Navigating the Committee on Foreign Investment in the United States has long been a key consideration for inbound investors to the U.S. But at the start of 2025, a new regulatory framework was introduced to limit certain outbound investments and transactions by domestic entities. With the new rules having been in effect for six months, we explore their impact on deal structuring.
In August 2023, the Biden administration laid the foundations for the Outbound Investment Security Program (OISP) via an executive order (EO). After a long rulemaking process, the Treasury Department issued a final rule implementing the program in late 2024, with the OISP taking effect in January 2025.
The program targets transactions involving counterparties connected to “countries of concern”—currently China, Hong Kong and Macau—and that are active in developing technologies with national security implications (specifically semiconductors and microelectronics, quantum information technologies, and artificial intelligence).
The regulation is designed to prevent U.S. companies' IP, know-how, capital or professional connections from being transferred to entities based in, or owned or controlled by persons based in, these territories.
From an operational perspective, the OISP requires U.S. persons to conduct due diligence and either notify the U.S. Department of the Treasury of the transaction if they determine the investment is a “notifiable transaction” under the OISP, or refrain from proceeding if it is a “prohibited transaction”.
Unlike the Committee on Foreign Investment in the United States (CFIUS) process, the OISP does not provide for a pre-closing government review or approval of proposed investments; instead, parties are responsible for determining whether their activities are notifiable or prohibited. In its current form, the OISP does not contemplate any pre-clearance or case-by-case approval mechanism.
The OISP imposes a broad "knowledge" standard on parties, meaning that a U.S. person is deemed to have knowledge that a notification or prohibition is necessary not only if they have actual knowledge of relevant facts or circumstances, but also if they are aware of a high probability that such facts exist or have "reason to know” (i.e., if they could have acquired the information through a reasonable and diligent inquiry).
This standard requires parties to undertake meaningful due diligence, including seeking information from transaction counterparties, reviewing public and non-public sources, and obtaining representations or warranties as appropriate, to determine whether a transaction is in scope.
Outbound investment program survives repeal of Biden-era policies
The OISP has been implemented unaltered by the Trump administration and indeed the President has reinforced some of the OISP's provisions via his “America First Investment Policy” EO, under which the administration may seek to expand the list of covered sectors to include biotechnology, hypersonics, aerospace and advanced manufacturing, among others. The policy also proposes using sanctions to “further deter United States persons from investing in the PRCs military-industrial sector”.
With U.S. dealmakers continuing to pursue outbound investments and joint ventures across the list of covered sectors, OISP considerations have become an important factor in diligence and deal structuring.
Parties structuring JVs to avoid falling in scope of OISP
The OISP does not limit JVs involving U.S. entities (or foreign businesses with U.S. owners) and China-linked counterparties engaged in the development of technologies that are close to those subject to the regulations. However, great consideration must be taken with respect to the activities of these JVs—or frankly any partnership involving investment from the U.S. short of a full buyout—in order to ensure compliance with the program.
Specifically, by focusing on the governance and ownership structure, investments and transactions can be structured to provide that the JV is not classified as a “person of a country of concern”, and as such would not be subject to the OISP.
This is the case even if one of the parties to the JV was a Chinese entity or otherwise would be a "person of a country of concern". Accordingly, structuring a transaction and investment where (i) any such counterparty holds less than 50% of the JVs voting interest, voting power of the board or common stock, and otherwise has limited governance or operational rights, and (ii) the JVs management HQ and place of incorporation are in the U.S. or a neutral third country, could allow a JV with a person of a country of concern to be outside of the OISP.
As such, even if the JVs activities fall into the OISP's current list of covered activities, or if that list were to expand in future to capture the JVs activities, then it would still fall outside the OISP. Parties contemplating the formation of a JV should there consider the effects of the JVs governance and ownership structure on whether it is currently or could in future become subject to the OISP.
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