[[Page 55866]]
recognizing that the extent of this diligence will necessarily vary
from transaction to transaction, the Department of the Treasury arrived
at the below estimates for purposes of this regulatory analysis.
The range of estimated aggregate annual costs for understanding the
proposed rule begins at $468,520 on the low end and goes up to $614,800
on the high end. This is based on the estimate of an average time
burden to be ten total person hours per transaction for understanding
the proposed rule. As such, ten total person hours per transaction
multiplied by 212 annual transactions and the low-end hourly labor cost
range and high-end hourly labor cost range described above,
respectively, result in the total cost range for understanding the
proposed rule.
Costs Associated With Diligence and Maintaining Records
Based on the above assumptions and estimates of affected entities,
number of transactions and labor costs, the Department of the Treasury
has estimated the annual time and cost that would be spent by affected
entities on conducting additional transactional diligence with respect
to this proposed rule. These economic estimates should in no way be
construed as relevant to the reasonableness of the inquiry a party
would pursue in light of the particular facts and circumstances of a
transaction and the requirements of the proposed rule. While
recognizing that the extent of this diligence will necessarily vary
from transaction to transaction, the Department of the Treasury arrived
at the below estimates for purposes of this regulatory analysis.
The Department of the Treasury recognizes that most investment
transactions, regardless of whether the investment is potentially
subject to this proposed rule, involve some level of review, diligence,
assessment, and recordkeeping by the investor. And, for some
transactions and investors, the level of information collection,
retention, and diligence necessary to comply with the proposed rule may
not give rise to any costs beyond what would be incurred in the absence
of the proposed rule. This conclusion is reached by focusing on the
nature of the information required for a notification, which consists
of data typically gathered or available in the process of making an
investment. This includes, for example, the proposed information
requirements regarding transaction party identifying information as
well as the commercial rationale, transaction structure, financial
details, and completion date of the transaction itself.
The Department of the Treasury assesses that it is reasonable in
some cases to assume that customary transactional due diligence would
involve the collection and review of this required information, meaning
that the only incremental costs would be incurred for the review of the
information from the perspective of ensuring compliance with the
proposed rule. While the notification requirement would also include
(1) information regarding covered activities undertaken by the covered
foreign person that makes the transaction a notifiable transaction, as
well as a brief description of the known end uses and end users of the
covered foreign person's technology, products, or services; (2) a
statement of the attributes that cause the entity to be a covered
foreign person; and (3) in certain cases, the identification of the
technology node(s) at which any applicable product is produced, the due
diligence underlying many covered transactions would include gathering
and reviewing this information even if not specifically to comply with
the proposed rule. The proposed rule further states that a U.S. person
that has failed to conduct a reasonable and diligent inquiry by the
time of a given transaction may be assessed to have had awareness or
reason to know of a given fact or circumstance, including facts or
circumstances that would cause the transaction to be a covered
transaction. Compliance with this provision and the requirements of the
proposed rule may in some cases require enhanced diligence. Recognizing
that in some instances, compliance with the proposed rule may not
require the collection and retention of additional transaction-related
information, this analysis considers reasonable estimates of the
additional due diligence and recordkeeping costs that could be
associated with the proposed rule as described below.
The range of estimated annual incremental cost for conducting due
diligence and recordkeeping associated with the proposed rule runs from
$0 on the low end to $2,459,200 on the high end. These are two ends of
the range, and it is anticipated that the costs for most transactions
would fall between these figures. The Department of the Treasury
estimates that the average time burden would likely not exceed 40 total
person hours per transaction for conducting additional due diligence
and recordkeeping with respect to the proposed rule.
For the low end of this range, it is reasonable to anticipate that
some investors, having spent resources learning about the proposed
rule, as discussed above, will be able to quickly collect and assess
the information needed to determine whether a potential transaction
would be a prohibited transaction. As such, the low-end estimate is a
zero-dollar incremental cost for additional due diligence and
recordkeeping. Not all transactions will be this simple, and it is
reasonable to anticipate more costs at the higher end of the range. As
such, 40 total person hours per transaction multiplied by 212 annual
transactions and the high-end hourly labor cost estimate described
above results in the high-end estimate for additional due diligence and
recordkeeping related to the proposed rule. The Department of the
Treasury estimates 40 person hours per transaction, based on
approximately a total of eight person hours across all involved general
and operations managers and lawyers per business day for one week.
However, the cost of a U.S. person conducting diligence and the
difficulty of that exercise will vary depending on a transaction's
complexity, the availability of relevant information, and the
incremental person hours may be higher for certain transactions, for
example those that involve indirect transactions.
The Department of the Treasury invites comments on whether these
figures are reasonable benchmarks and estimates for this analysis or
whether there are other sources of data or estimates it should
consider.
Costs Associated With Providing Information
The proposed rule would require the submission of information to
the Department of the Treasury for notifiable transactions and provides
for certain other circumstances that require information submission.
The Department of the Treasury intends to require U.S. persons to
provide notification of certain transactions under the proposed rule.
The proposed rule also contemplates that a person seeking a national
interest exemption from the proposed rule's notification requirement or
prohibition would submit certain information to the Department of the
Treasury. The proposed rule would also require a U.S. person to make a
post-closing submission regarding a transaction that it believed at
closing was not a covered transaction when the U.S. person later
discovers information which, had it been known at closing, would have
caused the transaction to be a covered
[[Page 55867]]
transaction. Also, the proposed rule would require a U.S. person to
inform the Department of the Treasury of any material omission or
inaccuracy in any previous representation, statement, or certification.
Lastly, the Department of the Treasury anticipates time and cost
associated with responding to inquiries by the Department of the
Treasury.
The Department of the Treasury expects that of the universe of
potentially covered transactions for which U.S. persons perform due
diligence each year, certain transactions will turn out not to be
covered, others will turn out to be notifiable, and still others will
turn out to be prohibited. For purposes of this analysis, however, the
Department of the Treasury has assumed that U.S. persons will perform
due diligence with respect to the estimated 212 potentially covered
transactions each year, and that all 212 will turn out to be notifiable
transactions. The Department of the Treasury took this approach in the
interest of estimating a theoretical maximum upper bound, recognizing
that the number of actual notifiable transactions is likely to be less
than 100 percent of potentially covered transactions. A notifiable
transaction would likely cost more in terms of time and resources than
a prohibited transaction, because, in addition to the due diligence
cost, a notifiable transaction would entail resources to prepare and
submit a notification.
The estimated annual cost range for time spent submitting
information would be $2,342,600 to $3,074,000. This estimate assumes 50
person hours per transaction for preparing and submitting a
notification through an online portal, combined with the number of
transactions per year (212) and the hourly labor cost range described
above--$221 to $290. As discussed above, this number reflects the high-
end estimate, since this analysis assumes that every potentially
relevant transaction would result in a notification.
For purposes of this analysis, the Department of the Treasury
estimated only the total annual costs of preparing and submitting a
notification under Sec. 850.404 of the proposed rule. The Department
of the Treasury anticipates that the time and cost behind preparing and
submitting a post-transaction notice, notice of any material omission
or inaccuracy in any previous representation, statement, or
certification, or responding to agency inquiries may be comparable to
the costs of preparing and submitting a notification. Likewise, where a
U.S. person elects to provide information in seeking a national
interest exemption, the Department of the Treasury anticipates that the
associated costs would be comparable to or could slightly exceed the
costs of preparing and submitting a notification.
Estimated Total Direct Costs
Based on the direct cost estimates above, the total annual direct
costs associated with complying with the proposed rule can be expected
to have a range of between $2,811,120 and $6,148,000 and the total
annual time burden would be approximately 21,200 person hours.
Additional Indirect Costs Associated With Prohibited Transactions and
Non-Covered Transactions
With respect to prohibited transactions, the Department of the
Treasury has no basis to conclude that the proposed rule will have
additional direct economic costs to U.S. investors beyond those
described above. There may, however, be additional indirect costs
associated with prohibited transactions. Investors who would have
otherwise engaged in a prohibited transaction absent the proposed rule
may pursue alternative investment opportunities since they would be
precluded from undertaking a prohibited transaction. These indirect
costs amount to the difference, if any, between the return on
investment that would have been generated by a prohibited transaction
and the return on investment that would result from an alternative
transaction. Any attempt to quantify this cost would be speculative and
difficult to assess in any specificity due to individual decision-
making, opportunities available, and market conditions. In addition,
while the proposed rule may have an economic impact on investment
targets that are covered foreign persons because certain transactions
would be prohibited, the proposed rule is not designed to nor does it
prohibit all U.S. person investments into such persons, due to the
scope of transactions covered as well as the exceptions provided for in
the proposed rule.
Costs to the U.S. Government
Administering the regulation would also entail costs to the U.S.
Government. Such costs would include information technology (IT)
development and ongoing annual maintenance, as well as processing
electronic notifications. The Department of the Treasury estimates that
initial IT development costs would be between $4 million and $8 million
with an additional $2 million to $3 million required to maintain the
systems and the underlying technology being leveraged to support the
capabilities. The Department of the Treasury and other relevant
agencies, including the Department of Commerce, may incur additional
costs, besides those estimated above. This includes other
responsibilities related to the implementation of the proposed rule
such as analyzing notifications submitted as well as complying with the
reporting requirements under the Outbound Order. Furthermore, costs may
be associated with efforts to promote compliance with the notification
requirement and prohibition requirements, potentially including
education on the requirements, development of guidance and frequently
asked questions, and conducting stakeholder outreach. The Department of
the Treasury does not currently have specific estimates for these costs
but estimates that there would be personnel costs of less than $2
million associated with the proposed regulation in Fiscal Year 2024
with additional costs for ongoing outreach and enforcement thereafter.
The Department of the Treasury and other government agencies may
also incur costs in enforcing compliance with the regulation. The
Department of the Treasury does not currently have estimates for these
costs, and they are not included in the estimates above.
The Department of the Treasury plans to monitor compliance with the
final regulation by leveraging a variety of data sources, both internal
and external. Because the external data sources may include third
parties, the Department of the Treasury requests comment on what
external data sources would be appropriate to leverage in identifying
non-compliance with respect to the regulations and what potential costs
may be incurred by such third parties. If the external data sources
include third party commercial data, the Department of the Treasury
assesses that the cost associated with accessing these databases would
be modest and incremental, given that the Department of the Treasury
regularly maintains access to such databases in the course of other
work but may need to request additional licenses for employees. After
identifying an instance of apparent non-compliance, the Department of
the Treasury may initiate outreach to the involved entity, work with
law enforcement to investigate the apparent non-compliance, or initiate
an enforcement action. The Department of the Treasury's enforcement of
the proposed regulation would also involve coordination with law
enforcement agencies. These law enforcement
[[Page 55868]]
agencies may also incur costs (time and resources) while conducting
investigations into potential non-compliance.
C. Benefits
The President found in the Outbound Order that the advancement by
countries of concern in sensitive technologies and products critical
for the military, intelligence, surveillance, or cyber-enabled
capabilities of such countries constitutes an unusual and extraordinary
threat to the national security of the United States, which has its
source in whole or substantial part outside the United States, and that
certain United States investments risk exacerbating this threat. The
potential military, intelligence, surveillance, or cyber-enabled
applications of these technologies and products pose risks to U.S.
national security particularly when developed by a country of concern
in which the government seeks to (1) direct entities to obtain
technologies to achieve national security objectives; and (2) compel
entities to share with or transfer these technologies to the
government's military, intelligence, surveillance, or security
apparatuses. As part of their strategy of advancing the development of
these sensitive technologies and products, countries of concern are
exploiting or could 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.
Such investments, therefore, risk exacerbating this threat to U.S.
national security. Although the United States has undertaken efforts to
enhance existing policy tools and develop new policy initiatives aimed
at maintaining U.S. leadership in technologies critical to national
security, there remain instances where the risks presented by U.S.
investments enabling countries of concern to develop critical military,
intelligence, surveillance, or cyber-enabled capabilities are not
sufficiently addressed by existing tools.
The proposed rule is designed to complement our existing tools and
effectively address the threat to the national security of the United
States described in the Outbound Order. The benefit of protecting
national security is difficult to quantify. Furthermore, the
notification component of the proposed rule is intended to provide key
information that the Department of the Treasury could use to better
inform the development and implementation of the program. These
notifications would increase the U.S. Government's visibility into
transactions by U.S. persons or their controlled foreign entities and
involving technologies and products relevant to the threat to the
national security of the United States due to the policies and actions
of countries of concern. These notifications would be helpful in
highlighting trends with respect to related capital flows and would
inform future policy development. The Department of the Treasury
expects that the national security benefits, while qualitative, will
outweigh the compliance costs of the proposed rule. The Department of
the Treasury requests comment on data or methods that may inform
estimates of potential costs of the proposed rule.
D. Alternatives
The Outbound Order requires the Secretary of the Treasury to issue
implementing regulations subject to public notice and comment. As a
result, the Department of the Treasury did not have the discretion to
refrain from promulgating the proposed rule or to promulgate it without
notice and comment. However, the Department of the Treasury considered
different approaches to the proposed rule that would be available under
the Outbound Order. Specifically, the Department of the Treasury
considered the following potential alternatives to the proposed rule:
Scope of covered transaction and excepted transaction. The
Department of the Treasury could have proposed a broader definition of
covered transaction and/or fewer exceptions and considered certain
alternatives to the scope of covered transaction and excepted
transaction in developing the proposed rule. This discussion does not
cover each alternative considered for the scope of covered transaction
but provides a summary of a few alternatives the Department of the
Treasury considered.
The Department of the Treasury considered and selected regulatory
approaches that maximize net benefits (including effectively addressing
the national security threat identified in the Outbound Order) while
balancing potential compliance and implementation costs. For example,
an alternative that the Department of the Treasury considered in
relation to contingent equity interests in particular was to limit the
scope of covered transaction to just the acquisition of a contingent
equity interest and not separately cover the conversion of the
contingent equity interest. This would have reduced some of the
compliance and resource burden on a U.S. person, who would have, in the
context of a notifiable transaction, been required to submit a
notification only at the time of acquisition rather than a notification
at the time of acquisition and another notification at the time of
conversion of contingent equity. However, this alternative would have
reduced the ability of the U.S. Government to observe the frequency and
instances in which the relevant contingent interests convert.
Additionally, it would not have scoped in circumstances where the
acquisition of a contingent equity interest did not involve a covered
foreign person but then a covered foreign person was involved at the
time of the conversion of a contingent equity interest, which would
have limited the proposed rule's reach and ability to address the
national security threat identified in the Outbound Order. Another
example is with respect to the exception for LP investments where the
proposed rule puts forth two proposed alternatives. As discussed above
in the section-by-section analysis with respect to Sec. 850.501 of the
proposed rule, the Department of the Treasury, after consulting with
the heads of other agencies, is offering and seeking comment on two
alternates for this exception. Under proposed Alternate 1, a U.S.
person's investment made as an LP in a pooled investment fund would
constitute an excepted transaction if (1) the LP's rights are
consistent with a passive investment and (2) the LP's committed capital
is not more than 50 percent of the total assets under management of the
pooled fund. If the U.S. person LP's committed capital were to
constitute more than 50 percent of the total assets under management of
the pooled fund, its investment would qualify as an excepted
transaction only if the U.S. person secured a binding agreement that
the pooled fund would not use its capital for a prohibited transaction.
This approach would address situations where the U.S. person's LP
investment falls below the threshold but contains one of several
indicia of control or influence over the pooled fund or the ultimate
covered foreign person investment target. Compared to Alternate 2,
Alternate 1 would scope in fewer LP investments as covered transactions
but could potentially be more challenging for a U.S. person to comply
with, as it requires a multi-factor analysis for assessing whether a
U.S. person's LP investment is an excepted transaction. Under Alternate
2, a U.S. person LP's
[[Page 55869]]
committed capital in a pooled fund that then invests in a covered
foreign person would be an excepted transaction only if the committed
capital was not more than $1,000,000. Although this alternate would
likely scope in a greater number of LP investments as covered
transactions compared to Alternate 1 (and potentially increase the
compliance costs of this program), the bright-line approach may be
easier for U.S. persons to comply with than Alternate 1.
Covered national security technologies using broad
definition of sectors rather than specific activities and technologies.
In the proposed rule, the Department of the Treasury proposed to define
notifiable transaction and prohibited transaction in Sec. 850.217 and
Sec. 850.224, respectively, by reference to certain technologies and
activities, and in some instances, end uses. Alternatively, the
Department of the Treasury could have opted for a broad sectoral
categorization, such as, for example, all technologies and products in
the artificial intelligence sector, regardless of the end use of such
artificial intelligence related technologies or products. If the
Department of the Treasury had proposed that approach, the Department
of the Treasury estimates that the economic impact for U.S. persons
subject to the rule, and for the overall U.S. economy, would be
significantly greater than under the proposed rule. Instead, the
Department of the Treasury, along with other relevant agencies,
carefully tailored the covered activities and technical descriptions
under the definitions of notifiable transaction and prohibited
transaction. In the case of AI systems, the proposed rule addresses
covered activities related to certain AI systems that would have
applications that pose or have the potential to pose national security
risks without broadly capturing AI systems intended only for commercial
applications or other civilian end uses that do not have potential
national security consequences, thereby limiting the additional
compliance and implementation burden on U.S. persons.
The Department of the Treasury intends that the proposed rule would
provide a U.S. person with clarity and guidance regarding its
obligations with respect to a covered transaction, while effectively
addressing the national emergency identified in the Outbound Order in a
targeted manner. The Department of the Treasury expects that the
national security benefits, while qualitative, will outweigh the
compliance costs of the proposed rule.
Paperwork Reduction Act
The collections of information contained in this notice of proposed
rulemaking have been submitted to the Office of Management and Budget
for review in accordance with the Paperwork Reduction Act of 1995 (44
U.S.C. 3507(d)) (PRA).
The proposed rule would require a U.S. person to submit a
notification with respect to (1) any notifiable transaction; (2) any
transaction by a controlled foreign entity that would be a notifiable
transaction if engaged in by a U.S. person; and (3) any transaction for
which a U.S. person acquires actual knowledge after the completion date
of the transaction that the transaction would have been a prohibited
transaction or a notifiable transaction if knowledge had been possessed
by the relevant U.S. person at the time of the transaction. Such
notification would include relevant details on the U.S. person involved
in the transaction as well as information on the transaction and the
covered foreign person involved. The proposed rule would require any
U.S. person that has filed a notification to respond to any questions
or document requests from the Department of the Treasury related to the
transaction or compliance with the proposed rule; any information or
documents provided to the Department of the Treasury in response to
such request would be deemed part of the notification under the
proposed rule.
The proposed rule would also require any U.S. person that files a
notification to maintain a copy of the notification filed and
supporting documentation for a period of ten years from the date of the
filing. Further, the proposed rule would require any person who has
made any representation, statement, or certification subject to the
proposed rule to notify the Department of the Treasury in writing of
any material omission or inaccuracy in such representation, statement,
or certification. Finally, the proposed rule would also require any
U.S. person seeking a national interest exemption to submit information
to the Department of the Treasury regarding the scope of the
transaction including, as applicable, the information that would be
required for a notification of a notifiable transaction.
The collections of information described would be used by the
Department of the Treasury and the Department of Commerce, and, as
appropriate, other relevant agencies, in connection with the analysis
of notifiable transactions pursuant to the Outbound Order. The
information provided in the notifications would increase the U.S.
Government's visibility into the volume and nature of U.S. person
transactions involving the defined technologies and products that may
contribute to the threat to the national security of the United States.
The information in the notifications will be helpful in highlighting
trends with respect to related capital flows. It would also inform
future policy development and decisions, including any modifications to
the scope of notifiable transactions and prohibited transactions.
Additionally, the information would assist the Secretary in complying
with the report requirements in section 4 of the Outbound Order and in
determining whether to grant a national interest exemption to a
particular covered transaction. The proposed rule would prohibit the
Department of the Treasury from making public any information or
documentary materials submitted to or filed with the Department of the
Treasury under the proposed rule unless required by law or otherwise
provided in the proposed rule.
Written comments and recommendations for the proposed information
collections can be submitted by visiting https://www.reginfo.gov/public/do/PRAMain. Information collection requests may be found by
selecting ``Currently Under Review--Open for Public Comments'' or by
using the search function. Comments on the collections of information
should be received by August 4, 2024.
The Department of the Treasury used the methodology described in
the previous section to estimate the total annual reporting and
recordkeeping burden of the information collections in this proposed
rule. The Department of the Treasury estimates that the annual hourly
burden would be up to 19,080 hours. This annual total is based on the
Department of the Treasury's assumption that: (1) 120 entities per year
would respond to the information collections in this proposed rule and
each entity would submit an average of 1.77 notifications annually,
meaning these respondents would file a total 212 responses to the
information collections annually; and (2) each respondent would spend
an estimated 50 to 90 person hours per response. The Department of the
Treasury estimates that the annual cost burden associated with the
information collections and recordkeeping in the proposed rule would
range between $2,342,600 and $5,533,200.
In accordance with 5 CFR 1320.8(d)(1), the Department of the
Treasury is soliciting comments from
[[Page 55870]]
members of the public concerning these collections of information to:
(1) Evaluate whether the proposed collections of information are
necessary for the proper performance of the functions of the agency,
including whether the information will have practical utility;
(2) Evaluate the accuracy of the agency's estimate of the burden of
the proposed collections of information;
(3) Enhance the quality, utility, and clarity of the information to
be collected; and
(4) Minimize the burden of the collections of information on those
who are to respond, including through the use of appropriate automated
collection techniques or other forms of information technology.
Under the PRA, an agency may not conduct or sponsor, and a person
is not required to respond to, a collection of information unless it
displays a valid control number assigned by the OMB.
Regulatory Flexibility Act
It is hereby certified that the proposed rule would not have a
significant economic impact on a substantial number of small entities
within the meaning of section 601(6) of the Regulatory Flexibility Act
(5 U.S.C. 601 et seq.).
The proposed rule may impact any U.S. person, including a small
business that engages in a covered transaction with a covered foreign
person. The Department of the Treasury does not anticipate that the
proposed rule would affect ``small organizations'' or ``small
governmental jurisdiction[s],'' as defined in the RFA.
The Department of the Treasury expects the proposed rule to have a
negligible baseline impact on small businesses because the proposed
rule's obligations on U.S. persons target investments generally
associated with larger institutions that more often are involved in
cross-border investments related to the sectors under the proposed
rule. These larger institutions are more likely to enter into
transactions that will trigger the definition of covered transaction.
The proposed rule would except specific types of transactions that may
be more attractive or accessible to small business investors. And, as
discussed below, the Department of the Treasury has assessed that small
businesses would be likely to enter into transactions that constitute
excepted transactions. As an example, the Small Business
Administration's (SBA's) Table of Size Standards with respect to NAICS
U.S. Industry Sector 52 ``Finance and Insurance'' defines a small
business in this sector by dollar value of assets or revenue rather
than by number of employees. As discussed below, the Department of the
Treasury believes that the relevant SBA thresholds are too low to
capture the type of U.S. investor likely to actively invest in an
entity that engages in the identified activities related to
technologies and products in the semiconductors and microelectronics,
quantum information technologies, and artificial intelligence sectors
that are critical for the military, intelligence, surveillance, or
cyber-enabled capabilities of a country of concern. For example, SBA
categories such as ``open end investment funds,'' and ``other financial
vehicles'' are not considered small businesses if their average annual
receipts exceed $40 million. As a reference point, IBISWorld reports
that for NAICS Industry Code 52591 ``Open-End Investment Funds,'' for
years 2018 to 2023, there were 825 businesses in this category and a
total 2023 revenue across those businesses of $191.1 billion.\4\
Extrapolating from this data, the average 2023 revenue per firm in this
category would have been $231.5 million.
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\4\ IBIS World, https://www.ibisworld.com/united-states/market-research-reports/open-end-investment-funds-industry/#IndustryStatisticsAndTrends (last visited Mar. 15, 2024).
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In fact, the total number of potential investors subject to the
regulation is likely limited to a small set of relatively large and
sophisticated investors. As discussed above, the Department of the
Treasury considered PitchBook Data from approximately 2021 through
2023. Notably, the most common type of U.S. based investors in this
survey were identified by PitchBook Data as a venture capital business,
corporation, private equity or buyout firm, or comparable investor
types.
Given the applications of technologies and products in these
sectors, the Department of the Treasury believes investments into these
sectors involving a person of a country of concern is not typical for a
small business, as these investor types are treated in the SBA's Table
of Size Standards. Importantly, the proposed rule would also except
certain types of transactions, including certain investments into
publicly traded securities or into securities issued by an investment
company, such as an index fund, mutual fund, or exchange traded fund,
where a small business is more likely to consider investing. Given the
narrow scoping of what constitutes a covered transaction under the
proposed rule, the Department of the Treasury expects that few small
businesses, as that term is defined by SBA, will be impacted by the
proposed rule.
In the unlikely event that a small entity is subject to the
requirements of the program, such entity would be expected to incur the
costs described in the separate cost benefit analysis above. For
submission of notifications, the Department of the Treasury has
endeavored to develop information gathering procedures that minimize
the burden on U.S. persons, both large and small. U.S. persons who file
a notification will use a fillable form that will be available online
and is intended to facilitate submission through an electronic format.
This fillable form will benefit anyone who submits a notification,
regardless of their size, but may be especially helpful for small
businesses who will be able to submit directly to the Department of the
Treasury through an online portal.
Notwithstanding this certification, the Department of the Treasury
invites comments from the public about the impact the proposed rule on
small entities. The proposed rule will be submitted to the Chief
Counsel for the Office of Advocacy of the Small Business Administration
for comment on its impact on small business.
List of Subjects in 31 CFR Part 850
Administrative practice and procedure, Artificial intelligence,
Business and industry, Confidential business information, Electronic
filing, Executive orders, Foreign persons, Hong Kong, Holding
companies, Investigations, Investments, Investment companies,
Microelectronics, National defense, National security, Macau,
Penalties, People's Republic of China, Quantum information
technologies, Reporting and recordkeeping requirements, Science and
technology, Securities, Semiconductors, U.S. investments abroad.
0
For the reasons set forth in the preamble, the Department of the
Treasury proposes to add part 850 of title 31 of the Code of Federal
Regulations as follows:
PART 850--PROVISIONS PERTAINING TO U.S. INVESTMENTS IN CERTAIN
NATIONAL SECURITY TECHNOLOGIES AND PRODUCTS IN COUNTRIES OF CONCERN
Subpart A--General
Sec.
850.101 Scope.
850.102 Relation of this part to other laws and regulations.
850.103 Rules of construction and interpretation.
850.104 Knowledge standard.
[[Page 55871]]
Subpart B--Definitions
850.201 Advanced packaging.
850.202 AI system.
850.203 Certification.
850.204 Completion date.
850.205 Contingent equity interest.
850.206 Controlled foreign entity.
850.207 Country of concern.
850.208 Covered activity.
850.209 Covered foreign person.
850.210 Covered transaction.
850.211 Develop.
850.212 Entity.
850.213 Excepted transaction.
850.214 Fabricate.
850.215 Knowingly directing.
850.216 Knowledge.
850.217 Notifiable transaction.
850.218 Package.
850.219 Parent.
850.220 Person.
850.221 Person of a country of concern.
850.222 Principal place of business.
850.223 Produce.
850.224 Prohibited transaction.
850.225 Quantum computer.
850.226 Relevant agencies.
850.227 Subsidiary.
850.228 United States.
850.229 U.S. person.
Subpart C--Prohibited Transactions and Other Prohibited Activities
850.301 Undertaking a prohibited transaction.
850.302 Actions of a controlled foreign entity.
850.303 Knowingly directing an otherwise prohibited transaction.
Subpart D--Notifiable Transactions and Other Notifiable Activities
850.401 Undertaking a notifiable transaction.
850.402 Notification of actions of a controlled foreign entity.
850.403 Notification of post-transaction knowledge.
850.404 Procedures for notifications.
850.405 Content of notifications.
850.406 Notice of material omission or inaccuracy.
Subpart E--Exceptions and Exemptions
850.501 Excepted transaction.
850.502 National interest exemption.
850.503 IEEPA statutory exception.
Subpart F--Violations
850.601 Taking actions prohibited by this part.
850.602 Failure to fulfill requirements.
850.603 Misrepresentation and concealment of facts.
850.604 Evasions; attempts; causing violations; conspiracies.
Subpart G--Penalties and Disclosures
850.701 Penalties.
850.702 Administrative collection; referral to United States
Department of Justice.
850.703 Divestment.
850.704 Voluntary self-disclosure.
Subpart H--Provision and Handling of Information
850.801 Confidentiality.
850.802 Language of information.
Subpart I--Other Provisions
850.901 Delegation of authorities of the Secretary of the Treasury.
850.902 Amendment, modification, or revocation.
850.903 Severability.
850.904 Reports to be furnished on demand.
Authority: 50 U.S.C. 1701 et seq.; E.O. 14105, 88 FR 54867.
Subpart A--General
Sec. 850.101 Scope.
(a) This part implements Executive Order 14105 of August 9, 2023,
``Addressing United States Investments in Certain National Security
Technologies and Products in Countries of Concern'' (the Order),
directing the Secretary of the Treasury (the Secretary), in
consultation with the Secretary of Commerce and, as appropriate, the
heads of other relevant executive departments and agencies, to issue,
subject to public notice and comment, regulations that require U.S.
persons to provide notification of information relative to certain
transactions involving covered foreign persons and that prohibit U.S.
persons from engaging in certain other transactions involving covered
foreign persons.
(b) The regulations identify certain types of transactions that are
covered transactions--that is, transactions that are either notifiable
or prohibited. Additionally, the regulations identify other instances
where a U.S. person has obligations with respect to certain
transactions. The regulations prescribe exceptions to the definition of
covered transaction. A transaction that meets an exception is not a
covered transaction and is referred to as an excepted transaction.
Finally, the regulations prescribe a process for the Secretary to
exempt certain covered transactions from the rules otherwise
prohibiting or requiring notification of covered transactions on a
case-by-case basis.
(c) The regulations identify categories of covered transactions
that are notifiable transactions. A notifiable transaction is a
transaction by a U.S. person or its controlled foreign entity with or
resulting in the establishment of a covered foreign person that engages
in a covered activity or a person of a country of concern's engagement
in a new covered activity that the Secretary, in consultation with the
Secretary of Commerce and, as appropriate, the heads of other relevant
agencies, has determined may contribute to the threat to the national
security of the United States identified in the Order. The regulations
require a U.S. person to notify the Department of the Treasury of each
such notifiable transaction by such U.S. person or its controlled
foreign entity. The regulations also require a U.S. person to provide
prompt notice to the Department of the Treasury upon acquiring actual
knowledge after the completion date of a transaction of facts or
circumstances that would have caused the transaction to be a covered
transaction if the U.S. person had had such knowledge on the completion
date. Additionally, any person who makes a representation, statement,
or certification under to this part is required to promptly notify the
Department of the Treasury upon learning of a material omission or
inaccuracy in such representation, statement, or certification.
(d) The regulations identify categories of covered transactions
that are prohibited transactions. A prohibited transaction is a
transaction by a U.S. person with or resulting in the establishment of
a covered foreign person that engages in a covered activity or a person
of a country of concern's engagement in a new covered activity that the
Secretary, in consultation with the Secretary of Commerce and, as
appropriate, the heads of other relevant agencies, has determined poses
a particularly acute national security threat because of its potential
to significantly advance the military, intelligence, surveillance, or
cyber-enabled capabilities of a country of concern. The regulations
prohibit a U.S. person from engaging in a prohibited transaction and
also prohibit a U.S. person from knowingly directing a transaction that
the U.S. person knows would be a prohibited transaction if engaged in
by a U.S. person. The regulations also require a U.S. person to take
all reasonable steps to prohibit and prevent any transaction by its
controlled foreign entity that would be a prohibited transaction if
undertaken by a U.S. person.
(e) Pursuant to the Order, the Secretary shall, as appropriate:
(1) Communicate with the Congress and the public with respect to
the
implementation of the Order;
(2) Consult with the Secretary of Commerce on industry engagement
and analysis of notifiable transactions;
(3) Consult with the Secretary of State, the Secretary of Defense,
the Secretary of Commerce, the Secretary of Energy, and the Director of
National Intelligence on the implications for military, intelligence,
surveillance, or cyber-enabled capabilities of covered national
security technologies and products in the Order and potential
[[Page 55872]]
covered national security technologies and products;
(4) Engage, together with the Secretary of State and the Secretary
of Commerce, with allies and partners regarding the national security
risks posed by countries of concern advancing covered national security
technologies and products;
(5) Consult with the Secretary of State on foreign policy
considerations related to the implementation of the Order, including
but not limited to the issuance and amendment of regulations; and
(6) Investigate, in consultation with the heads of relevant
agencies, as appropriate, violations of the Order or the regulations in
this part and pursue available civil penalties for such violations.
Sec. 850.102 Relation of this part to other laws and regulations.
Nothing in this part shall be construed as altering or affecting
any other authority, process, regulation, investigation, enforcement
measure, license, authorization, or review provided by or established
under any other provision of federal law, including the International
Emergency Economic Powers Act (50 U.S.C. 1701 et seq.) (IEEPA), or any
other authority of the President or the Congress under the Constitution
of the United States. This part is separate from, and independent of,
the other parts of this subtitle. Differing foreign policy and national
security circumstances may result in differing interpretations of the
same or similar language among the parts of this subtitle. No action
taken pursuant to any other provision of law or regulation, including
the other parts of this subtitle, authorizes any transaction prohibited
by this part or alters any other obligation under this part. No action
taken pursuant to this part relieves the involved parties from
complying with any other applicable laws or regulations.
Sec. 850.103 Rules of construction and interpretation.
(a) As used in this part, the term ``including'' (or variations
such as ``include'') means ``including but not limited to.''
(b) Any term in the singular includes the plural, and the plural
includes the singular, if such use would be appropriate.
(c) Section headings are included for convenience of reference only
and shall not affect the interpretation of this part.
Sec. 850.104 Knowledge standard.
(a) Certain provisions of this part apply only if a U.S. person
knows of a fact or circumstance. The term knowledge is defined in Sec.
850.216. In determining whether a U.S. person is complying with this
part or has violated any obligation under this part, the Department of
the Treasury will assess whether such person has or had knowledge of
the relevant facts and circumstances at the specified time.
(b) Such assessment as to whether, at the time of a given
transaction, a U.S. person has or had knowledge of a given fact or
circumstance will be made based on information a U.S. person had or
could have had through a reasonable and diligent inquiry. A U.S. person
that has failed to conduct a reasonable and diligent inquiry by the
time of a given transaction may be assessed to have had reason to know
of a given fact or circumstance, including facts or circumstances that
would cause the transaction to be a covered transaction.
(c) In assessing whether a U.S. person has undertaken such a
reasonable and diligent inquiry, the Department of the Treasury's
considerations will include the following, as applicable, among others
that the Department of the Treasury deems relevant, with respect to a
particular transaction:
(1) The inquiry a U.S. person, its legal counsel, or its
representatives have made on behalf of the U.S. person regarding an
investment target or relevant counterparty, including questions asked
of the investment target or relevant counterparty, as of the time of
the transaction;
(2) The contractual representations or warranties the U.S. person
has obtained or attempted to obtain from the investment target or
relevant counterparty with respect to the determination of a
transaction's status as a covered transaction and an investment target
or relevant counterparty's status as a covered foreign person;
(3) The effort by the U.S. person at the time of the transaction to
obtain available non-public information relevant to the determination
of a transaction's status as a covered transaction and an investment
target or relevant counterparty's status as a covered foreign person,
and the efforts undertaken by the U.S. person to obtain and review such
information;
(4) Available public information, the efforts undertaken by the
U.S. person to obtain and review such information, and the degree to
which other information available to the U.S. person at the time of the
transaction is consistent or inconsistent with such publicly available
information;
(5) Whether the U.S. person, its legal counsel, or its
representatives have purposefully avoided learning or sharing relevant
information;
(6) The presence or absence of warning signs, which may include
evasive responses or non-responses from an investment target or
relevant counterparty to questions or a refusal to provide information,
contractual representations, or warranties; and
(7) The use of public and commercial databases to identify and
verify relevant information of an investment target or relevant
counterparty.
Subpart B--Definitions
Sec. 850.201 Advanced packaging.
The term advanced packaging means to package integrated circuits in
a manner that supports the two-and-one-half-dimensional (2.5D) or
three-dimensional (3D) assembly of integrated circuits, such as by
directly attaching one or more die or wafer using through-silicon vias,
die or wafer bonding, heterogeneous integration, or other advanced
methods and materials.
Sec. 850.202 AI system.
The term AI system means:
(a) A machine-based system that can, for a given set of human-
defined objectives, make predictions, recommendations, or decisions
influencing real or virtual environments--i.e., a system that uses data
inputs to:
(1) Perceive real and virtual environments;
(2) Abstract such perceptions into models through automated or
algorithmic statistical analysis; and
(3) Use model inference to make a classification, prediction,
recommendation, or decision.
(b) Any data system, software, hardware, application, tool, or
utility that operates in whole or in part using a system described in
(a).
Sec. 850.203 Certification.
(a) The term certification means a written statement signed by the
chief executive officer or other duly authorized designee of the person
filing a notification or providing other information that certifies
under the penalties provided in the False Statements Accountability Act
of 1996, as amended (18 U.S.C. 1001) that the notification or other
information filed or provided:
(1) Fully complies with the regulations in this part; and
(2) Is accurate and complete in all material respects to the best
knowledge of the person filing a notification or other information.
(b) For purposes of this section, a duly authorized designee is:
[[Page 55873]]
(1) In the case of a partnership, any general partner thereof;
(2) In the case of a corporation, any officer thereof; and
(3) In the case of any entity lacking partners and officers, any
individual within the organization exercising executive functions
similar to those of a general partner of a partnership or an officer of
a corporation or otherwise authorized by the board of directors or
equivalent to provide such certification.
(c) In each case described in paragraphs (b)(1) through (3) of this
section, such designee must possess actual authority to make the
certification on behalf of the person filing a notification or other
information.
Note 1 to Sec. 850.203: A template for certifications may be
found at the Outbound Investment Security Program section of the
Department of the Treasury website.
Sec. 850.204 Completion date.
The term completion date means:
(a) With respect to a covered transaction other than under Sec.
850.210(a)(6), the earliest date upon which any interest, asset,
property, or right is conveyed, assigned, delivered, or otherwise
transferred to a U.S. person, or as applicable, its controlled foreign
entity; or
(b) With respect to a covered transaction under Sec.
850.210(a)(6), the earliest date upon which any interest, asset,
property, or right in the relevant covered foreign person is conveyed,
assigned, delivered, or otherwise transferred to the applicable fund.
Sec. 850.205 Contingent equity interest.
The term contingent equity interest means a financial instrument
that currently does not constitute an equity interest but is
convertible into, or provides the right to acquire, an equity interest
upon the occurrence of a contingency or defined event.
Sec. 850.206 Controlled foreign entity.
(a) The term controlled foreign entity means any entity
incorporated in, or otherwise organized under the laws of, a country
other than the United States of which a U.S. person is a parent.
(b) For purposes of this term, the following rules shall apply in
determining whether an entity is a parent of another entity in a tiered
ownership structure:
(1) Where the relationship between an entity and another entity is
that of parent and subsidiary, the holdings of voting interest or
voting power of the board, as applicable, of a subsidiary shall be
fully attributed to the parent.
(2) Where the relationship between an entity and another entity is
not that of parent and subsidiary (i.e., because the holdings of voting
interest or voting power of the board, as applicable, of the first
entity in the second entity is 50 percent or less), then the indirect
downstream holdings of voting interest or voting power of the board, as
applicable, attributed to the first entity shall be determined
proportionately.
(3) Where the circumstances in paragraphs (b)(1) and (2) of this
section apply (i.e., because a U.S. person holds both direct and
indirect downstream holdings in the same entity), any holdings of
voting interest shall be aggregated for the purposes of applying this
definition, and any holdings of voting power of the board shall be
aggregated for the purposes of applying this definition. Voting
interest shall not be aggregated with voting power of the board for the
purposes of applying this definition.
Sec. 850.207 Country of concern.
The term country of concern has the meaning given to it in the
Annex to the Order.
Sec. 850.208 Covered activity.
The term covered activity means, in the context of a particular
transaction, any of the activities referred to in the definition of
notifiable transaction in Sec. 850.217 or prohibited transaction in
Sec. 850.224.
Sec. 850.209 Covered foreign person.
(a) The term covered foreign person means:
(1) A person of a country of concern that engages in a covered
activity; or
(2) A person that directly or indirectly holds any voting interest,
board seat, or equity interest in any person described in paragraph
(a)(1) of this section, or holds any power to direct or cause the
direction of the management or policies of any person described in
paragraph (a)(1) of this section through one or more contractual
arrangements, including, for the avoidance of doubt, variable interest
entities; and where the person, based the relevant financial statement
described in paragraph (b) of this section:
(i) Derives more than 50 percent of its revenue from any person
described in paragraph (a)(1) of this section, individually or in the
aggregate;
(ii) Derives more than 50 percent of its net income from any person
described in paragraph (a)(1) of this section, individually or in the
aggregate;
(iii) Incurs more than 50 percent of its capital expenditure
through any person described in paragraph (a)(1) of this section,
individually or in the aggregate; or
(iv) Incurs more than 50 percent of its operating expenses through
any person described in paragraph (a)(1) of this section, individually
or in the aggregate.
(3) With respect to a covered transaction described in Sec.
850.210(a)(5), the person of a country of concern that participates in
the joint venture is deemed to be a covered foreign person by virtue of
its participation in the joint venture.
(b) Determination of whether a person is a covered foreign person
within the meaning of paragraph (a)(2) of this section shall be made
based on an annual financial statement from the most recent year for
which an audited financial statement of such person is available at the
time of a given transaction. If an audited financial statement is not
available, the most recent unaudited financial statement shall be used
instead.
Sec. 850.210 Covered transaction.
(a) The term covered transaction means a U.S. person's direct or
indirect:
(1) Acquisition of an equity interest or a contingent equity
interest (or interest equivalent to an equity or contingent equity
interest) in a person that the U.S. person knows at the time of the
acquisition is a covered foreign person;
(2) Provision of a loan or a similar debt financing arrangement to
a person that the U.S. person knows at the time of the provision is a
covered foreign person, where such debt financing:
(i) Is convertible to an equity interest; or
(ii) Affords or will afford the U.S. person the right to make
management decisions with respect to or on behalf of the covered
foreign person or the right to appoint members of the board of
directors (or equivalent) of the covered foreign person;
(3) Conversion of a contingent equity interest (or interest
equivalent to a contingent equity interest) or conversion of debt to an
equity interest in a person that the U.S. person knows at the time of
the conversion is a covered foreign person;
(4) Acquisition, leasing, or other development of operations, land,
property, or other assets in a country of concern that the U.S. person
knows at the time of such acquisition, leasing, or other development
will result in, or that the U.S. person intends to result in:
(i) The establishment of a covered foreign person; or
(ii) The engagement of a person of a country of concern in a
covered activity where it was not previously engaged in such covered
activity;
[[Page 55874]]
(5) Entrance into a joint venture, wherever located, that is formed
with a person of a country of concern and that the subject U.S. person
knows at the time of entrance into the joint venture will engage in or
the U.S. person intends to engage in a covered activity; or
(6) Acquisition of a limited partner or equivalent interest in a
venture capital fund, private equity fund, fund of funds, or other
pooled investment fund (in each case where the fund is not a U.S.
person) that a U.S. person knows at the time of the acquisition likely
will invest in a person of a country of concern that is in the
semiconductors and microelectronics, quantum information technologies,
or artificial intelligence sectors, and such fund undertakes a
transaction that would be a covered transaction if undertaken by a U.S.
person.
(b) Notwithstanding paragraph (a) of this section, a transaction is
not a covered transaction if it is:
(1) An excepted transaction as set forth in Sec. 850.501; or
(2) For the conduct of the official business of the United States
Government by employees, grantees, or contractors thereof.
(c) The acquisition of a convertible or contingent interest
described in paragraph (a)(1) or (2) of this section may constitute a
covered transaction, and the subsequent occurrence of a conversion
event described in paragraph (a)(3) of this section may constitute a
separate covered transaction. A U.S. person should assess each of the
acquisition and the conversion to determine the applicability of this
part.
Note 1 to Sec. 850.210: For the avoidance of doubt, in the
context of a debt financing, a lender's foreclosure on collateral
that constitutes an equity interest is an acquisition of such equity
interest by the lender.
Sec. 850.211 Develop.
The term develop means to engage in any stages prior to serial
production, such as design or modification, design research, design
analyses, design concepts, assembly and testing of prototypes, pilot
production schemes, design data, process of transforming design data
into a product, configuration design, integration design, and layouts.
Sec. 850.212 Entity.
The term entity means any branch, partnership, association, estate,
joint venture, trust, corporation or division of a corporation, group,
sub-group, or other organization (whether or not organized under the
laws of any State or foreign state).
Sec. 850.213 Excepted transaction.
The term excepted transaction means a transaction that meets the
criteria in Sec. 850.501.
Sec. 850.214 Fabricate.
The term fabricate means to form devices such as transistors, poly
capacitors, non-metal resistors, and diodes on a wafer of semiconductor
material.
Sec. 850.215 Knowingly directing.
The term knowingly directing has the definition set forth in Sec.
850.303.
Sec. 850.216 Knowledge.
Knowledge of a fact or circumstance (the term may be a variant,
such as ``know'') means:
(a) Actual knowledge that a fact or circumstance exists or is
substantially certain to occur;
(b) An awareness of a high probability of a fact or circumstance's
existence or future occurrence; or
(c) Reason to know of a fact or circumstance's existence.
Note 1 to Sec. 850.216: See the discussion of the knowledge
standard in Sec. 850.104 for more information about how this term
is applied in this part.
Sec. 850.217 Notifiable transaction.
The term notifiable transaction means a covered transaction (that
is not a prohibited transaction) in which the relevant covered foreign
person or, with respect to a covered transaction described in Sec.
850.210(a)(5), the relevant joint venture:
(a) Designs any integrated circuit that is not described in Sec.
850.224(c);
(b) Fabricates any integrated circuit that is not described in
Sec. 850.224(d);
(c) Packages any integrated circuit that is not described in Sec.
850.224(e); or
(d) Develops any AI system that is not described in Sec.
850.224(j) or (k) and that is:
(1) Designed to be used for any government intelligence or mass-
surveillance end use (e.g., through mining text, audio, or video; image
recognition; location tracking; or surreptitious listening devices) or
military end use (e.g., for weapons targeting, target identification,
combat simulation, military vehicle or weapons control, military
decision-making, weapons design, or combat system logistics and
maintenance);
(2) Intended by the covered foreign person to be used for
cybersecurity applications, digital forensics tools, and penetration
testing tools, or the control of robotic systems; or
Alternate 1
(3) Trained using a quantity of computing power greater than
10[supcaret]23 computational operations (e.g., integer or floating-
point operations).
Alternate 2
(3) Trained using a quantity of computing power greater than
10[supcaret]24 computational operations (e.g., integer or floating-
point operations).
Alternate 3
(3) Trained using a quantity of computing power greater than
10[supcaret]25 computational operations (e.g., integer or floating-
point operations).
Note 1 to Sec. 850.217: Consistent with section 3 of the
Order, the Secretary, in consultation with the Secretary of
Commerce, and, as appropriate, the heads of other relevant agencies,
shall periodically assess whether the quantity of computing power
described in paragraph (d)(3) remains effective in addressing
threats to the national security of the United States described in
the Order and make updates, as appropriate, through public notice.
Sec. 850.218 Package.
The term package means to assemble various components, such as the
integrated circuit die, lead frames, interconnects, and substrate
materials to safeguard the semiconductor device and provide electrical
connections between different parts of the die.
Sec. 850.219 Parent.
The term parent means, with respect to an entity:
(a) A person who or which directly or indirectly holds more than 50
percent of:
(1) The outstanding voting interest in the entity; or
(2) The voting power of the board of the entity;
(b) The general partner, managing member, or equivalent of the
entity; or
(c) The investment adviser to any entity that is a pooled
investment fund, with ``investment adviser'' as defined in the
Investment Advisers Act of 1940 (15 U.S.C. 80b-2(a)(11)).
Sec. 850.220 Person.
The term person means any individual or entity.
Sec. 850.221 Person of a country of concern.
The term person of a country of concern means:
(a) Any individual that:
(1) Is a citizen or permanent resident of a country of concern;
(2) Is not a U.S. citizen; and
(3) Is not a permanent resident of the United States.
(b) An entity with a principal place of business in, headquartered
in, or
[[Page 55875]]
incorporated in or otherwise organized under the laws of, a country of
concern;
(c) The government of a country of concern, including any political
subdivision, political party, agency, or instrumentality thereof; any
person acting for or on behalf of the government of such country of
concern; or any entity with respect to which the government of such
country of concern holds individually or in the aggregate, directly or
indirectly, 50 percent or more of the entity's outstanding voting
interest, voting power of the board, or equity interest, or otherwise
possesses the power to direct or cause the direction of the management
and policies of such entity (whether through the ownership of voting
securities, by contract, or otherwise);
(d) Any entity in which one or more persons identified in paragraph
(a), (b), or (c) of this section, individually or in the aggregate,
directly or indirectly, holds at least 50 percent of any of the
following interests of such entity: outstanding voting interest, voting
power of the board, or equity interest; or
(e) Any entity in which one or more persons identified in paragraph
(d) of this section, individually or in the aggregate, directly or
indirectly, holds at least 50 percent of any of the following interests
of such entity: outstanding voting interest, voting power of the board,
or equity interest.
Sec. 850.222 Principal place of business.
The term principal place of business means the primary location
where an entity's management directs, controls, or coordinates the
entity's activities, or, in the case of an investment fund, where the
fund's activities are primarily directed, controlled, or coordinated by
or on behalf of the general partner, managing member, or equivalent.
Sec. 850.223 Produce.
The term produce means to engage in any of the post-development
stages of realizing the relevant technology or product, such as
engineering, manufacture, integration, assembly, inspection, testing,
and quality assurance.
Sec. 850.224 Prohibited transaction.
The term prohibited transaction means a covered transaction in
which the relevant covered foreign person or, with respect to a covered
transaction described in Sec. 850.210(a)(5), the relevant joint
venture:
(a) Develops or produces any electronic design automation software
for the design of integrated circuits or advanced packaging;
(b) Develops or produces any:
(1) Front-end semiconductor fabrication equipment designed for
performing the volume fabrication of integrated circuits, including
equipment used in the production stages from a blank wafer or substrate
to a completed wafer or substrate (i.e., the integrated circuits are
processed but they are still on the wafer or substrate);
(2) Equipment for performing volume advanced packaging; or
(3) Commodity, material, software, or technology designed
exclusively for use in or with extreme ultraviolet lithography
fabrication equipment.
(c) Designs any integrated circuit that meets or exceeds the
performance parameters in Export Control Classification Number 3A090.a
in supplement No. 1 to 15 CFR part 774, or integrated circuits designed
for operation at or below 4.5 Kelvin;
(d) Fabricates any integrated circuit that meets any of the
following criteria:
(1) Logic integrated circuits using a non-planar transistor
architecture or with a production technology node of 16/14 nanometers
or less, including fully depleted silicon-on-insulator (FDSOI)
integrated circuits;
(2) NOT-AND (NAND) memory integrated circuits with 128 layers or
more;
(3) Dynamic random-access memory (DRAM) integrated circuits using a
technology node of 18 nanometer half-pitch or less;
(4) Integrated circuits manufactured from a gallium-based compound
semiconductor;
(5) Integrated circuits using graphene transistors or carbon
nanotubes; or
(6) Integrated circuits designed for operation at or below 4.5
Kelvin;
(e) Packages any integrated circuit using advanced packaging
techniques;
(f) Develops, installs, sells, or produces any supercomputer
enabled by advanced integrated circuits that can provide a theoretical
compute capacity of 100 or more double-precision (64-bit) petaflops or
200 or more single-precision (32-bit) petaflops of processing power
within a 41,600 cubic foot or smaller envelope;
(g) Develops a quantum computer or produces any of the critical
components required to produce a quantum computer such as a dilution
refrigerator or two-stage pulse tube cryocooler;
(h) Develops or produces any quantum sensing platform designed for,
or which the relevant covered foreign person intends to be used for,
any military, government intelligence, or mass-surveillance end use;
(i) Develops or produces any quantum network or quantum
communication system designed for, or which the relevant covered
foreign person intends to be used for:
(1) Networking to scale up the capabilities of quantum computers,
such as for the purposes of breaking or compromising encryption;
(2) Secure communications, such as quantum key distribution; or
(3) Any other application that has any military, government
intelligence, or mass-surveillance end use;
(j) Develops any AI system that is designed to be exclusively used
for, or which the relevant covered foreign person intends to be used
for, any:
(1) Military end use (e.g., for weapons targeting, target
identification, combat simulation, military vehicle or weapon control,
military decision-making, weapons design, or combat system logistics
and maintenance); or
(2) Government intelligence or mass surveillance end use (e.g.,
through mining text, audio, or video; image recognition; location
tracking; or surreptitious listening devices);
(k) Develops any AI system that is trained using a quantity of
computing power greater than:
Alternate 1 for paragraph (k)(1)
(1) 10[supcaret]24 computational operations (e.g., integer or
floating-point operations); or
Alternate 2 for paragraph (k)(1)
(1) 10[supcaret]25 computational operations (e.g., integer or
floating-point operations); or
Alternate 3 for paragraph (k)(1)
(1) 10[supcaret]26 computational operations (e.g., integer or
floating-point operations); or
Alternate 1 for paragraph (k)(2)
(2) 10[supcaret]23 computational operations (e.g., integer or
floating-point operations) using primarily biological sequence data;
Alternate 2 for paragraph (k)(2)
(2) 10[supcaret]24 computational operations (e.g., integer or
floating-point operations) using primarily biological sequence data;
(l) Meets the conditions set forth in Sec. 850.209(a)(2) because
of its relationship to one or more covered foreign persons engaged in
any covered activity described in any of paragraphs (a) through (k) of
this section; or
(m) Engages in a covered activity, whether referenced in this
section or Sec. 850.217 and is:
(1) Included on the Bureau of Industry and Security's Entity List
(15 CFR part 744, supplement no. 4);
(2) Included on the Bureau of Industry and Security's Military End
User List (15 CFR part 744, supplement no. 7);
(3) Meets the definition of ``Military Intelligence End-User'' by
the Bureau of
[[Page 55876]]
Industry and Security in 15 CFR 744.22(f)(2);
(4) Included on the Department of the Treasury's list of Specially
Designated Nationals and Blocked Persons (SDN List), or is an entity in
which one or more individuals or entities included on the SDN List,
individually or in the aggregate, directly or indirectly, own a 50
percent or greater interest;
(5) Included on the Department of the Treasury's list of Non-SDN
Chinese Military-Industrial Complex Companies (NS-CMIC List); or
(6) Designated as a foreign terrorist organization by the Secretary
of State under 8 U.S.C. 1189.
Note 1 to Sec. 850.224: Consistent with section 3 of the Order,
the Secretary, in consultation with the Secretary of Commerce and,
as appropriate, the heads of other relevant agencies, shall
periodically assess whether the quantities of computing power
described in paragraph (k) of this section remain effective in
addressing threats to the national security of the United States
described in the Order and make updates, as appropriate, through
public notice.
Sec. 850.225 Quantum computer.
The term quantum computer means a computer that performs
computations that harness the collective properties of quantum states,
such as superposition, interference, or entanglement.
Sec. 850.226 Relevant agencies.
The term relevant agencies means the Departments of State, Defense,
Justice, Commerce, Energy, and Homeland Security, the Office of the
United States Trade Representative, the Office of Science and
Technology Policy, the Office of the Director of National Intelligence,
the Office of the National Cyber Director, and any other department,
agency, or office the Secretary determines appropriate.
Sec. 850.227 Subsidiary.
The term subsidiary means, with respect to a person, an entity of
which such person is a parent.
Sec. 850.228 United States.
The term United States or U.S. means the United States of America,
the States of the United States of America, the District of Columbia,
and any commonwealth, territory, dependency, or possession of the
United States of America, or any subdivision of the foregoing, and
includes the territorial sea of the United States of America. For
purposes of this part, an entity organized under the laws of the United
States of America, one of the States, the District of Columbia, or a
commonwealth, territory, dependency, or possession of the United States
is an entity organized ``in the United States.''
Sec. 850.229 U.S. person.
The term U.S. person means any United States citizen, lawful
permanent resident, entity organized under the laws of the United
States or any jurisdiction within the United States, including any
foreign branch of any such entity, or any person in the United States.
Subpart C--Prohibited Transactions and Other Prohibited Activities
Sec. 850.301 Undertaking a prohibited transaction.
A U.S. person may not engage in a prohibited transaction unless an
exemption for that transaction has been granted under Sec. 850.502.
Sec. 850.302 Actions of a controlled foreign entity.
(a) A U.S. person shall take all reasonable steps to prohibit and
prevent any transaction by its controlled foreign entity that would be
a prohibited transaction if engaged in by a U.S. person.
(b) If a controlled foreign entity engages in a transaction that
would be a prohibited transaction if engaged in by a U.S. person, in
determining whether the relevant U.S. person took all reasonable steps
to prohibit and prevent such transaction, the Department of the
Treasury will consider, among other factors, any of the following with
respect to a U.S. person and its controlled foreign entity:
(1) The execution of agreements with respect to compliance with
this part between the subject U.S. person and its controlled foreign
entity;
(2) The existence and exercise of governance or shareholder rights
by the U.S. person with respect to the controlled foreign entity, where
applicable;
(3) The existence and implementation of periodic training and
internal reporting requirements by the U.S. person and its controlled
foreign entity with respect to compliance with this part;
(4) The implementation of appropriate and documented internal
controls, including internal policies, procedures, or guidelines that
are periodically reviewed internally, by the U.S. person and its
controlled foreign entity; and
(5) Implementation of a documented testing and/or auditing process
of internal policies, procedures, or guidelines.
Note 1 to Sec. 850.302: Findings of violations of this section
and decisions related to enforcement and penalties will be made
based on a consideration of the totality of relevant facts and
circumstances, including whether the U.S. person has taken the steps
described in paragraph (b) of this section and whether such steps
were reasonable given the size and sophistication of the U.S.
person.
Sec. 850.303 Knowingly directing an otherwise prohibited transaction.
(a) A U.S. person is prohibited from knowingly directing a
transaction by a non-U.S. person that the U.S. person knows at the time
of the transaction would be a prohibited transaction if engaged in by a
U.S. person. For purposes of this section, a U.S. person ``knowingly
directs'' a transaction when the U.S. person has authority,
individually or as part of a group, to make or substantially
participate in decisions on behalf of a non-U.S. person, and exercises
that authority to direct, order, decide upon, or approve a transaction.
Such authority exists when a U.S. person is an officer, director, or
senior advisor, or otherwise possesses senior-level authority at a non-
U.S. person.
(b) A U.S. person that has the authority described in paragraph (a)
of this section and recuses themself from an investment will not be
considered to have exercised their authority to direct, order, decide
upon, or approve a transaction.
Subpart D--Notifiable Transactions and Other Notifiable Activities
Sec. 850.401 Undertaking a notifiable transaction.
A U.S. person that undertakes a notifiable transaction shall file a
notification of that transaction with the Department of the Treasury
pursuant to Sec. 850.404.
Sec. 850.402 Notification of actions of a controlled foreign entity.
A U.S. person shall file a notification with the Department of the
Treasury pursuant to Sec. 850.404 with respect to any transaction by a
controlled foreign entity of that U.S. person that would be a
notifiable transaction if engaged in by a U.S. person.
Sec. 850.403 Notification of post-transaction knowledge.
A U.S. person that acquires actual knowledge after the completion
date of a transaction of a fact or circumstance such that the
transaction would have been a covered transaction if such knowledge had
been possessed by the relevant U.S. person at the time of the
transaction shall promptly, and in no event later than 30 calendar days
following the acquisition of such
[[Page 55877]]
knowledge, submit a notification pursuant to Sec. 850.404. This
requirement applies regardless of whether the transaction would have
been a notifiable transaction or a prohibited transaction.
Note 1 to Sec. 850.403: For the avoidance of doubt, a U.S.
person's submission of a notification pursuant to this section shall
not preclude a finding by the Department of the Treasury that as a
factual matter the U.S. person had relevant knowledge of the
transaction's status at the time of the transaction.
Sec. 850.404 Procedures for notifications.
(a) A U.S. person that has an obligation under Sec. Sec. 850.401,
850.402, or 850.403 shall file an electronic copy of the notification
of the transaction with the Department of the Treasury including the
information set out in Sec. 850.405 and the certification referred to
in Sec. 850.203. The U.S. person shall follow the electronic filing
instructions posted on the Department of the Treasury's Outbound
Investment Security Program website. No communications or submissions
other than those described in this section shall constitute the filing
of a notification for purposes of this part.
(b) The Department of the Treasury may contact a U.S. person that
has filed a notification with questions or document requests related to
the transaction or compliance with this part. The U.S. person shall
respond to any such questions or requests within the time frame and in
the manner specified by the Department of the Treasury. Information and
other documents provided by the U.S. person to the Department of the
Treasury after the filing of the notification under this section shall
be deemed part of the notification and shall be subject to the
certification referred to in Sec. 850.203.
(c) A U.S. person shall file a notification under Sec. 850.401 or
Sec. 850.402 with the Department of the Treasury no later than 30
calendar days following the completion date of a notifiable
transaction. A U.S. person shall file a notification required under
Sec. 850.403 with the Department of the Treasury no later than 30
calendar days after it acquires the knowledge referred to in Sec.
850.403.
(d) If a U.S. person files a notification prior to the completion
date of the notifiable transaction, the U.S. person shall update such
notification no later than 30 calendar days following the completion
date of the notifiable transaction if information in the original
filing has materially changed.
(e) A U.S. person shall inform the Department of the Treasury in
writing no later than 30 calendar days following the acquisition of
previously unavailable information required under Sec. 850.405.
Note 1 to Sec. 850.404: While the Department of the Treasury
may engage with the U.S. person following notification, it is also
possible the U.S. person will receive no communication from the
Department of the Treasury other than an electronic acknowledgment
of receipt after notification is submitted.
Sec. 850.405 Content of notifications.
(a) A U.S. person that has an obligation under this part to file a
notification shall provide the information set forth in this section,
which must be accurate and complete in all material respects.
(b) A notification shall provide, as applicable:
(1) The contact information of a representative of the U.S. person
filing the notification who is available to communicate with the
Department of the Treasury about the notification including such
representative's name, title, email address, mailing address, phone
number, and employer;
(2) A description of the U.S. person, including name, and as
applicable, principal place of business and place of incorporation or
legal organization, company address, website, and, if the U.S. person
is an entity, such U.S. person's ultimate owner;
(3) A post-transaction organizational chart of the U.S. person that
includes its relationship with any controlled foreign entity or
entities of the U.S. person and that identifies the covered foreign
person and other relevant persons involved in the transaction;
(4) A brief description of the commercial rationale for the
transaction;
(5) A brief description of why the U.S. person has determined the
transaction is a covered transaction that includes a discussion of the
nature of the transaction, its structure, reference to the paragraph of
Sec. 850.210(a) that best describes the transaction type, and whether
the notification is being submitted pursuant to Sec. Sec. 850.401,
850.402, or 850.403;
(6) The status of the transaction, including the actual or expected
completion date of the transaction;
(7) The total transaction value in U.S. dollars or U.S. dollar
equivalent, an explanation of how the transaction value was determined,
and a description of the consideration for the transaction (including
cash, securities, other assets, and debt forgiveness);
(8) The aggregate equity interest, voting interest, board seats (or
equivalent holdings) of the U.S. person and its affiliates in the
covered foreign person (or in the joint venture, as applicable)
following the completion date of the transaction, including a
description of any agreements or commitments for future investment or
options to make future investments in the covered foreign person (or
joint venture);
(9) Information about the covered foreign person, including its
name, and as applicable, principal place of business and place of
incorporation or legal organization, company address, website, and if
the covered foreign person is an entity, such covered foreign person's
ultimate owner, and the full legal names and titles of each officer,
director, and other member of management of the covered foreign person,
and a post-transaction organizational chart of the covered foreign
person;
(10) Identification and description of each of the covered activity
or activities undertaken by the covered foreign person that makes the
transaction a covered transaction, as well as a brief description of
the known end use(s) and end user(s) of the covered foreign person's
technology, products, or services;
(11) A statement describing the attributes that cause the entity to
be a covered foreign person, and any other relevant information
regarding the covered foreign person and covered activity or
activities;
(12) If a transaction involves a covered activity identified in
Sec. 850.217(a), (b), or (c), identification of the technology node(s)
at which any applicable product is produced; and;
(13) If the notification is required under Sec. 850.403:
(i) Identification of the fact or circumstance of which the U.S.
person acquired knowledge post-transaction;
(ii) The date upon which the U.S. person acquired such knowledge;
(iii) A statement explaining why the U.S. person did not possess or
obtain such knowledge at the time of the transaction; and
(iv) A description of any pre-transaction diligence undertaken by
the U.S. person, including, as applicable, any steps described in Sec.
850.104(c).
(c) The U.S. person shall maintain a copy of the notification filed
and supporting documentation for a period of ten years from the date of
the filing. Such supporting documentation shall include, as applicable,
any pitch decks, marketing letters, and offering memorandums;
transaction documents including side letters and investment agreements;
and due diligence materials related to the transaction. The U.S. person
shall make all supporting
[[Page 55878]]
documentation available upon request by the Department of the Treasury.
(d) If the U.S. person does not provide responses to the
information required in paragraph (b) of this section, the U.S. person
shall provide sufficient explanation for why the information is
unavailable or otherwise cannot be obtained and explain the U.S.
person's efforts to obtain such information. If such information
subsequently becomes available, the U.S. person shall provide such
information to the Department of the Treasury promptly, and in no event
later than 30 calendar days following the availability of such
information.
Sec. 850.406 Notice of material omission or inaccuracy.
A person who has made any representation, statement, or
certification subject to this part shall inform the Department of the
Treasury in writing promptly, and in no event later than 30 calendar
days after learning of a material omission or inaccuracy in such
representation, statement, or certification.
Subpart E--Exceptions and Exemptions
Sec. 850.501 Excepted transaction.
A transaction that would be either a prohibited transaction or a
notifiable transaction if engaged in by a U.S. person but for this
section is not a prohibited transaction or a notifiable transaction if
the conditions set forth in this section are met. In that case, the
transaction is an excepted transaction.
(a) The following transactions are excepted transactions:
(1) An investment by a U.S. person:
(i) In any publicly traded security, with ``security'' as defined
in section 3(a)(10) of the Securities Exchange Act of 1934, as amended,
at 15 U.S.C. 78c(a)(10), denominated in any currency, and that trades
on a securities exchange or through the method of trading that is
commonly referred to as ``over-the-counter,'' in any jurisdiction;
(ii) In a security issued by (1) any ``investment company'' as
defined in section 3(a)(1) of the Investment Company Act of 1940, as
amended, at 15 U.S.C. 80a-3(a)(1), that is registered with the U.S.
Securities and Exchange Commission, such as index funds, mutual funds,
or exchange traded funds, or (2) any company that has elected to be a
business development company pursuant to section 54 of the Investment
Company Act of 1940 (15 U.S.C. 8a-54); or any derivative thereon; or
Alternate 1 for paragraph (a)(1)(iii)
(iii) Made as a limited partner or equivalent in a venture capital
fund, private equity fund, fund of funds, or other pooled investment
fund other than as described in paragraph (a)(1)(ii) of this section
where:
(A) The limited partner's contribution is solely capital and the
limited partner:
(1) Is not responsible for any debts or other financial obligations
with respect to the fund beyond its investment including any uncalled
capital commitments related thereto;
(2) Cannot approve, disapprove, or otherwise influence or
participate in the investment decisions of the fund;
(3) Cannot approve, disapprove, or otherwise influence or
participate in the decisions made by the general partner, managing
member, or equivalent related to entities in which the fund is
invested;
(4) Cannot unilaterally dismiss, prevent the dismissal of, select,
or determine the compensation of the general partner, managing member,
or equivalent of the fund; and
(5) Cannot participate in, and has no right or ability, by virtue
of its status as a limited partner or any other contractual
relationship, to influence the decision-making or operations of any
covered foreign person in which the fund is invested; and;
(B)(1) The limited partner's committed capital is not more than 50
percent of the total assets under management of the fund, aggregated
across any investment and co-investment vehicles that comprise the
fund; or,
(2) Where the fund is not a U.S. person or a controlled foreign
entity, the limited partner has secured a binding contractual assurance
that its capital will not be used to engage in a transaction that would
cause the limited partner to have made an indirect prohibited
transaction.
Alternate 2 for paragraph (a)(1)(iii)
(iii) Made as a limited partner or equivalent in a venture capital
fund, private equity fund, fund of funds, or other pooled investment
fund other than as described in paragraph (a)(1)(ii) of this section
where the limited partner's committed capital is not more than
$1,000,000, aggregated across any investment and co-investment vehicles
that comprise the fund.
(2) Notwithstanding paragraph (a)(1) of this section, an investment
is not an excepted transaction if it affords the U.S. person rights
beyond standard minority shareholder protections with respect to the
covered foreign person. Such protections include:
(i) The power to prevent the sale or pledge of all or substantially
all of the assets of an entity or a voluntary filing for bankruptcy or
liquidation;
(ii) The power to prevent an entity from entering into contracts
with majority investors or their affiliates;
(iii) The power to prevent an entity from guaranteeing the
obligations of majority investors or their affiliates;
(iv) The right to purchase an additional interest in an entity to
prevent the dilution of an investor's pro rata interest in that entity
in the event that the entity issues additional instruments conveying
interests in the entity;
(v) The power to prevent the change of existing legal rights or
preferences of the particular class of stock held by minority
investors, as provided in the relevant corporate documents governing
such stock; and
(vi) The power to prevent the amendment of the Articles of
Incorporation, constituent agreement, or other organizational documents
of an entity with respect to the matters described in paragraphs
(a)(2)(i) through (v) of this section;
(b) The acquisition by a U.S. person of equity or other interests
in an entity held by one or more persons of a country of concern;
provided that:
(1) The U.S. person is acquiring all equity or other interests in
such entity held by all persons of a country of concern; and
(2) Following such acquisition, the entity does not constitute a
covered foreign person.
(c) A transaction that, but for this paragraph, would be a covered
transaction between a U.S. person and its controlled foreign entity
that supports ongoing operations or other activities that are not
covered activities as defined in Sec. 850.208; provided that this
exception shall not apply when the transaction is a covered transaction
pursuant to Sec. 850.210(a)(4) or (a)(5);
(d) A transaction made after the effective date of this part
pursuant to a binding, uncalled, capital commitment entered into before
August 9, 2023; or
(e) The acquisition of a voting interest in a covered foreign
person by a U.S. person upon default or other condition involving a
loan or a similar financing arrangement, where the loan was made by a
syndicate of banks in a loan participation where the U.S. person
lender(s) in the syndicate:
(1) Cannot on its own initiate any action vis-[agrave]-vis the
debtor; and
(2) Does not have a lead role in the syndicate; or
(f)(1) A transaction that is:
(i) With or involving a person of a country or territory outside of
the United States designated by the Secretary, after taking into
account whether the country or territory is
[[Page 55879]]
addressing national security concerns posed by outbound investment; and
(ii) Of a type for which the Secretary has determined that the
related national security concerns are likely to be adequately
addressed by measures taken or that may be taken by the government of
the relevant country or territory.
(2) Prior to making a designation or determination under this
paragraph (f), the Secretary shall consult with the Secretary of State,
the Secretary of Commerce, and, as appropriate, the heads of other
relevant agencies.
(3) The Secretary's designations and determinations under paragraph
(f) of this section shall be made available through public notice.
Note 1 to Sec. 850.501: A limited partner's participation on
an advisory board or a committee of an investment fund shall not
constitute having the ability to undertake the actions referred to
in Alternate 1 paragraphs (a)(1)(iii)(A)(1) to (5) of this section
if the advisory board or committee does not have the ability to
approve, disapprove, or otherwise control: (i) investment decisions
of the investment fund; or (ii) decisions made by the general
partner, managing member, or equivalent related to entities in which
the investment fund is invested.
Sec. 850.502 National interest exemption.
(a) The Secretary, in consultation with the Secretary of Commerce,
the Secretary of State, and the heads of relevant agencies, as
appropriate, may determine that a covered transaction is in the
national interest of the United States and therefore is exempt from
applicable provisions in Subparts C and D of this part (excluding
Sec. Sec. 850.406, 850.603, and 850.604). Such a determination may be
made following a request by a U.S. person on its own behalf or on
behalf of its controlled foreign entity.
(b) Any determination pursuant to paragraph (a) of this section
will be based on a consideration of the totality of the relevant facts
and circumstances and may be informed by, among other considerations,
the transaction's effect on critical U.S. supply chain needs; domestic
production needs in the United States for projected national defense
requirements; United States' technological leadership globally in areas
affecting U.S. national security; and impact on U.S. national security
if the U.S. person is prohibited from undertaking the transaction.
(c) A U.S. person seeking a national interest exemption shall
submit relevant information to the Department of the Treasury regarding
the transaction and shall articulate the basis for the request,
including the U.S. person's analysis of the transaction's potential
impact on the national interest of the United States. The Department of
the Treasury may request additional information that may include some
or all of the information required under Sec. 850.405.
(d) A determination that a covered transaction is exempt under this
section may be subject to binding conditions.
(e) No determination pursuant to paragraph (a) of this section will
be valid unless provided to the subject U.S. person in writing and
signed by the Assistant Secretary or Deputy Assistant Secretary of the
Treasury for Investment Security.
Note 1 to Sec. 850.502: A process and related information for
exemption requests will be made available on the Department of the
Treasury's Outbound Investment Security Program website.
Sec. 850.503 IEEPA statutory exception.
Conduct referred to in 50 U.S.C. 1702(b) shall not be regulated or
prohibited, directly or indirectly, by this part.
Subpart F--Violations
Sec. 850.601 Taking actions prohibited by this part.
The taking of any action prohibited by this part is a violation of
this part.
Sec. 850.602 Failure to fulfill requirements.
Failure to take any action required by this part, and within the
time frame and in the manner specified by this part, as applicable, is
a violation of this part.
Sec. 850.603 Misrepresentation and concealment of facts.
With respect to any information submission to or communication with
the Department of the Treasury pursuant to any provision of this part,
the making of any materially false or misleading representation,
statement, or certification, or falsifying or concealing any material
fact is a violation of this part.
Sec. 850.604 Evasions; attempts; causing violations; conspiracies.
(a) Any action on or after the effective date of this part that
evades or avoids, has the purpose of evading or avoiding, causes a
violation of, or attempts to violate any of the prohibitions set forth
in this part is prohibited.
(b) Any conspiracy formed to violate the prohibitions set forth in
this part is prohibited.
Subpart G--Penalties and Disclosures
Sec. 850.701 Penalties.
(a) Section 206 of IEEPA applies to any person subject to the
jurisdiction of the United States who violates, attempts to violate,
conspires to violate, or causes a violation of any order, regulation,
or prohibition issued by or pursuant to the direction or authorization
of the Secretary pursuant to this part or otherwise under IEEPA.
(1) A civil penalty not to exceed the maximum amount set forth in
section 206 of IEEPA may be imposed on any person who violates,
attempts to violate, conspires to violate, or causes a violation of any
order, regulation, or prohibition issued under IEEPA, including any
provision of this part.
(2) A person who willfully commits, willfully attempts to commit,
willfully conspires to commit, or aids or abets in the commission of a
violation, attempt to violate, conspiracy to violate, or causing of a
violation of any order, regulation, or prohibition issued under IEEPA,
including any provision of this part, shall, upon conviction, be fined
not more than $1,000,000, or if a natural person, be imprisoned for not
more than 20 years, or both.
(b) The Secretary may refer potential criminal violations of the
Order, or of this part, to the Attorney General.
(c) The civil penalties provided for in IEEPA are subject to
adjustment pursuant to the Federal Civil Penalties Inflation Adjustment
Act of 1990, as amended (Pub. L. 101-410, 28 U.S.C. 2461 note).
(d) The criminal penalties provided for in IEEPA are subject to
adjustment pursuant to 18 U.S.C. 3571.
(e) The penalties available under this section are without
prejudice to other penalties, civil or criminal, and forfeiture of
property, available under other applicable law.
(f) Pursuant to 18 U.S.C. 1001, whoever, in any matter within the
jurisdiction of the executive, legislative, or judicial branch of the
Government of the United States, knowingly and willfully falsifies,
conceals or covers up by any trick, scheme, or device a material fact;
makes any materially false, fictitious, or fraudulent statement or
representation; or makes or uses any false writing or document knowing
the same to contain any materially false, fictitious, or fraudulent
statement or entry shall be fined under title 18, United States Code,
or imprisoned not more than 5 years, or both.
Sec. 850.702 Administrative collection; referral to United States
Department of Justice.
The imposition of a monetary penalty under this part creates a debt
due to the U.S. Government. The Department of the Treasury may take
action to collect the penalty assessed if not paid. In addition or
instead, the matter may be
[[Page 55880]]
referred to the Department of Justice for appropriate action to recover
the penalty.
Sec. 850.703 Divestment.
(a) The Secretary, in consultation with the heads of relevant
agencies, as appropriate, may take any action authorized under IEEPA to
nullify, void, or otherwise compel the divestment of any prohibited
transaction entered into after the effective date of this part.
(b) The Secretary may refer any action taken under paragraph (a) of
this section to the Attorney General to seek appropriate relief to
enforce such action.
Sec. 850.704 Voluntary self-disclosure.
(a) Any person who has engaged in conduct that may constitute a
violation of this part may submit a voluntary self-disclosure of that
conduct to the Department of the Treasury.
(b) In determining the appropriate response to any violation, the
Department of the Treasury will consider the submission and the
timeliness of any voluntary self-disclosure.
(c) In assessing the timeliness of a voluntary self-disclosure, the
Department of the Treasury will consider whether it has learned of the
conduct prior to the voluntary self-disclosure. The Department of the
Treasury may consider disclosure of a violation to another government
agency other than the Department of the Treasury as a voluntary self-
disclosure based on a case-by-case assessment.
(d) Notwithstanding the foregoing, identification to the Department
of the Treasury of conduct that may constitute a violation of this part
may not be assessed to be a voluntary self-disclosure in one or more of
the following circumstances:
(1) A third party has provided a prior disclosure to the Department
of the Treasury of the conduct or similar conduct related to the same
pattern or practice, regardless of whether the disclosing person knew
of the third party's prior disclosure;
(2) The disclosure includes materially false or misleading
information;
(3) The disclosure, when considered along with supplemental
information timely provided by the disclosing person, is materially
incomplete;
(4) The disclosure is not self-initiated, including when the
disclosure results from a suggestion or order of a federal or state
agency or official;
(5) The disclosure is a response to an administrative subpoena or
other inquiry from the Department of the Treasury or another government
agency;
(6) The disclosure is made about the conduct of an entity by an
individual in such entity without the authorization of such entity's
senior management; or
(7) The filing is made pursuant to a required notification under
this part, including Sec. 850.403 or Sec. 850.406.
(e) A voluntary self-disclosure to the Department of the Treasury
must take the form of a written notice describing the conduct that may
constitute a violation and each of the persons involved. A voluntary
self-disclosure must include, or be followed within a reasonable period
of time by, a report of sufficient detail to afford a complete
understanding of the conduct that may constitute the violation. A
person making a voluntary self-disclosure must respond in a timely
manner to any follow-up inquiries by the Department of the Treasury.
Subpart H--Provision and Handling of Information
Sec. 850.801 Confidentiality.
(a) Except to the extent required by law or otherwise provided in
paragraphs (b) and (c) of this section, information or documentary
materials not otherwise publicly available that are submitted to the
Department of the Treasury under this part shall not be disclosed to
the public.
(b) Notwithstanding paragraph (a) of this section, except to the
extent prohibited by law, the Department of the Treasury may disclose
information or documentary materials that are not otherwise publicly
available, subject to appropriate confidentiality and classification
requirements, when such information or documentary materials are:
(1) Relevant to any judicial or administrative action or
proceeding;
(2) Provided to Congress or to any duly authorized committee or
subcommittee of Congress; or
(3) Provided to any domestic governmental entity, or to any foreign
governmental entity of a United States partner or ally, where the
information or documentary materials are important to the national
security analysis or actions of such governmental entity or the
Department of the Treasury.
(c) Notwithstanding paragraph (a) of this section, the Department
of the Treasury may disclose to third parties information or
documentary materials that are not otherwise publicly available when
the person who submitted or filed the information or documentary
materials has consented to its disclosure to such third parties.
(d) The Department of the Treasury may use the information gathered
pursuant to this part to fulfill its obligations under the Order, which
may include publication of anonymized data.
Sec. 850.802 Language of information.
All materials or information filed with the Department of the
Treasury under this part shall be submitted in English. If
supplementary or additional materials were originally written in a
foreign language, they shall be submitted in their original language.
Where English versions of those documents exist, they shall also be
submitted.
Subpart I--Other Provisions
Sec. 850.901 Delegation of authorities of the Secretary of the
Treasury.
Any action that the Secretary is authorized to take pursuant to the
Order and any further executive orders relating to the national
emergency declared in the Order may be taken by the Assistant Secretary
of the Treasury for Investment Security or their designee or by any
other person to whom the Secretary has delegated the authority so to
act, as appropriate.
Sec. 850.902 Amendment, modification, or revocation.
(a) Except as otherwise provided by law, and in consultation with
the Secretary of Commerce and, as appropriate, the heads of other
relevant agencies, the Secretary may amend, modify, or revoke
provisions of this part at any time.
(b) Except as otherwise provided by law, any instructions, orders,
forms, regulations, or rulings issued pursuant to this part may be
amended, modified, or revoked at any time.
(c) Unless otherwise specifically provided, any amendment,
modification, or revocation of any provision in or appendix to this
part does not affect any act done or omitted, or any civil or criminal
proceeding commenced or pending, prior to such amendment, modification,
or revocation. All penalties, forfeitures, and liabilities under any
such instructions, orders, forms, regulations, or rulings pursuant to
this part continue and may be enforced as if such amendment,
modification, or revocation had not been made.
Sec. 850.903 Severability.
The provisions of this part are separate and severable from one
another. If any of the provisions of this part, or the application
thereof to any person or circumstance, is held to be invalid, such
invalidity shall not affect other provisions or application of such
provisions to other persons or circumstances that can be given effect
[[Page 55881]]
without the invalid provision or application.
Sec. 850.904 Reports to be furnished on demand.
(a) Any person is required to furnish under oath, in the form of
reports or otherwise, at any time as may be required by the Department
of the Treasury, complete information regarding any act or transaction
subject to the provisions of this part, regardless of whether such act
or transaction is effected pursuant to a national interest exemption
under Sec. 850.502. Except as provided otherwise, the Department of
the Treasury may, through any person or agency, conduct investigations,
hold hearings, administer oaths, examine witnesses, receive evidence,
take depositions, and require by subpoena the attendance and testimony
of witnesses and the production of any books, contracts, letters,
papers, and other hard copy or electronic documents relating to any
matter under investigation, regardless of whether any report has been
required or filed under this section.
(b) For purposes of paragraph (a) of this section, the term
document includes any written, recorded, or graphic matter or other
means of preserving thought or expression (including in electronic
format), and all tangible things stored in any medium from which
information can be processed, transcribed, or obtained directly or
indirectly.
(c) Persons providing documents to the Department of the Treasury
pursuant to this section must do so in a usable format agreed upon by
the Department of the Treasury.
Paul M. Rosen,
Assistant Secretary for Investment Security.
[FR Doc. 2024-13923 Filed 7-3-24; 8:45 am]
BILLING CODE 4810-AK-P