Outbound Investment Security Program Regulations

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Department of the Treasury

Office of Investment Security

1. 31 CFR Parts 850 and 851
2. [Docket No. TREAS-DO-2026-0595]
3. RIN 1505-AC94

( printed page 67396)

AGENCY:

Office of Investment Security, Department of the Treasury.

ACTION:

Proposed rule.

SUMMARY:

This proposed rule sets forth regulations that would implement Subtitle C of the Comprehensive Outbound Investment National Security Act, which is codified at Title VIII of the Defense Production Act. The proposed rule would require United States persons to provide notification to the U.S. Department of the Treasury regarding certain transactions involving foreign persons that are engaged in notifiable technologies; and prohibit United States persons from engaging in certain other transactions involving foreign persons that are engaged in prohibited technologies. Where consistent with Title VIII, the proposed rule incorporates certain definitions and concepts from the current regulations governing the Outbound Investment Security Program. The proposed rule also would add applicability dates to the regulations, such that those regulations would continue to apply to activities that occurred within the relevant timeframe.

DATES:

Written comments must be received by December 7, 2026.

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.

We encourage comments to be submitted via https://www.regulations.gov. Please submit comments only and include your name and organization name (if any) and cite “Outbound Investment Security Program Regulations” in all correspondence. All comments submitted, including attachments and other supporting material, in response to this Notice of Proposed Rulemaking will be made public, including any personally identifiable or confidential business information that is included in a comment. Therefore, you should submit only information that you wish to make publicly available.

As required by the Administrative Procedure Act at 5 U.S.C. 553(b)(4), a plain language summary of the proposed rule is available at https://www.regulations.gov.

FOR FURTHER INFORMATION CONTACT:

Meena R. Sharma, Director, Office of Investment Security for Policy and International Relations, at U.S. Department of the Treasury, 1500 Pennsylvania Avenue NW, Washington, DC 20220; email: OIS.Outbound.Regulations@treasury.gov.

SUPPLEMENTARY INFORMATION:

I. Background

A. Executive Order 14105 and Current Outbound Investment Security Program

On August 9, 2023, Executive Order 14105 (88 FR 54867), “Addressing United States Investments in Certain National Security Technologies and Products in Countries of Concern” (the Outbound Order), was issued. The Outbound Order described the threat posed to the United States by countries of concern that exploit, 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. The Outbound Order identified the People's Republic of China (PRC), along with the Special Administrative Regions of Hong Kong and Macau, as a country of concern, and identified three technology areas for coverage.

On November 15, 2024, the Department of the Treasury (Treasury Department) published regulations to implement the Outbound Order. These regulations are found at 31 CFR part 850 (Part 850 Regulations), and they established the Outbound Investment Security Program (OISP), which went into effect on January 2, 2025. Among other things, the Part 850 Regulations (1) require U.S. persons to provide notification to the Treasury Department regarding certain transactions involving persons of a country of concern that are engaged in specified activities in the semiconductor and microelectronics and artificial intelligence (AI) sectors that may contribute to the threat to the national security of the United States; and (2) prohibit U.S. persons from engaging in certain other transactions involving persons of a country of concern that are engaged in other specified activities in the semiconductor and microelectronics, quantum information technologies, and AI systems sectors that pose a particularly acute national security threat to the United States.

In the time since the OISP went into effect (approximately 21 months), the Treasury Department has received approximately 100 notifications of investments in the semiconductor and AI industries from a range of transaction parties, including venture capital firms, asset managers, investment banks, and individual investors and entrepreneurs. Many other transaction parties and their counsel have engaged with the Treasury Department during this time. The Treasury Department also has been closely monitoring investment activity that may be subject to the OISP, because such investment was either potentially prohibited or not notified. Additionally, the Treasury Department has engaged with a wide range of stakeholders across industries, issued guidance and responses to more than 50 Frequently Asked Questions, and launched a website dedicated to the OISP that includes an online portal for submission of notifications.

B. Comprehensive Outbound Investment National Security Act of 2025

On December 18, 2025, Congress enacted the Comprehensive Outbound Investment National Security (COINS) Act as part of the National Defense Authorization Act for Fiscal Year 2026 (FY26 NDAA). In passing the COINS Act, Congress made clear that restricting certain U.S. outbound investments into dual-use strategic technologies that benefit a foreign adversary's military modernization efforts, surveillance states, and human rights abuses is necessary to prevent harm to U.S. national security and foreign policy interests. In addition, Congress stated that the President should exercise the authorities granted in the COINS Act to prevent countries of concern from exploiting U.S. capital to undermine U.S. national security and foreign policy interests.

Subtitle C of the COINS Act adds Title VIII to the Defense Production Act of 1950, 50 U.S.C. 4581-4589 (Title VIII), and establishes a statutory basis for the OISP. In the COINS Act, Congress codified the framework for the Secretary of the Treasury (Secretary) to (1) require United States persons to provide ( printed page 67397) notification to the Treasury Department regarding certain transactions involving foreign persons engaged in notifiable technologies, and (2) prohibit United States persons from engaging in certain other transactions involving foreign persons engaged in prohibited technologies. Title VIII maintains various aspects of the current OISP—such as its application to certain transactions involving the semiconductor and microelectronics, AI systems, and quantum information technologies sectors in the PRC including the Hong Kong and Macau Special Administrative Regions—while broadening the program to address threats to U.S. national security posed by other advanced technologies. Specifically, Title VIII expands the OISP's jurisdiction to include two new technology sectors (in addition to the three already covered under the Part 850 Regulations): (1) high-performance computing and supercomputing; and (2) hypersonic systems. Title VIII also authorizes the Secretary—in consultation with the appropriate congressional committees and subject to notice and comment—to identify additional categories of notifiable and prohibited technologies beyond those specifically listed in the law that enable the military, intelligence, surveillance, or cyber-enabled capabilities of a country of concern, and to define the technical parameters of the technologies within those categories as reasonably needed for national security purposes.

Title VIII includes an expanded list of countries of concern. In addition to the PRC (including Hong Kong and Macau), Title VIII includes as countries of concern the Republic of Cuba, the Islamic Republic of Iran, the Democratic People's Republic of Korea, the Russian Federation, and the Bolivarian Republic of Venezuela under the regime of Nicolás Maduro Moros. Title VIII uses the terms notifiable technology and prohibited technology to capture the relevant technologies for coverage largely in place of the terms “notifiable transaction” and “prohibited transaction” found in the Part 850 Regulations. Title VIII uses the term covered national security transaction (in place of the term “covered transaction” found in the Part 850 Regulations) and explicitly excepts from its coverage, among other things, underwriting services (including where such services involve the acquisition of equity), bank lending, processing or clearing of payments, prime brokerage, and global custody services. Title VIII also includes exceptions for de minimis transactions, specifically for (1) any transaction the value of which the Secretary determines is de minimis and (2) certain investments made by a limited partner or the equivalent where committed capital is not more than a de minimis amount, as determined by the Secretary. Title VIII does not set such de minimis values and instead grants the Secretary the discretion to do so. Title VIII additionally defines a covered foreign person only in terms of such person's relationship to a country of concern and not in connection with the technology or technologies in which such person engages (in contrast to the Part 850 Regulations, where “covered foreign person” has a different meaning).

In addition to certain changes that expand the scope of the OISP, Title VIII includes certain new processes. In particular, Title VIII requires the Treasury Department to implement regulations establishing a process under which a person can request confidential non-binding feedback or anonymized public guidance for a potentially prohibited transaction. Title VIII also requires the Secretary to establish a mechanism for the public to submit evidence on a confidential basis with respect to whether a foreign person is a covered foreign person engaged in a prohibited technology or a notifiable technology. Title VIII further provides the Secretary with the discretionary authority to establish a publicly accessible, non-exhaustive database that identifies covered foreign person s that are engaged in a prohibited technology or a notifiable technology.

II. The Proposed Rule

A. Scope and Structure of the Proposed Rule

The United States remains committed to maintaining a strong, open investment environment and supporting cross-border investment where consistent with the protection of U.S. national security. Certain U.S. investments, however, may be exploited by countries of concern to advance the development of sensitive technologies and products that contribute to those countries' military, intelligence, surveillance, or cyber-enabled capabilities.

This current rulemaking seeks comment on the draft regulatory framework (Proposed Rule) to implement Subtitle C of the COINS Act. Consistent with the sense of Congress, in implementing the COINS Act, the Treasury Department seeks to (1) restrict certain U.S. outbound investments into certain technologies in countries of concern as is necessary to prevent harm to United States national security and foreign policy interests; and (2) balance the priority of protecting the national security interest of the United States while, to the extent practicable, minimizing the cost and complexity of compliance, adopting the least burdensome alternative that achieves regulatory objectives, and prioritizing transparency and stakeholder involvement in the process of issuing the rules.

To implement Title VIII, Congress has directed the Secretary to issue or update current regulations that, as necessary, amend, terminate, supersede, revoke, or streamline the existing requirements in the Part 850 Regulations. Where consistent with Title VIII, the Proposed Rule incorporates certain definitions and concepts from the Part 850 Regulations. Where Title VIII uses new or different terminology, the Treasury Department has made adjustments while seeking, to the extent consistent with congressional intent, to preserve relevant aspects of the Part 850 Regulations. This approach is intended to minimize the cost and complexity of compliance for affected parties by maintaining certain definitions and concepts with which the regulated community is already familiar.

The Proposed Rule, therefore, includes detailed definitions and descriptions of terms and elements to clearly delineate the scope of coverage and facilitate compliance by U.S. persons. At the same time, the Proposed Rule seeks to avoid loopholes that could undermine the intent of the COINS Act. The Treasury Department seeks input on how the Proposed Rule can best meet these objectives.

Consistent with Title VIII, the Proposed Rule would place certain obligations upon any U.S. person in connection with a covered national security transaction in a prohibited technology or in a notifiable technology. A covered national security transaction would involve a U.S. person' s investment in, or other specific activities in connection with, a covered foreign person that “engages in” a prohibited technology or notifiable technology. The proposed definition of covered foreign person is based on the person's relationship with a country of concern. A covered national security transaction relating to a prohibited technology — i.e., where the relevant covered foreign person “engages in” a prohibited technology —would be a prohibited transaction, meaning it could not legally be undertaken. As set forth in the Proposed Rule, a covered foreign person “engages in” a prohibited technology when it undertakes an activity specified in the definition of ( printed page 67398) prohibited technology. The Proposed Rule would define prohibited technology to include specific activities in the sensitive technology sectors identified in Title VIII or by the Secretary pursuant to statutory authority. Meanwhile, a covered national security transaction in a notifiable technology — i.e., where the relevant covered foreign person “engages in” a notifiable technology —would be a notifiable transaction, meaning that it would be permitted under the Proposed Rule where a U.S. person would need to submit specified information about the transaction to the Treasury Department. As set forth in the Proposed Rule, a covered foreign person “engages in” a notifiable technology when it undertakes an activity specified in the definition of notifiable technology. The Proposed Rule would define notifiable technology to include certain other ( i.e., non-prohibited) specific activities in the sensitive technology sectors identified in Title VIII or by the Secretary pursuant to statutory authority. Further, a U.S. person would 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. These and other terms are defined in Subpart B of the Proposed Rule.

Under the Proposed Rule, a U.S. person undertaking a transaction would have the obligation to determine whether the given transaction is prohibited, permissible but subject to notification requirements, or not covered by the Proposed Rule because it is an excepted transaction, it is exempt, 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 prohibition set out in the Proposed Rule by following the process described in § 851.502 and further discussed below.

As directed by Title VIII, the provisions contained in the Proposed Rule will not have retroactive effect. The Part 850 Regulations, however, will continue to apply to activities occurring between January 2, 2025, and the effective date of the final regulations implementing Title VIII. Nothing in this Proposed Rule limits the authority of the Treasury Department or any other department or agency of the U.S. Government to take action, including enforcement action, in connection with conduct that would be a violation of the Part 850 Regulations, as applicable.

In Section III, the Treasury Department seeks comment from stakeholders regarding the provisions of the Proposed Rule. The Treasury Department asks commentors to provide, where possible, empirical data or other specific information in support of their comments.

B. Discussion of the Proposed Rule

The following discussion provides an overview and narrative description of the key substantive provisions of the Proposed Rule to implement Title VIII. Because the Part 850 Regulations will remain in effect for transactions occurring during the relevant period, the Treasury Department views establishing a new Part 851 within Title 31 of the Code of Federal Regulations with the full process, procedures, and requirements under Title VIII as the most administrable approach. To make clear the applicability of the Part 850 Regulations, the Proposed Rule also would add a new § 850.105 to the Part 850 Regulations that sets the specific dates for the applicability of those regulations.

Many provisions of the Proposed Rule are substantively identical to the corresponding provisions in the Part 850 Regulations. The Proposed Rule should be read in its entirety as many terms are related and various features are discussed in different parts. The Treasury Department will carefully consider all comments provided to the Proposed Rule and is particularly interested in receiving comments relating to the new provisions and revisions described below.

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, the similarities and differences between the Proposed Rule and the Part 850 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 Title VIII, the role of the heads of other relevant Federal departments and agencies in the implementation and administration of Title VIII and the Proposed Rule. Subpart A of the Proposed Rule would generally be identical in substance to §§ 850.101 through 850.104 in Subpart A of the Part 850 Regulations, with most differences focused on conforming the language of the regulatory text to terms used in Title VIII. Proposed § 851.101(e) would also revise the Secretary's responsibilities to conform to Title VIII's requirements.

The most significant change in Subpart A compared to the Part 850 Regulations is an additional element explicitly added to the knowledge standard. The Treasury Department proposes to clarify in § 851.104 that it will take into consideration whether a U.S. person appropriately considered any information that the Treasury Department has provided to such U.S. person when assessing whether the U.S. person conducted a reasonable and diligent inquiry.

§ 851.104—Knowledge Standard

Under the Proposed Rule, certain provisions, including the definition of covered national security transaction, would apply only if a U.S. person knows of a relevant fact or circumstance. As with the Part 850 Regulations, §  851.104 of the Proposed Rule would provide explanation and guidance regarding the application of the knowledge standard. It would state that if a U.S. person fails to conduct a “reasonable and diligent inquiry” at the time of a transaction and undertakes the transaction where a particular fact or circumstance indicative of a covered national security transaction is present, the Treasury Department 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). The articulation of the application of the knowledge standard in §  851.104 would be similar to that in the Part 850 Regulations. This is because Title VIII's definition of knowledge is substantially identical to that in the Part 850 Regulations, which indicates congressional intent to maintain the Part 850 Regulations' general approach to the knowledge standard. Further, consistency in this provision minimizes the cost and complexity of compliance for affected parties because the regulated community is already familiar with it. As such, the Proposed Rule would maintain both the definition of knowledge from the Part 850 Regulations (see the discussion of § 851.217 below), as well as the important explanatory language in § 851.104, with certain modifications discussed below.

The Treasury Department recognizes that for some potential covered national security transactions, a U.S. person' s ability to conduct diligence may be somewhat limited in certain situations, including in the context of certain secondary market transactions. The Treasury Department reiterates that its assessment of whether a U.S. person has undertaken a reasonable and diligent inquiry would under the Proposed Rule be based on a consideration of the totality of the relevant facts and ( printed page 67399) circumstances surrounding the transaction.

Based on experience operating the OISP, the Treasury Department proposes adding at § 851.104(c) of the Proposed Rule an additional factor it will consider when assessing whether a U.S. person has undertaken a reasonable and diligent inquiry: whether the U.S. person appropriately considered information provided by the Treasury Department prior to undertaking the transaction, including any assessments by the Treasury Department that the relevant covered foreign person may be engaged in a notifiable technology or a prohibited technology. The Treasury Department would consider the provision of such information when determining whether the U.S. person had knowledge of certain facts or circumstances. As discussed further below, the Treasury Department also proposes adding at § 851.104(e) of the Proposed Rule a clarification that the knowledge standard shall also apply to the knowledge of a controlled foreign entity for the purposes of applying §§ 851.402 and 851.403.

Subpart B—Definitions

The Proposed Rule would preserve several definitions from the Part 850 Regulations in their entirety; amend certain definitions from the Part 850 Regulations; and add several new defined terms both to implement the requirements in Title VIII and to make adjustments based on feedback received during implementation of the Part 850 Regulations. To assist in understanding this Proposed Rule, the discussion below notes proposed changes from the Part 850 Regulations and, in certain cases, highlights that the Proposed Rule would make no such substantive changes.

§ 851.202—Affiliate

The Treasury Department proposes defining the term affiliate to mean, in the context of a transaction or activity covered under the Proposed Rule, a person that directly, or indirectly through one or more intermediaries, controls or is controlled by, or is under common control with, a person subject to this part. Under the Proposed Rule, if an affiliate of a covered foreign person is included on a list enumerated in § 851.226(v), then a covered national security transaction involving a covered foreign person engaged in a notifiable technology would be a prohibited transaction.

§ 851.206—Controlled Foreign Entity

Title VIII refers to the actions of a controlled foreign entity of a U.S. person when explaining the application of the prohibition and notification requirement but does not define the term. The Treasury Department proposes using the definition of controlled foreign entity from the Part 850 Regulations. As noted in the preamble to the Part 850 Regulations, a controlled foreign entity is an 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. The definition is intended to draw a clear line so that it is straightforward for a U.S. person to ascertain whether an entity is a controlled foreign entity. Of note, Title VIII also uses the term “controlled foreign person” in reference to the exception for certain intracompany transfers of funds. The term “controlled foreign person” is not used in the Part 850 Regulations, and the context for its use in Title VIII is substantially similar to that of a controlled foreign entity in the Part 850 Regulations. Therefore, the Proposed Rule would continue only to refer to a controlled foreign entity.

§ 851.207—Country of Concern

Title VIII defines country of concern as the PRC (including the Hong Kong and Macau Special Administrative Regions), which is consistent with the Part 850 Regulations, and adds Cuba, Iran, North Korea, Russia, and the Bolivarian Republic of Venezuela under the regime of Nicolás Maduro Moros. The Proposed Rule would define country of concern consistent with the definition in Title VIII.

With respect to inclusion of the Bolivarian Republic of Venezuela under the regime of Nicolás Maduro Moros in Title VIII, that regime no longer exists. On March 5, 2026, the United States recognized Delcy Rodríguez as the head of state of Venezuela and her government is not the regime of Nicolás Maduro Moros.

§ 851.208—Covered Foreign Person

Title VIII defines a covered foreign person as, subject to regulations, a foreign person that (i) is incorporated in, has a principal place of business in, or is organized under the laws of a country of concern; (ii) is a member of the Central Committee of the Chinese Communist Party (CCP) or is a member of the political leadership of a country of concern; (iii) is directly or indirectly subject to the direction or control of a country of concern, as defined by regulation, an entity described in (i) or (ii), or the state or the government of a country of concern (including any political subdivision, agency, or instrumentality thereof); or (iv) is owned in the aggregate, directly or indirectly, 50 percent or more by a country of concern, an entity described in (i) or (ii), or the state or the government of a country of concern (including any political subdivision, agency, or instrumentality thereof).

Many aspects of the definition of covered foreign person in Title VIII generally align with the definition of “person of a country of concern” in the Part 850 Regulations, and Title VIII provides no indication that it was intended to limit the application of the program in ways that would permit easy circumvention of its restrictions. The Treasury Department therefore proposes defining covered foreign person in the Proposed Rule in a manner consistent with the definition of “person of a country of concern” from the Part 850 Regulations. The Proposed Rule would maintain the Part 850 Regulations' coverage of certain individual foreign persons who are citizens or permanent residents of a country of concern. This inclusion is necessary to prevent circumvention that would undermine the effectiveness of the Proposed Rule. For example, if an individual national of a country of concern (who is not a member of the CCP Central Committee or the political leadership of a country of concern) chose to redomicile an entity that such individual wholly owned to engage in a prohibited technology or notifiable technology outside of a country of concern, the proposed definition would treat such entity as a covered foreign person. Including such individuals also minimizes the cost and complexity of compliance for affected parties, in this case by maintaining a definition with which the regulated community is already familiar.

Title VIII includes as a category of covered foreign person certain foreign persons who are, directly or indirectly, subject to the direction or control of a country of concern or certain entities associated with a country of concern. For the purpose of the proposed definition of a covered foreign person, the Proposed Rule would define “subject to the direction or control” to mean that the government of a country of concern (including any political subdivision, political party, agency, or instrumentality thereof, or any person acting for or on behalf of the government of a country of concern), relevant individual, or relevant entity has the power, directly or indirectly, to direct or cause the direction of the management or policies of the subject entity (whether through the ownership of voting securities, by contract, or otherwise). ( printed page 67400)

The Proposed Rule would also clarify that the 50 percent aggregate ownership requirement in Title VIII can be met through holdings of outstanding voting interest, voting power of the board, or equity interest. In addition, consistent with the need to prevent circumvention and retain features of the Proposed Rule that strengthen its effectiveness and are familiar to the regulated community, the Proposed Rule would state that this ownership interest also can be held by any individual that meets the definition of covered foreign person.

Additionally, the Treasury Department proposes that where a person holds a voting interest, board seat, equity interest, or the contractual power to direct or cause the direction of management or policies of a covered foreign person, and more than 50 percent of the revenue, net income, capital expenditure, or operating expenses of the covered foreign person are attributable to that person, then that person be considered a covered foreign person. A person would also meet this condition if that person holds an interest in more than one covered foreign person, and more than 50 percent of the person's revenue, net income, capital expenditure, or operating expenses is attributable to such covered foreign persons, in aggregate. When calculating whether more than 50 percent of the person's revenue, net income, capital expenditure, or operating expenses are attributable to a given covered foreign person, amounts below $50,000 should not be included for purposes of calculating revenue attributable to a covered foreign person.

This provision is intended to align the Proposed Rule's definition of covered foreign person with the definition of covered foreign person at § 850.209(a)(2) of the Part 850 Regulations. This approach is consistent with Title VIII given its coverage of indirect covered national security transactions. This approach also addresses potential evasion or avoidance pursuant to the Secretary's authority in Title VIII, and it furthers the goal of providing clear guidance about coverage, while reducing confusion that might be caused by changes from the Part 850 Regulations.

§ 851.209—Covered National Security Transaction

Title VIII defines the term covered national security transaction as, subject to regulations, a U.S. person' s direct or indirect:

• Acquisition of an equity interest orcontingent equity interest in a covered foreign person that the U.S. person knows at the time of the acquisition is a covered foreign person;
• Provision of a loan or similar debt financing agreement to acovered foreign person that the U.S. person knows at the time of the provision is a covered foreign person and where the provision affords or will afford the U.S. person lender certain financial or governance rights characteristic of an equity investment in the covered foreign person but not typical of a loan;
• Entrance into a joint venture, wherever located, that is formed with aperson of a country of concern where the U.S. person knows at the time of entrance into the joint venture, that the joint venture will engage, or plans to engage, in a prohibited technology or notifiable technology;
• Conversion ofcontingent equity interest (or equivalent) or debt into an equity interest in a covered foreign person;
• Acquisition, leasing, or other development of operations, land, property, or other assets in acountry of concern that will result in, or the U.S. person plans to result in, the establishment of a covered foreign person or the engagement of a person of a country of concern in a prohibited technology or notifiable technology;
• Direction of a transaction by aforeign person that the U.S. person knows at the time of the transaction would be a covered national security transaction if engaged in by a U.S. person, other than an acquisition of a limited partner interest or equivalent in a non-U.S. person pooled investment fund;
• Acquisition of a limited partner or equivalent interest in a pooled investment fund where the fund is not aU.S. person and the U.S. person knows at the time of the acquisition that such fund likely will invest in a person of a country of concern that is in an enumerated prohibited technology or a notifiable technology sector, and where such fund undertakes a transaction that would be a covered national security transaction if engaged in by a U.S. person; and
• Any other transaction identified by the Secretary, in consultation with the appropriate congressional committees and subject to public notice and comment, that is contributing to the military, intelligence, surveillance, or cyber-enabled capabilities of acountry of concern.

The Treasury Department proposes to implement Title VIII's definition of covered national security transaction in a way substantively consistent with the statutory text, but with a number of important modifications to ensure clarity and consistency with other provisions of Title VIII. Specifically, the Title VIII definition of covered national security transaction refers in multiple places to a “person of a country of concern.” The term “person of a country of concern” is not defined in Title VIII but is used in the Part 850 Regulations. Title VIII also uses the term covered foreign person, which appears to be the equivalent of “person of a country of concern.” As previously discussed, the Proposed Rule would include within the definition of covered foreign person some provisions currently included in the definition of a person of a country of concern in the Part 850 Regulations. Accordingly, the Proposed Rule would replace all references to a “person of a country of concern” in the definition of covered national security transaction with the term covered foreign person. Additionally, in each of the relevant provisions of the definition of covered national security transaction, the Treasury Department proposes to clarify that the relevant knowledge that the U.S. person must possess is not merely that the transaction involves a covered foreign person, but rather that it involves a covered foreign person that engages in a notifiable technology or prohibited technology. As reflected in the Proposed Rule, this would include specified circumstances in which that engagement is indirect because the covered foreign person has one of certain specified relationships with a covered foreign person engaged in a notifiable technology or prohibited technology. Without this clarification, the definition of covered national security transaction would extend to transactions without any nexus to relevant technologies.

In addition, as noted in the discussion regarding the definition of covered foreign person, Title VIII and the Proposed Rule do not define that term in connection with activity that meets the definition of notifiable technology or prohibited technology. A covered national security transaction, however, involves a covered foreign person engaged in a notifiable technology or prohibited technology. For the Proposed Rule to reach a U.S. person investment in a covered foreign person or relevant joint venture that meet the conditions set forth in § 851.208(a)(8) because of its relationship to one or more covered foreign persons that engage in a notifiable technology under § 851.218(a) through (g) or a prohibited technology under § 851.226(a) through (u), the Treasury Department would propose to define covered national security ( printed page 67401) transaction to include where such conditions are met.

With respect to the provision of a loan or similar debt financing, the Treasury Department proposes to incorporate into the definition of covered national security transaction clarifications that were included in Note 2 to § 850.210 of the Part 850 Regulations.

The Proposed Rule would make one substantive clarification to the definition of covered national security transaction in Title VIII by adding a knowledge element to the conversion of a contingent equity interest (or equivalent) or debt in a covered foreign person that engages in a notifiable technology or prohibited technology or meets the conditions of § 851.208(a)(8). This clarification would harmonize the conversion prong of the definition of a covered national security transaction with the other prongs of the definition and would avoid penalizing unwitting activity by a U.S. person that conducted a reasonable and diligent inquiry prior to the conversion of such interest and lacked reason to know that the contingent equity interest was subject to the Proposed Rule. The Proposed Rule would also clarify that the conversion prong applies only to a contingent equity interest (or equivalent) or debt acquired on or after the effective date that is set when the Proposed Rule is finalized.

The Treasury Department notes that Title VIII incorporates directly into the definition of covered national security transaction the concept of “knowingly directing” present in the Part 850 Regulations and, accordingly, extends the scope of “knowingly directing” to include notifiable transactions. By contrast, the Part 850 Regulations limit the application of “knowingly directing” to prohibited transactions as that term is defined in that part (see 31 CFR 850.303). Consistent with Title VIII, proposed § 851.209 incorporates the concept of “knowingly directing” into the definition of a covered national security transaction. Proposed § 851.209(a)(6) also states when the Treasury Department considers the criteria in this prong to have been met and describes the conditions under which a U.S. person may recuse themself from decision-making so as not to be considered engaging in such a covered national security transaction. The proposed § 851.209(a)(6) closely corresponds to § 850.303 of the Part 850 Regulations.

The Treasury Department clarifies that a covered national security transaction involving the entrance into a joint venture under § 851.209(a)(3) would not require the establishment or formation of a new entity. The Proposed Rule would not define the term “joint venture” and instead, the Treasury Department refers to the plain English meaning of the term, i.e., as involving the contribution of capital and/or assets by two parties and the sharing of profits and losses.

The Treasury Department also clarifies that U.S. person investments in venture capital funds, private equity funds, “funds of funds,” or other pooled investment funds with pre-existing investments in a covered foreign person may constitute an indirect covered national security transaction as proposed to be defined in § 851.209(a)(1) through (a)(6), separate and apart from whether the acquisition may be a covered national security transaction under § 851.209(a)(7).