Provisions Pertaining to U.S. Investments in Certain National Security Technologies and Products in Countries of Concern, 90398-90473 [2024-25422]

Agencies

• DEPARTMENT OF THE TREASURY
• Office of Investment Security

[Federal Register Volume 89, Number 221 (Friday, November 15, 2024)]
[Rules and Regulations]
[Pages 90398-90473]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-25422]



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Vol. 89

Friday,

No. 221

November 15, 2024

Part II





 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; Final Rule

Federal Register / Vol. 89 , No. 221 / Friday, November 15, 2024 / 
Rules and Regulations

[[Page 90398]]


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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: Final rule.

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SUMMARY: This final rule sets forth the regulations that 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 that seek 
to develop and exploit sensitive technologies or products critical for 
military, intelligence, surveillance, or cyber-enabled capabilities. 
The final rule requires United States persons to provide notification 
to the U.S. Department of the Treasury regarding certain transactions 
involving persons of a country of concern that 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 prohibits United States persons from engaging in 
certain other transactions involving persons of a country of concern 
that are engaged in activities involving certain other national 
security technologies and products that pose a particularly acute 
national security threat to the United States.

DATES: This final rule is effective on January 2, 2025.

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

A. Outbound Order

    On August 9, 2023, the President issued Executive Order 14105 (88 
FR 54867), ``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 (NEA), 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. On August 6, 2024, the President continued the 
national emergency (89 FR 65163) declared in the Outbound Order.
    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 (Hong Kong) and the Special Administrative Region of Macau 
(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 public or private 
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 their 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 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 outlines 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

[[Page 90399]]

U.S. Department of the Treasury (Treasury Department) 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.

B. Advance Notice of Proposed Rulemaking

    Concurrent with the issuance of the Outbound Order, on August 9, 
2023, the Treasury Department issued an Advance Notice of Proposed 
Rulemaking, 88 FR 54961 (published 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 Treasury Department received 60 comment letters in response to 
the ANRPM, many from business associations that represented a wide 
variety of stakeholders across industries as well as from individuals 
and companies in the financial services, legal, and technology sectors. 
(The comments to the ANPRM are available on the public rulemaking 
docket at https://www.regulations.gov (Docket TREAS-DO-2023-0009)). In 
general, the 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 Treasury 
Department considered each comment in developing the Notice of Proposed 
Rulemaking discussed in the next section.

C. Notice of Proposed Rulemaking

    On June 21, 2024, the Treasury Department issued a Notice of 
Proposed Rulemaking, 89 FR 55846 (published July 5, 2024) (Proposed 
Rule), setting forth the full proposed regulations for implementing the 
Outbound Order. The Proposed Rule built on the ANPRM and reflected the 
Treasury Department's consideration of comments received in response to 
the ANPRM. The Proposed Rule included the full draft regulations and 
explanatory discussion regarding the intent of the proposal. It also 
solicited additional comments from the public.
Obligations on U.S. Persons
    The Proposed Rule would have placed obligations on U.S. persons, 
including a notification requirement for certain transactions and 
prohibition of certain other transactions. A U.S. person was defined to 
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, and any person in the United States.
Knowledge Standard
    The obligations of a U.S. person under the Proposed Rule would have 
applied if such person had knowledge of relevant facts or circumstances 
related to a transaction. Under the proposed standard, a U.S. person 
may have been assessed to have had knowledge if the U.S. person 
possessed actual knowledge that a fact or circumstance existed or was 
substantially certain to occur, if the U.S. person possessed an 
awareness of a high probability of a fact or circumstance's existence 
or future occurrence, or if the U.S. person could have possessed such 
information through a ``reasonable and diligent inquiry.'' To provide 
clarity, the Proposed Rule listed factors that the Treasury Department 
would consider in assessing whether a U.S. person undertook a 
``reasonable and diligent inquiry.'' Such factors reflected information 
that should have been ascertainable and/or contractual assurances that 
should have been obtainable through reasonable due diligence.
Specific Categories of Covered Transaction
    The Proposed Rule would have applied to certain transactions by 
U.S. persons, including the acquisition of an equity interest or 
contingent equity interest; certain debt financing convertible to an 
equity interest or that afforded certain rights to the lender; the 
conversion of a contingent equity interest; a greenfield investment or 
other corporate expansion; a joint venture; and certain investments as 
a limited partner or equivalent (LP) in a non-U.S. person pooled 
investment fund.
Involving a Covered Foreign Person
    The Proposed Rule would have applied to certain transactions by a 
U.S. person that also involved a covered foreign person--that is, a 
person of a country of concern engaged in a covered activity related to 
defined subsets of technologies and products or a person that had a 
specified relationship with such a person. Under the Proposed Rule, a 
person of a country of concern included an individual who is a citizen 
or permanent resident of a country of concern (and not a U.S. citizen 
or permanent resident of the United States); an entity organized under 
the laws of a country of concern, or headquartered in, incorporated in, 
or with a principal place of business in a country of concern; the 
government of a country of concern; or an entity that is directly or 
indirectly owned 50 percent or more by any persons in any of the 
aforementioned categories. Additionally, the Proposed Rule would have 
applied to certain transactions involving an entity that had a voting 
interest, board seat, or equity interest in a covered foreign person 
where more

[[Page 90400]]

than 50 percent of one of several key financial metrics of the entity 
was attributable to such covered foreign person.
Excepted Transaction
    The Proposed Rule would have excepted certain types of transactions 
from coverage, provided that such transactions did not afford a U.S. 
person certain rights that were not standard minority shareholder 
protections. These included: investments in publicly traded securities, 
certain LP investments, buyouts of country of concern ownership; 
intracompany transactions; investments made pursuant to pre-Outbound 
Order binding commitments; certain syndicated debt financings; and 
certain transactions involving a person of a country or territory 
outside of the United States based on a determination by the Secretary.
National Interest Exemption
    Under the Proposed Rule, a U.S. person could have sought an 
exemption from the application of the prohibition or notification 
requirement on the basis that a transaction was in the national 
interest of the United States.
Notification Requirement
    A U.S. person subject to the notification requirement under the 
Proposed Rule would have been required to file a notification form with 
the Treasury Department that included information related to the 
transaction such as details about the U.S. person, the covered 
transaction, relevant national security technologies and products, and 
the covered foreign person. The Proposed Rule would have required that 
such notification be filed no later than 30 days after a transaction is 
completed or, where a U.S. person acquires actual knowledge after the 
completion date of a transaction that the transaction would have been a 
covered transaction if such knowledge had been possessed at the time of 
the transaction, no later than 30 days after the U.S. person's 
acquisition of such knowledge.
National Security Technologies and Products
    The Proposed Rule identified the subsets of national security 
technologies and products identified in the Outbound Order that would 
have been subject to the Proposed Rule.
     Semiconductors and microelectronics. Covered transactions 
related to electronic design automation software; certain fabrication 
and advanced packaging tools; the design, fabrication, or packaging of 
certain advanced integrated circuits; and supercomputers would have 
been prohibited. Covered transactions related to the design, 
fabrication, or packaging of integrated circuits not otherwise covered 
by the prohibited transaction definition would have been subject to the 
notification requirement.
     Quantum information technologies. Covered transactions 
related to the development of quantum computers and production of 
critical components; the development or production of certain quantum 
sensing platforms; and the development or production of quantum 
networking and quantum communication systems would have been 
prohibited.
     Artificial intelligence (AI) systems. Covered transactions 
related to the development of any AI system designed to be exclusively 
used for, or intended to be used for, certain end uses would have been 
prohibited. The Proposed Rule also included proposed alternatives for a 
prohibition on covered transactions related to the development of any 
AI system that was trained using a specified quantity of computing 
power, and trained using a specified quantity of computing power using 
primarily biological sequence data. Covered transactions related to the 
development of any AI system not otherwise covered by the prohibited 
transaction definition, where such AI system was designed or intended 
to be used for certain end uses or was trained using a specified 
quantity of computing power (set below the levels in the prohibited 
transaction definition), would have been subject to the notification 
requirement.
Violations
    The Proposed Rule outlined the penalty and disclosure framework for 
violations. A violation would have been subject to civil and criminal 
penalties as set forth in IEEPA. In the event of a violation, the 
Treasury Department would have been authorized to impose civil 
penalties and could also have referred criminal violations to the 
Attorney General. The Secretary also could have taken any action 
authorized under IEEPA to nullify, void, or otherwise require 
divestment of any prohibited transaction. The Proposed Rule would have 
provided a process for a U.S. person to submit a voluntary self-
disclosure if they believed their conduct may have resulted in a 
violation of any part of the Proposed Rule. Such self-disclosure would 
have been taken into consideration during the Treasury Department's 
determination of the appropriate response to the self-disclosed 
violation.

II. Overview of Comments on the Proposed Rule

    The public was given an opportunity to comment on the Proposed 
Rule, and comments were due by August 4, 2024. The public comments 
received are available on the rulemaking docket at https://www.regulations.gov (Docket TREAS-DO-2024-0012). The Treasury 
Department received over 40 comment letters in response to the Proposed 
Rule reflecting a range of views. The Treasury Department considered 
each comment before issuing this final rule (Final Rule). Discussed 
below are the comments received and the Treasury Department's responses 
in consideration of the comments.

III. Discussion of the Final Rule

A. Scope and Objective of the Final Rule

    The preamble to the Proposed Rule noted that its focus was on the 
types of U.S. investments that presented a likelihood of conveying both 
capital and intangible benefits that could be exploited by countries of 
concern to accelerate the development of sensitive technologies or 
products 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 included 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 sought to avoid loopholes that could have undermined the 
national security objectives of the Outbound Order.
    Several commenters noted their support for the overall goals of the 
Outbound Order and Proposed Rule. One commenter commended the Treasury 
Department for taking action to stop U.S. investment in entities backed 
by the Chinese Communist Party that threaten U.S. national security. 
Another commenter endorsed U.S. Government efforts to ensure entities 
that pose national security threats are denied access to all U.S. 
investors and U.S. capital markets. Several commenters expressed 
support for the Treasury Department's goal of restricting investment 
that would accelerate the development of military, intelligence, 
surveillance, and cyber-enabled capabilities in countries of concern. 
Another commenter emphasized the importance and difficulty of 
countering

[[Page 90401]]

the undesired transfer of emerging technologies. One commenter 
commended the Treasury Department's recognition that U.S. leadership in 
emerging technologies is critical to long-term U.S. interests, while 
another noted that maintaining a healthy U.S. semiconductor industry is 
an essential component to protecting national security.
    Several commenters noted the importance of balancing the protection 
of national security with the maintenance of economic competitiveness 
and an open investment policy. One commenter stated that a well-
designed rule would have actionable requirements that achieve the 
Treasury Department's goals while mitigating unintended consequences.
    Several commenters highlighted the importance of clarity in the 
Proposed Rule, especially in the definitions, or requested further 
clarification. Other commenters requested that the rule be no more 
burdensome than necessary to achieve its aims. One commenter encouraged 
the Treasury Department to be mindful of the implications of the U.S. 
Supreme Court decision in Loper-Bright v. Raimondo, 144 S. Ct. 2244 
(2024), particularly related to implementation of broad authorities and 
industry's reliance on a stable, clear, and predictable regulatory 
environment.
    One commenter highlighted a think tank report about outbound 
investment that encouraged authorities to target the highest risk 
transactions and recommended establishing a rule that is proportionate, 
easy to understand, nonduplicative of existing tools, and that enables 
dialogue with allies about adopting similar regimes.
    Other commenters expressed the view that the Proposed Rule was too 
broad or not designed to address the threat identified in the Outbound 
Order. Some commenters requested the notification requirement be 
removed from the rule, with one commenter expressing the view that the 
notification requirement would not address the threat identified in the 
Outbound Order. One commenter asserted that the investment restriction 
in the Proposed Rule was based on misconceptions and assumptions about 
the PRC government and PRC businesses that are not supported by 
evidence. Another commenter asserted that the Proposed Rule represents 
a departure from the United States' traditional support for free and 
open capital flows. Another commenter characterized the Proposed Rule 
as unreasonable and contrary to principles of free and fair trade. The 
commenter alleged that the Proposed Rule would obstruct opportunities 
for PRC companies, limit the innovation capacity of the United States, 
and destroy the global industrial supply chain. Another commenter 
expressed concern that the Proposed Rule is overly broad and that it 
underestimates the potential negative impacts on investment managers.
    In response to these comments, the Treasury Department notes that 
the United States has long maintained an open investment policy and 
supported cross-border investment where consistent with U.S. national 
security interests. In developing the Final Rule, the Treasury 
Department has sought to maintain the goals of both open investment and 
protection of national security by focusing on 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 countries of concern in 
ways that threaten the national security of the United States.
    The Treasury Department also recognizes the potential for 
unintended consequences that may arise under the Final Rule and has 
sought to further minimize the impact of those consequences, including 
through changes to the definitions of covered transaction and excepted 
transaction in the Final Rule that are described below. The Treasury 
Department made these changes to provide additional clarity, improve 
administrability, and facilitate compliance by U.S. persons, while also 
cognizant of the need to close loopholes that could undermine the 
national security objectives of the Outbound Order. In addition, as 
discussed further below, the Treasury Department anticipates providing 
additional information on its Outbound Investment Security Program 
website to facilitate compliance by U.S. persons.
    Similar to the Proposed Rule, the Final Rule seeks to complement 
existing authorities and tools of the U.S. Government, such as export 
controls and inbound investment reviews. The Final Rule addresses the 
complex and evolving national security threat identified in the 
Outbound Order.
    The Treasury Department also notes that the Final Rule is based on 
the President's finding in the Outbound Order that countries of concern 
are ``engaged in comprehensive, long-term strategies that direct, 
facilitate, or otherwise support advancements in sensitive technologies 
and products that are critical to such countries' military, 
intelligence, surveillance, or cyber-enabled capabilities.'' The 
President's finding also notes that ``[a]s part of this strategy of 
advancing the development of these sensitive technologies and products, 
countries of concern are exploiting or have the ability to exploit 
certain United States outbound investments, including certain 
intangible benefits that often accompany United States investments and 
that help companies succeed.'' The Treasury Department assesses that 
the requirements of the Final Rule are narrowly scoped to focus on a 
limited subset of investment activity and to avoid unintended impacts 
in broader sectors of the U.S. or global economies. The Treasury 
Department also notes that imposing targeted measures to address acute 
national security risks is consistent with trade and investment 
agreements to which the United States is a party. The Treasury 
Department further notes that the two components of the program--that 
is, requiring notification of certain transactions and prohibiting 
other transactions--helps limit the impact on market participants while 
providing the Treasury Department with visibility into the volume and 
nature of U.S. person covered transactions and informing future policy 
development and decisions. Finally, regarding the potential unintended 
impact on asset managers, the Treasury Department notes that some 
modifications made to the Final Rule are specifically intended to limit 
the applicability to certain routine cross-border financial activity 
that the Treasury Department has determined is unlikely to result in 
the transfer of intangible benefits along with capital that can be 
exploited to threaten U.S. national security.

B. Statutory Authority

    As described above, the Outbound Order was issued by the President 
pursuant to his authority under the Constitution and the laws of the 
United States, including IEEPA, the NEA, and section 301 of title 3, 
U.S.C. 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 Treasury Department 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

[[Page 90402]]

Order. The Secretary's issuance of the Proposed Rule and this Final 
Rule 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).
    One commenter raised questions about whether the Treasury 
Department had appropriate authority to issue and administer the rule. 
The commenter noted that Congress did not explicitly authorize the 
Assistant Secretary of the Treasury for Investment Security to oversee 
an outbound investment program in the Foreign Investment Risk Review 
Modernization Act of 2018 (FIRRMA; Subtitle A of Title XVII of Pub. L. 
115-232, 132 Stat. 2173), the legislation that established the position 
of Assistant Secretary of the Treasury for Investment Security. The 
commenter noted that the establishment of the Outbound Investment 
Security Program would mean that the Assistant Secretary's duties would 
no longer be principally related to the Committee on Foreign Investment 
in the United States (CFIUS) as FIRRMA requires. The commenter also 
asserted that personnel hired under FIRRMA's hiring authority likewise 
must have CFIUS-related work as their primary responsibility, which in 
the commenter's view, does not encompass the rulemaking to implement 
the Outbound Order. The commenter also expressed the view that IEEPA 
could not be a source of authority for the Proposed Rule. The commenter 
expressed that in practice, the Proposed Rule sought to regulate access 
to expertise and professional networks, and that this was ``sharing of 
information'' that could not be prohibited under IEEPA unless such 
information was subject to espionage or export control laws.
    The Treasury Department appreciates these comments and the 
opportunity to respond to the legal points they raise. IEEPA (50 U.S.C. 
1701 et seq.) authorizes the President to deal with any unusual and 
extraordinary threat, which has its source in whole or substantial part 
outside the United States, to the national security, foreign policy, or 
economy of the United States, if the President declares a national 
emergency with respect to such threat. Nothing in FIRRMA limits the 
President's authority under IEEPA. As described in more detail above, 
consistent with the framework of the NEA and IEEPA, the President 
declared a national emergency in the Outbound Order and directed the 
Secretary to issue regulations to address that emergency. As noted, 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).
    As directed by the President, the Final Rule addresses the declared 
national emergency and threat to national security by prohibiting 
certain transactions and requiring notification of certain other 
transactions by U.S. persons involving subsets of sensitive 
technologies and products critical for military, intelligence, 
surveillance, or cyber-enable capabilities of countries of concern.
    The commenter states that a provision of IEEPA exempting from 
regulation ``the importation from any country, or the exportation to 
any country . . . of any information or informational materials'' (50 
U.S.C. 1702(b)(3)) forecloses the Treasury Department from issuing the 
rule under IEEPA. Consistent with the statute, neither the Proposed 
Rule nor the Final Rule regulates the export of ``information or 
informational materials.'' Section 850.503 of the Final Rule explicitly 
provides that conduct referred to in 50 U.S.C. 1702(b) shall not be 
regulated or prohibited, directly or indirectly, by this part. Instead, 
the Proposed Rule would have regulated, and the Final Rule will 
regulate, covered transactions. Consistent with the national emergency 
framework described above, IEEPA unambiguously authorizes the President 
to, among other things, ``regulate . . . transactions involving[ ] any 
property in which any foreign country or a national thereof has any 
interest by any person, or with respect to any property, subject to the 
jurisdiction of the United States'' (50 U.S.C. 1702(a)(1)(B)), and the 
Outbound Order, ANPRM, Proposed Rule, and Final Rule rely on this 
authority. The existence of a covered transaction is a fundamental 
prerequisite for the application of the notification requirement and 
prohibitions under the Proposed Rule or Final Rule, and the concept of 
a covered transaction has been crafted in a manner consistent with both 
section 1702(b) of IEEPA and section 850.503 of the Final Rule. 
Notifiable transactions and prohibited transactions are each defined as 
covered transactions in which the relevant covered foreign person 
undertakes (or in certain instances, the U.S. person knows will or 
plans to undertake) specified covered activities. The types of 
transactions that may constitute a covered transaction are the 
acquisition of an equity interest or contingent equity interest; 
certain debt financing that affords certain rights to the lender; the 
conversion of a contingent equity interest; a greenfield investment or 
other corporate expansion; a joint venture; and certain investments as 
an LP in a non-U.S. person pooled investment fund. Granting access to 
expertise or professional networks via a U.S. person is not a covered 
transaction, and thus is not subject to regulation under the Final 
Rule.
    The commenter observes that the duties of the Assistant Secretary 
of the Treasury for Investment Security, as defined in 50 U.S.C. 
4565(k)(4)(A)(ii)(II), must be ``principally related to [CFIUS].'' The 
Final Rule and the establishment of the Outbound Investment Security 
Program within the Treasury Department's Office of Investment Security 
are consistent with this requirement. Taking into account factors such 
as budget, personnel, and allocation of time, the Assistant Secretary 
for Investment Security's duties, and those of relevant Treasury 
Department staff, will remain principally related to CFIUS, even with 
the Outbound Investment Security Program coming under the Assistant 
Secretary's purview.

C. Summary of Comments to the Proposed Rule and Changes From the 
Proposed Rule

    The discussion below summarizes comments submitted to the Proposed 
Rule and the Treasury Department's responses to those comments. For 
provisions that are not discussed below, the Treasury Department did 
not receive any substantive comments on those provisions and is 
implementing them in the Final Rule without substantive change from the 
Proposed Rule.
Subpart A--General
Sec.  850.101--Scope
    Section 850.101 of the Proposed Rule outlined the scope of the 
Proposed Rule. Section 850.101(a) explained that the Proposed Rule 
implemented the Outbound Order, and Sec.  850.101(b), (c), and (d) 
discussed at a high level certain key terms and requirements in the

[[Page 90403]]

Proposed Rule, namely covered transactions and excepted transactions, 
along with notifiable and prohibited transactions and the requirements 
for U.S. persons and controlled foreign entities regarding notifiable 
and prohibited transactions. Section 850.101(e) described requirements 
in the Outbound Order for the Secretary to communicate with Congress 
and the public with respect to implementation of the Outbound Order and 
consult with specified departments and agencies on various aspects of 
the Outbound Order and regulations.
    The Treasury Department did not receive any comments on Sec.  
850.101 of the Proposed Rule. The Final Rule adopts Sec.  850.101 in a 
form nearly identical to that in the Proposed Rule but makes some non-
substantive edits to the structure of paragraphs (c) and (d) to clarify 
the requirements applicable to the Secretary's determination with 
respect to covered activities.
Sec.  850.104--Knowledge Standard
    Under Sec.  850.104 of the Proposed Rule, certain provisions, 
including in the definition of covered transaction, would have applied 
only if a U.S. person knew of a relevant fact or circumstance. The 
definition of knowledge in the Proposed Rule at Sec.  850.216 included 
the following: actual knowledge that a fact or circumstance existed or 
was 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 definition of 
covered transaction in the Proposed Rule at Sec.  850.210 generally 
would have required the U.S. person to know (or in some circumstances, 
to intend) at the time of a transaction that the transaction involved a 
covered foreign person, would have resulted in the establishment of a 
covered foreign person (in the case of a greenfield, brownfield, or a 
joint venture investment), or would have resulted in a person of a 
country of concern's engagement in a new covered activity (in the case 
of a business pivot). The Proposed Rule noted that the Treasury 
Department was not proposing to hold a U.S. person liable for a 
transaction that had all of the other attributes of a covered 
transaction but that the U.S. person did not know at the time (which 
would have included not having ``reason to know'' at the time) was 
involved with or would have resulted in a covered foreign person. As 
discussed in the Proposed Rule, 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 Treasury 
Department might have found 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 further clarity, the Proposed Rule, in Sec.  850.216, 
included some of the factors that the Treasury Department would have 
considered in assessing whether a U.S. person undertook such an 
inquiry, as applicable. These included efforts to obtain contractual 
assurances and information that should have been 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 Treasury Department received comments on several aspects of 
Sec.  850.104 of the Proposed Rule. In response, the Treasury 
Department has made changes to clarify this provision in the Final Rule 
and discusses other issues below.
    Commenters sought clarification or guidance on how the Treasury 
Department will evaluate the sufficiency of a U.S. person's due 
diligence as part of determining whether a ``reasonable and diligent 
inquiry'' occurred, citing potential obstacles to conducting due 
diligence in the PRC. Several commenters asked that the Treasury 
Department explicitly acknowledge the challenges of conducting due 
diligence in foreign jurisdictions and provide specific due diligence 
guidance, include language in the rule that makes clear that it will 
evaluate a U.S. person's due diligence efforts based on the totality of 
the facts and circumstances, and/or provide a safe harbor from 
enforcement if the U.S. person takes specific due diligence steps, such 
as soliciting or securing representations and warranties or using 
representative due diligence questions that some commenters requested 
be provided by the Treasury Department. A few commenters suggested 
that, with respect to the language in the Proposed Rule regarding a 
``relevant counterparty,'' a U.S. person's due diligence obligations 
should be limited to obtaining certain representations and warranties 
in the relevant investment agreement.
    As in the Proposed Rule, Sec.  850.104(c) of the Final Rule sets 
forth an illustrative list of factors that the Treasury Department will 
consider in assessing whether a U.S. person has undertaken a 
``reasonable and diligent inquiry'' with respect to a particular 
transaction. The Treasury Department recognizes that some of the 
considerations in 850.104(c) may be inapplicable to a given 
transaction. In response to comments seeking clarity regarding how the 
Treasury Department will evaluate the sufficiency of a U.S. person's 
due diligence, the Treasury Department has added a new paragraph (d) to 
Sec.  850.104 of the Final Rule to clarify that the Treasury 
Department's assessment of whether a U.S. person has undertaken a 
``reasonable and diligent inquiry'' will be made based on a 
consideration of the totality of relevant facts and circumstances. This 
new language accounts for the circumstance where a U.S. person may face 
obstacles to conducting due diligence, while preserving the necessary 
flexibility to consider the individual facts and circumstances of a 
transaction when assessing whether a ``reasonable and diligent 
inquiry'' has occurred.
    The Treasury Department declines to include a safe harbor provision 
or to prescribe specific due diligence obligations in the Final Rule. 
Rather, the Final Rule is designed to address the fact-specific and 
individualized nature of each transaction by offering an illustrative 
list of considerations at Sec.  850.104(c), in combination with Sec.  
850.104(d), as described above.
    One commenter stated that the Treasury Department should not 
consider an entity's refusal to make representations or warranties to 
be a warning sign, by itself, while another commenter stated that they 
did not believe they would be able to credibly assess information 
received from an investment target for warning signs. Given the variety 
of forms a warning sign could take, the Final Rule does not prescribe 
what a warning sign or red flag would be, but Sec.  850.104(d) 
addresses commenter concerns by stating that the totality of the 
relevant facts and circumstances shall be considered in determining if 
the U.S. person has undertaken a ``reasonable and diligent inquiry.'' 
If, for example, a U.S. person is unable to obtain certain information 
from a transaction counterparty, or unable to obtain relevant 
representations or warranties, the presence or absence of other 
relevant factors may be relevant to the consideration of whether, in 
totality, the U.S. person undertook a ``reasonable and diligent 
inquiry.''
    Commenters also requested clarification that a U.S. person will not 
be held responsible for an investment target's provision of false or 
inaccurate information or failure to provide information, or at least 
will have safe

[[Page 90404]]

harbor for good faith reliance on the information provided absent 
warning signs or contradictory information. Another commenter noted 
that U.S. persons would have to rely on unverified responses from 
prospective portfolio companies because much of the information would 
be in the exclusive possession of the target company and may be 
proprietary.
    The Treasury Department acknowledges that in certain instances, 
information required to assess whether a transaction is a covered 
transaction may be difficult to ascertain. In such circumstances, and 
in the absence of warning signs, a U.S. person may wish to obtain 
representations or warranties from the relevant transaction 
counterparty regarding pertinent information such as the investment 
target or counterparty's ownership, investments, and activities.
    Multiple commenters sought clarification regarding how the Treasury 
Department will evaluate a U.S. person's efforts to obtain information 
in the context of an assessment of a ``reasonable and diligent 
inquiry.'' One commenter asked that the Treasury Department not 
evaluate a U.S. person's efforts to obtain non-publicly available 
information, but merely assess whether they evaluated what was in their 
possession. The commenter stated that it would be sufficient for the 
Treasury Department to make clear that this factor, and others, would 
be evaluated in light of the totality of the facts and circumstances, 
including the sophistication of the U.S. person. One commenter asked 
for clarification regarding the degree of effort that a U.S. person 
must exert to obtain non-publicly available information. Another 
questioned what ``available'' means--whether it refers to information 
in the U.S. person's possession, information that the U.S. person could 
obtain in the normal course of business, or information that must be 
sought. A few commenters indicated that they did not believe they would 
be able to review all publicly available information about a target due 
to the voluminous amount of public information often available 
regarding a target, much of it not in English, and the timeframes on 
which many venture capital deals occur. One commenter asked whether a 
risk-based approach was sufficient. Another commenter asked for 
clarification that only U.S. persons who are party to covered 
transactions are obligated to conduct the required ``reasonable and 
diligent inquiry.''
    Other commenters sought information about the degree to which a 
U.S. person must access commercially available databases, while another 
commenter requested guidance regarding which sources for non-publicly 
available information a U.S. person should review. Another commenter 
suggested that, in absence of specific guidance, the Treasury 
Department include a safe harbor for good faith reliance on a 
reasonable interpretation of the rule's requirements.
    Under the Final Rule, a U.S. person is responsible for knowledge 
the U.S. person had or could have had through a ``reasonable and 
diligent inquiry.'' The Treasury Department expects a U.S. person to 
make a reasonable effort, taking into account the context of a given 
transaction and any warning signs, among other factors.
    The Final Rule adopts, with minor changes, the text of Sec.  
850.104(c)(3) and (4) from the Proposed Rule regarding ``available non-
public information'' and ``available public information'' as well as a 
U.S. person's efforts to obtain it. The text of Sec.  850.104(c)(3) now 
refers to the ``efforts,'' rather than effort, of the U.S. person, for 
consistency with Sec.  850.104(c)(4). Both sub-paragraphs now focus on 
the efforts of the U.S. person ``as of''--instead of ``at''--the time 
of the transaction. The Treasury Department assesses that the phrase 
``as of'' better describes the process of due diligence leading up to 
and including the time of the transaction. Sections 850.104(c)(3) and 
850.104(c)(4) have been further revised to describe efforts by the U.S. 
person to ``obtain and consider'' available non-public and public 
information, respectively, clarifying that the U.S. person's evaluation 
or assessment of the available public and non-public information is 
relevant. The Treasury Department assesses that the language in Sec.  
850.104(c) is otherwise sufficiently clear on its face, particularly in 
combination with the added Sec.  850.104(d) that, as discussed above, 
explains that the ``the totality of the relevant facts and 
circumstances'' should be considered. Limiting consideration only to 
the information already in a U.S. person's possession, as one commenter 
requested, could incentivize purposeful blindness and is inconsistent 
with the intent of the Final Rule to require reasonable ``inquiry'' 
where certain relevant facts may not already be known to the U.S. 
person.
    At the same time, Sec.  850.104(c) of the Final Rule does not 
require a U.S. person to obtain and consider ``all'' publicly available 
information, and this is clear from the fact that the word ``all'' is 
not included in this paragraph. Instead, the expectation is that a U.S. 
person undertake a reasonable and diligent approach to gathering and 
assessing information. The practical implication of such an approach 
may mean that, for example, a U.S. person investor is generally 
expected to view a transaction counterparty's responses or statements 
in light of other information contained in commercially available 
information sources in addition to information that is freely available 
to the general public. Such diligence is commonplace when investors are 
considering a transaction--such as when conducting diligence with 
respect to risks related to sanctions, bribery and corruption, or 
litigation exposure.
    The Final Rule also includes a related technical edit to Sec.  
850.104(c)(7), adding ``available'' before ``public and commercial 
databases.'' This edit is being made to clarify the scope of databases 
that may be reviewed and to be consistent with how other sources of 
information in Sec.  850.104(c) are qualified with ``available.'' It is 
not intended to affect the substance of the requirement.
    One commenter requested that the Treasury Department identify 
specific standards or considerations for what constitutes a 
``reasonable and diligent inquiry'' for an LP in an investment fund 
where the LP cannot reasonably know the specific targets of the fund. 
Another commenter asked that the Treasury Department publish a list of 
covered foreign persons to supplement--not replace--U.S. person due 
diligence efforts.
    The Treasury Department notes that the foregoing discussion of the 
knowledge standard and a ``reasonable and diligent inquiry'' is 
generally applicable to an investment by a U.S. person and, like the 
Final Rule's approach to knowledge generally, is intended to account 
for a variety of situations and transaction structures. This also 
applies in the context of a U.S. person LP's investment into a non-U.S. 
pooled investment fund. The Treasury Department declines to prescribe, 
in the Final Rule, particular assurances for an LP to seek from the 
manager of a fund or specific standards or considerations in situations 
where a U.S. person LP does not know a fund's specific investment 
targets at the time of the U.S. person LP's investment. As discussed 
further in the discussion of the definition of an excepted transaction 
below, the Treasury Department has determined to except U.S. person LP 
investments into funds if the U.S. person has obtained a binding 
contractual assurance that its capital in the fund will not be used to 
engage in a transaction that would be a notifiable transaction or a 
prohibited transaction, as applicable, if engaged in by a U.S.

[[Page 90405]]

person. Consistent with the Treasury Department's approach to the 
knowledge standard, the Treasury Department does not specify the 
particular language of such a binding contractual assurance. The 
Treasury Department also declines to provide a list of covered foreign 
persons in Sec.  850.104 or elsewhere for the reasons set forth in the 
discussion of the definition of covered foreign person below.
    One commenter requested the reference to legal counsel in Sec.  
850.104(c)(5) be deleted, arguing that it would permit an inappropriate 
imputation of knowledge to the U.S. person. In response and for 
consistency throughout Sec.  850.104(c), the Treasury Department has 
removed the references to ``legal counsel'' from Sec.  850.104(c)(1) 
and (5) of the Final Rule. Under the Final Rule, a U.S. person is 
responsible for information such person knew or should have known, 
following a ``reasonable and diligent inquiry,'' although the Treasury 
Department notes that due diligence may be conducted on behalf of a 
U.S. person by the U.S. person's legal counsel or other representative.
    A number of commenters requested clarification regarding the 
definition of ``relevant counterparty'' in Sec.  850.104(c), stating 
that if the term were to include other investors of the relevant fund 
or other owners of the target portfolio company, then the necessary due 
diligence would be unduly burdensome. As such, one commenter asked that 
the term be defined to mean a party to the transaction, while others 
requested limiting the required diligence to parties participating in 
the transaction.
    In response, the Treasury Department has adopted the suggestion 
made by commenters and modified Sec.  850.104(c) to refer to ``an 
investment target or other relevant transaction counterparty (such as a 
joint venture partner)'' where applicable. This change is intended to 
clarify that as a general matter, the Treasury Department does not 
expect diligence to be conducted on persons who are not parties to the 
transaction. However, inquiries related to non-parties, such as 
beneficial owners or downstream entities that are not technically 
parties to the transaction, may be necessary to determine, for example, 
whether a party to a transaction is a person of a country of concern or 
a covered foreign person. Further, the Treasury Department believes the 
language regarding a ``reasonable and diligent inquiry'' is clear, as 
written, in referring to a U.S. person that is party to a transaction, 
rather than unrelated U.S. persons.
    Commenters expressed similar views with respect to the feasibility 
of conducting due diligence to determine whether the criteria for a 
person of a country of concern is met. Some commenters expressed 
concern that the definition would require due diligence with respect to 
all investments. One commenter requested a standard with specific 
factors for investments in private equity or venture capital funds, 
such as researching past investments, engaging with the general 
partner, and reviewing a fund's prospectus. Another commenter 
recommended that the rule include factors for identifying a person of a 
country of concern, as well as language deeming an inquiry reasonable 
and diligent, ``if and only if, based on these factors, it will 
typically be adequate to correctly identify persons of concern.''
    Given the wide variety of possible transaction structures and for 
the reasons stated above, the Treasury Department declines to adopt 
prescriptive diligence standards as they relate to particular 
transaction structures or the application of a particular definition in 
the Final Rule. Instead, the knowledge standard discussed in the Final 
Rule, the specific factors enumerated in Sec.  850.104(c), and the 
consideration of the totality of relevant facts and circumstances 
described in Sec.  850.104(d) explain the obligations and expectations 
regarding due diligence under the Final Rule.
Knowledge Standard--Final Rule Summary
    The Final Rule specifies that certain provisions, including Sec.  
850.210, which defines covered transaction, will apply only if a U.S. 
person has knowledge of the relevant facts or circumstances at the time 
of a transaction. The definition of knowledge set out in Sec.  850.216 
includes any of 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 definition of covered transaction requires the U.S. person to 
know at the time of a transaction that the transaction involves a 
covered foreign person, will result or is planned to result in the 
establishment of a covered foreign person (in the case of a greenfield, 
brownfield, or joint venture investment), or will result or is planned 
to result in a person of a country of concern's engagement in a covered 
activity (in the case of a brownfield investment). The Treasury 
Department will not consider a transaction that has all of the other 
attributes of a covered transaction but that the U.S. person does not 
know at the time of the transaction (which includes not having ``reason 
to know'' at the time of the transaction) involves or will result in a 
covered foreign person to be a covered transaction subject to the 
notification requirement or prohibition, as applicable. The Treasury 
Department notes, however, that if the U.S. person subsequently 
acquires actual knowledge of a fact or circumstance that, if known at 
the time of the transaction, would have caused the transaction to be a 
covered transaction, the U.S. person is required to notify the Treasury 
Department pursuant to Sec.  850.403 of the Final Rule. 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 transaction is present, 
the Treasury Department may find in the course of determining 
compliance with the Final Rule that the U.S. person had reason to know 
(and therefore, for purposes of the proposed rule, knew) of such fact 
or circumstance. To provide clarity, Sec.  805.104 of the Final Rule 
includes some of the factors that the Treasury Department will consider 
in assessing whether a U.S. person undertook such an inquiry. That 
inquiry will be based on a consideration of the totality of the facts 
and circumstances. 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. Accordingly, the Final Rule adds a 
new provision clarifying that an assessment of whether a U.S. person 
has undertaken a ``reasonable and diligent inquiry'' will be made based 
on a consideration of the totality of relevant facts and circumstances.
    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 will result in a covered 
foreign person in a way that will render the transaction a covered 
transaction, the knowledge requirements in Sec.  850.210 are not met.
    The Treasury Department anticipates making additional information 
available on its Outbound Investment Security Program website regarding 
topics such as the application of the knowledge standard.

[[Page 90406]]

Subpart B--Definitions
Sec.  850.202--AI System
    As discussed in the Proposed Rule, 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--and those that have applications in 
areas such as cybersecurity and robotics. Additionally, the U.S. 
Government is concerned with software and hardware, among other things, 
that incorporate such AI systems. The policy objective of the 
definition is to cover U.S. investment into entities that develop AI 
systems with 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 with no potential 
national security consequences. To address these concerns, the Proposed 
Rule included a notification requirement and a prohibition with respect 
to investments into entities engaged in certain covered activities 
involving AI systems.
    Under the Proposed Rule, AI system was defined in Sec.  850.202(a) 
as a machine-based system with certain specified functions and 
characteristics. Section 850.202(b) of the Proposed Rule included 
within the definition of the term any data system, software, hardware, 
application, tool, or utility that operated in whole or in part using 
such a machine-based system. As noted in the Proposed Rule, this 
definition combined the definitions of ``artificial intelligence'' and 
``AI system'' from Executive Order 14110, ``Safe, Secure, and 
Trustworthy Development and Use of Artificial Intelligence'' issued on 
October 30, 2023 (the AI Order).
    Several commenters expressed concern about the breadth of the 
definition in the Proposed Rule. One commenter argued that the 
definition did not differentiate products that pose a national security 
risk from those that do not. Others requested the removal of Sec.  
850.202(b) from the definition of AI system, noting that its inclusion 
would cover products, services, or applications that incorporate AI for 
internal or commercial use, which may not pose national security risks. 
Commenters cited the recent practice among technology firms to 
leverage, rather than develop, AI by incorporating AI capability into 
existing systems. Commenters suggested narrowing the definition of AI 
system to limit the impact on such firms and also make the rule more 
administrable. One commenter requested that AI systems for medical use 
be excluded from the definition.
    The Final Rule makes clarifying edits to the definition of AI 
system at Sec.  850.202(a) by moving the clause ``uses data inputs to'' 
from (a) to (a)(1) in order to be consistent with the definition in the 
AI Order, and adjusts the first word at the beginning of each of (a)(2) 
and (a)(3) accordingly. Otherwise, the Final Rule adopts the text of 
Sec.  850.202 from the Proposed Rule. The Treasury Department 
considered the comments requesting a narrower definition of AI system 
and the Final Rule adopts the text of Sec.  850.202 from the Proposed 
Rule. However, in response to the comments, the Final Rule adds two 
notes to each of Sec. Sec.  850.217 and 850.224. Note 2 clarifies how 
AI systems defined at Sec.  850.202(b) are implicated by the criteria 
of notifiable and prohibited transactions. The Treasury Department 
notes that the scope of the AI systems definition is intentional, since 
a covered transaction involving an AI system, whether that system is an 
AI model or machine-based system described at Sec.  850.202(a) or a 
system operating in whole or in part using a system described at Sec.  
850.202(a), that meets one or more of the listed end-use or computing 
power thresholds could contribute to the advancement of military, 
intelligence, surveillance, or cyber-enabled capabilities by a country 
of concern. While the scope of AI systems as defined at Sec.  
850.202(b) may implicate a range of persons who use third-party AI 
models or machine-based systems in a data system, software, hardware, 
application, tool, or utility, the Treasury Department notes that such 
persons would be implicated by the Final Rule only to the extent they 
develop the AI system defined at Sec.  850.202(b) by engaging in the 
activities enumerated in Sec.  850.211, such as design or substantive 
modification, with respect to the relevant third-party AI model or 
machine-based system being used. For example, a person engaging in 
substantive modifications of a third-party AI model that is being used 
by a data system, software, hardware, application, tool, or utility to 
operate in whole or in part, such as removing security measures or 
safeguards of the third-party AI model, would be developing an AI 
system. The addition of Note 2 clarifies this point, consistent with 
the definition for develop at Sec.  850.211. The Final Rule also adds a 
Note 3 to each of Sec. Sec.  850.217 and 850.224 to provide a carve-out 
for customizing, configuring, or fine-tuning a third-party AI model or 
machine-based system that is being used by a data system, software, 
hardware, application, tool, or utility to operate in whole or in part, 
where such customization, configuration, or fine-tuning of the third-
party AI model or machine-based system is strictly for a person's own 
internal, non-commercial use. Such activity would not itself trigger 
the notification requirements or prohibition delineated in Sec.  
850.217 or Sec.  850.224, respectively, for covered transactions 
involving AI systems, unless it has government intelligence, mass-
surveillance, or military end use, or is for digital forensics tools, 
penetration testing tools, or the control of robotic systems.
    One commenter requested that the Treasury Department clarify that 
the computing power thresholds for a notifiable transaction or 
prohibited transaction involving an AI system pertain to the combined 
computing power required to train a given AI system, including 
computing power used to train relevant sub-models or generate inputs to 
inform such an AI system. The purpose of this clarification would be to 
prevent undercounting of computing power for an AI system where a 
covered foreign person may develop an AI system by combining smaller 
models or the learnings of other models. The same commenter also 
requested clarification regarding whether different versions of an AI 
system would be considered one system or multiple AI systems, and if 
adaptations of an AI system would be considered a new or distinct AI 
system.
    The Treasury Department notes that the computing power thresholds 
refer to the aggregate or combined computing power required to train a 
given AI system. For example, the computing power required to train an 
AI system that is a combination of smaller, pre-trained AI models would 
be the summation of computing power required to train and combine each 
component model of the AI system. Similarly, developing an AI model 
based on the transfer of knowledge from one model to another would 
include the computing power required to train both models. The Treasury 
Department intends persons employing techniques to develop AI systems 
that are derived from, or are a combination of, other AI systems to 
evaluate the aggregate computing power required for training when 
assessing whether the AI system meets the criteria set forth in 
Sec. Sec.  850.217(d)(3) and 850.224(k). For the purposes of assessing 
whether an AI system has any of the end-use applications set forth in 
Sec. Sec.  850.217(d) and 850.224(j), the Treasury Department

[[Page 90407]]

notes that different versions of an AI system, including adaptations, 
derivatives, subsequent generations, or successor systems, should be 
assessed as distinct AI systems since the designed end-use or 
capabilities of a successor system could vary from a prior version.
    One commenter stated the Treasury Department would need to hire 
technical staff to monitor changes in the AI marketplace and suggested 
the Treasury Department leverage technical talent at other U.S. 
Government agencies if the roles cannot be maintained within the 
Treasury Department. In response to this comment, the Treasury 
Department notes that the Outbound Order directs the Treasury 
Department to consult with relevant U.S. Government agencies on the 
implications for military, intelligence, surveillance, or cyber-enabled 
capabilities of covered national security technologies and products and 
potential covered national security technologies and products. The 
Treasury Department has leveraged the expertise of other U.S. 
Government agencies through the rulemaking process and will continue to 
do so in the implementation and administration of the Final Rule.
Sec.  850.205--Contingent Equity Interest
    The Proposed Rule defined a contingent equity interest as 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.'' While the Treasury Department did not receive any comments to 
the Proposed Rule's definition of contingent equity interest, there 
were several comments that sought additional clarity on what types of 
contingent or convertible equity interests would be included in the 
definition of covered transaction at Sec.  850.210(a)(1) and (3) of the 
Proposed Rule (defining covered transactions involving the acquisition 
or conversion of a contingent equity interest).
    In response to these comments, the Final Rule modifies the 
definition of contingent equity interest at Sec.  850.205 of the 
Proposed Rule. The definition of contingent equity interest in the 
Final Rule refers to a ``financial interest,'' rather than a 
``financial instrument'' as in the Proposed Rule. As described below in 
the discussion to Sec.  850.210 of the Final Rule, this change is 
intended to more accurately reflect the Treasury Department's intent to 
cover the acquisition or conversion of interests that are convertible 
into an equity interest, or provide the right to acquire equity 
interests. The definition of contingent equity interest in the Final 
Rule also clarifies that debt can constitute a financial interest that 
is convertible into, or provides the right to acquire, an equity 
interest.
Sec.  850.206--Controlled Foreign Entity
    The Proposed Rule defined controlled foreign entity as an entity 
incorporated in, or organized under the law of, a country other than 
the United States of which a U.S. person was a parent. Section 850.219 
of the Proposed Rule defined parent as a U.S. person that directly or 
indirectly held more than 50 percent of the outstanding voting interest 
or voting power of the board of the entity; was a general partner, 
managing member, or equivalent of the entity; or, if the entity was a 
pooled investment fund, was an investment adviser to any such fund. 
Section 850.302 of the Proposed Rule would have placed 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 
have been a prohibited transaction if undertaken by a U.S. person, and 
Sec.  850.402 would have required a U.S. person to notify the Treasury 
Department if its controlled foreign entity undertook a transaction 
that would have been a notifiable transaction if undertaken by a U.S. 
person. The Treasury Department proposed defining controlled foreign 
entity using a bright line so that a U.S. person could easily ascertain 
whether an entity was its controlled foreign entity. The Treasury 
Department invited comments regarding this definition, including 
considerations with respect to the definition's inclusion of entities 
established outside of the United States.
    The Treasury Department received several comments on the definition 
of controlled foreign entity. After considering these comments, the 
Final Rule adopts Sec.  850.206 as in the Proposed Rule without 
changes.
    One commenter expressed support for the 50 percent threshold set 
forth in the definition of parent in Sec.  850.219 of the Proposed Rule 
(and referred to in the definition of controlled foreign entity in 
Sec.  850.206(a)) because it would provide a bright line framework to 
assist industry in complying with the rule's requirements. The Treasury 
Department notes that paragraph 850.206(b) of the Proposed Rule 
delineated how the holdings of voting interest or voting power of the 
board of a subsidiary would have been attributed to the parent. Where 
the relationship between one entity and another would have been that of 
parent and subsidiary, attribution would have been full. Where the 
relationship between an entity and another entity would have not been 
that of parent and subsidiary (i.e., because the holdings of voting 
interest or voting power of the board of the first entity in the second 
entity would be 50 percent or less), then the indirect downstream 
holdings of voting interest or voting power of the board would have 
been attributed proportionately to the first entity.
    Another commenter stated that the Proposed Rule's definition of 
controlled foreign entity applied the 50 percent threshold to voting 
interest, which the commenter argued ``deviates significantly from 
ANPRM, which had proposed basing the 50% calculation on revenue, 
income, expenditure and operating expense.'' The commenter questioned 
whether a U.S. person with a 51 percent voting interest would be able 
to prevent its controlled foreign entity from entering into a 
prohibited transaction and suggested that the requirement would 
``impose an unrealistic knowledge standard'' on the U.S. person, 
particularly in certain roles such as an investment adviser. This 
commenter appears to have conflated the ANPRM's discussion of the term 
controlled foreign entity with its discussion of the term covered 
foreign person, a distinct term with a distinct definition, where 
revenue, income, expenditure, and operating expenses were discussed as 
part of the definition in the ANPRM and the NPRM. (See more below 
regarding the definition of covered foreign person.) Additionally, with 
a threshold above 50 percent of the ``outstanding voting interest'' or 
``voting power of the board'' of an entity, it is reasonable to expect 
the U.S. person parent to have the power to influence the compliance 
infrastructure of its subsidiary. For a non-U.S. pooled investment fund 
of which a U.S. person is an adviser (meaning again that the U.S. 
person is a parent and the fund is its controlled foreign entity), 
investment advisers often manage the investment portfolios of such 
pooled investment funds.
    Commenters requested that the Treasury Department clarify that the 
U.S. person parent under 850.206(a) must be the ultimate parent entity 
and not an intermediary U.S. person without ultimate decision-making 
authority. In response, the Treasury Department has added a note (Note 
1) to the definition of parent at Sec.  850.219 of the Final Rule to 
clarify that a U.S. person that meets the definitional requirements of 
parent under Sec.  850.219 constitutes a parent, including a U.S. 
person that is an

[[Page 90408]]

intermediate entity. Further information on the definition of parent is 
below in the discussion of Sec.  850.219.
Controlled Foreign Entity--Final Rule Summary
    The Final Rule defines controlled foreign entity as 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. 
Section 850.219 of the Final Rule defines parent as a U.S. person that 
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.
    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 section of the Final Rule, 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 will 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 will 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, will be 
aggregated. For the avoidance of doubt, each of these metrics (voting 
interest or voting power of the board) will 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 will not be combined to equal 35 
percent.
    Section 850.206 should be read in connection with Sec. Sec.  
850.302 and 850.402, which 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 Treasury 
Department if the controlled foreign entity undertakes a transaction 
that would be a notifiable transaction if undertaken by a U.S. person, 
respectively.
Sec.  850.208--Covered Activity
    The Proposed Rule identified 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 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'' were 
covered activity, notifiable transaction, and prohibited transaction. 
The term covered activity meant, 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 definitions of notifiable transaction and prohibited 
transaction in the Proposed Rule identified specific covered activities 
relevant to the technologies or products within each category. Some 
such covered activities related to semiconductors and microelectronics 
technology, equipment, and capabilities that enabled the production and 
certain uses of integrated circuits that underpin current and future 
military innovations that improved the speed and accuracy of military 
decision-making, planning, and logistics, among other things; as well 
as that enabled mass surveillance or other cyber-enabled capabilities. 
The Proposed Rule also addressed covered activities related to quantum 
information technologies and products that enabled capabilities that 
could have compromised 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 
would have avoided covering use cases in strictly civilian fields. 
Finally, the Proposed Rule addressed covered activities related to 
certain AI systems with applications that posed or had the potential to 
pose significant national security risks. The Proposed Rule did not 
seek to broadly capture AI systems intended only for commercial 
applications or other civilian end-uses that did not have potential 
national security consequences.
    The Treasury Department received several comments related to the 
definition of covered activity that focused on certain aspects of the 
definitions of notifiable transaction and prohibited transaction. Those 
comments are discussed in the sections below on notifiable transaction 
and prohibited transaction.
    In the Final Rule, the Treasury Department adopts Sec.  850.208 
without change from the Proposed Rule. Covered activity means, in the 
context of a particular transaction, any of those activities included 
in the definition of notifiable transaction in Sec.  850.217 or 
prohibited transaction in Sec.  850.224. The term covered activity 
encompasses technologies and products that may contribute to the threat 
to the national security of the United States by cross-referencing the 
definition of notifiable transaction and also incorporates those 
technologies and products that pose a particularly acute national 
security threat by cross-referencing the definition of prohibited 
transaction. The scope of notifiable transaction and the scope of 
prohibited transaction are intended to be distinct and not overlap. The 
Treasury Department intends the notification requirement to increase 
the U.S. Government's visibility into U.S. person transactions 
involving the relevant technologies and products and expects that these 
notifications will be helpful in highlighting aggregate sector trends 
and related capital flows as well as informing future policy 
development. The prohibitions are 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 Final Rule were scoped with these 
objectives in mind.
Sec.  850.209--Covered Foreign Person
    The Outbound Order requires the Treasury Department 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

[[Page 90409]]

technologies and products.'' The definition of covered foreign person 
in the Proposed Rule described three sets of circumstances that would 
have caused a person to be a covered foreign person:
     A person of a country of concern that engages in a covered 
activity (Sec.  850.209(a)(1));
     Any person that has a particular relationship with a 
person of a country of concern that engages in a covered activity--
i.e., where (1) the person holds a specific interest in such person of 
a country of concern, such as a voting interest, board seat, 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); 
and if there is such an interest, (2) more than 50 percent of the first 
person's revenue, net income, capital expenditure, or operating 
expenses is attributable to such person of a country of concern, 
individually or in the aggregate (Sec.  850.209(a)(2)); or
     A person of a country of concern that participates in a 
joint venture with a U.S. person if such joint venture engages or 
intends to engage in a covered activity (Sec.  850.209(a)(3)).
    One commenter stated that the definition of a covered foreign 
person in Sec.  850.209(a)(1) would impact a broad range of businesses 
and activities because the definition of ``national security 
technologies and products'' in the Proposed Rule was ``obscure.'' The 
Treasury Department notes that ``national security technologies and 
products'' was not a defined term in the Proposed Rule, although the 
Outbound Order does refer to ``covered national security technologies 
and products'' as noted above in the discussion of Sec.  850.208. The 
Outbound Order directs the Treasury Department to issue regulations 
that identify categories of notifiable transactions as well as 
categories of prohibited transactions that involve ``covered national 
security technologies and products.'' Both the Proposed Rule and this 
Final Rule define notifiable transaction and prohibited transaction, 
and the definition of a covered activity in Sec.  850.208 of the Final 
Rule specifies that it refers to ``any of the activities referred to'' 
in those definitions. The commenter did not offer concrete suggestions 
regarding where or how any of the foregoing defined terms could be 
modified.
Covered Foreign Person--``Engages In''
    A number of commenters suggested that the term ``engages in,'' as 
used in Sec.  850.209(a)(1) of the Proposed Rule to connect a person of 
a country of concern to a covered activity, should be further defined 
or clarified. One commenter stated that without further clarification, 
``engages in'' could include ancillary activities such as the ownership 
of intellectual property, the direction of other companies' or 
entities' activities, or involvement in covered activities by an 
affiliate of the investment target. Another commenter requested clearer 
criteria linked to financial or business activities to avoid 
overbreadth.
    As used in Sec.  850.209(a)(1), the function of ``engages in'' is 
simply intended to provide a link between the person of a country of 
concern and the specified activities described in detail in Sec. Sec.  
850.217 (notifiable transaction) and 850.224 (prohibited transaction) 
(which, taken together, comprise the definition of covered activity in 
Sec.  850.208). In other words, the language ``engages in'' is a 
succinct way to capture the activities described in Sec. Sec.  850.217 
and 850.224, such as designs, fabricates, packages, develops, and 
produces, among other things. The Treasury Department therefore 
considers the criteria for a covered activity to be sufficiently clear 
given the specificity with which the enumerated covered activities are 
described in relevant part in Sec. Sec.  850.217 and 850.224 of the 
Final Rule. Similarly, various ancillary activities noted by commenters 
in response to this provision, as well as in response to the definition 
of covered transaction in Sec.  850.210 (see the discussion of covered 
transaction below), would not be within the scope of the Final Rule if 
they do not meet the criteria set forth in the definition of a covered 
transaction (including the terms used in that definition).
    One commenter asked that the rule distinguish between activities 
that are legitimately part of a person of a country of concern's normal 
operations and those activities that might be conducted by individual 
employees or without the guidance or supervision of a person of a 
country of concern's management. One commenter asked that the Treasury 
Department clarify that an entity must directly implement the covered 
activity.
    Regarding the distinction that one commenter raised between a 
covered activity that is known to a person of a country of concern 
investment target and employee-level activity that is not authorized by 
or not known to an investment target's management, under the Final 
Rule, whether or not a transaction is a covered transaction depends in 
part on whether the U.S. person knows, based on a reasonable and 
diligent inquiry, that the investment target or relevant transaction 
counterparty (such as a joint venture) is a covered foreign person. It 
may be the case that if the investment target itself was unaware that 
its employees were engaging in a covered activity, the U.S. person 
would not have reason to know that the investment target was engaging 
in a covered activity, particularly if no other information was 
available to indicate the presence of such activity. In response to one 
commenter's question about whether an entity must ``directly 
implement'' a covered activity, absent other facts (such as an intent 
to evade the Final Rule), to be assessed to be ``engaging in'' a 
covered activity, a person of a country of concern would need to 
perform one of the specific actions set forth in either Sec.  850.217 
or Sec.  850.224. To be assessed to be ``engaging in'' a covered 
activity described in Sec.  850.217(a), for example, would require that 
the relevant person of a country of concern itself designs the 
integrated circuit, as described in that paragraph.
    One commenter suggested that a person of a country of concern 
should be considered to ``engage'' in a covered activity only if it 
either conducts or participates in a covered activity or has a 
``demonstrated business objective'' to conduct or participate in a 
covered activity. The Treasury Department declines to make the changes 
suggested in this comment. The use of the language ``conducts or 
participates'' in place of ``engages in'' is not necessary given the 
Treasury Department's explanation of the role of ``engages in'' above, 
and the use of two verbs instead of one could introduce ambiguity. 
Regarding a ``demonstrated business objective,'' under the Final Rule, 
a U.S. person is responsible for information such person knew or should 
have known, following its own ``reasonable and diligent inquiry,'' as 
to whether a person of a country of concern ``engages in'' a covered 
activity. While such inquiry may take into account any ``demonstrated 
business objectives,'' identification of a ``demonstrated business 
objective'' is not necessary for a person of a country of concern to 
``engage'' in a covered activity, nor is the identification of such an 
objective necessarily part of a ``reasonable and diligent inquiry.'' In 
addition, and independently, the Treasury Department believes that a 
person of a country of concern ``engaging in'' a covered activity 
raises national security

[[Page 90410]]

concerns regardless of whether such activity comprises a ``business 
objective'' at that time. For example, early-stage entities may develop 
certain technologies that are not yet part of a ``business objective,'' 
but might become so later. In addition, and independently, a 
``demonstrated business objective'' can frequently refer to future 
intent, while ``engages in'' as used in Sec.  850.209(a)(1) refers to 
the underlying activities of an investment target at the time of the 
covered transaction, although this does not remove from coverage 
certain transactions intended to evade the Final Rule, such a covered 
foreign person's raising capital from a U.S. person investor for the 
specific purpose of ``engaging in'' a covered activity. (See further 
discussion of this issue below.)
    Commenters asked about the temporal aspects of ``engages in.'' One 
recommended that ``engages in'' require that engagement in a covered 
activity be ``active and ongoing,'' while another commenter asked 
whether past activity, ceased at the time of a transaction, would be 
covered. One suggested a definition of ``engages in'' to address both 
their questions about the temporal scope of ``engages in'' as well as 
their requested inclusion of a de minimis threshold (discussed further 
below), which would define ``engages in'' as: ``(a) conducts or 
participates in a covered activity or (b) has a demonstrated business 
objective to conduct or participate in a covered activity.''
    The Treasury Department has determined not to change Sec.  
850.209(a)(1) in the Final Rule. The Treasury Department notes that in 
the context of Sec.  850.209(a)(1), ``engages in,'' which is phrased in 
the present tense, refers to a person performing the specific actions 
described in detail in Sec. Sec.  850.217 and 850.224 at the time of a 
transaction, and does not have retroactive applicability. A person of a 
country of concern ``engaging in'' the covered activity described in 
Sec.  850.217(a), for example, would require that the person of a 
country of concern itself designs the integrated circuit, as described 
in that paragraph, at the time of a covered transaction. While the use 
of the present tense of the verb ``engages'' is deliberate, a person of 
a country of concern cannot avoid application of the Final Rule simply 
by ceasing the covered activity during fundraising only to resume the 
covered activity following the fundraising (see Sec.  850.604). Nor 
does the present tense remove from coverage a person of a country of 
concern that, for example, is raising capital from a U.S. person 
investor for the specific purpose of ``engaging in'' a covered 
activity. In other words, ``engages in'' refers to an attribute of an 
entity's business, not a condition that it be continuously occupied 
with a particular activity.
    Several commenters requested that the Treasury Department consider 
a de minimis activity threshold in the definition of a covered foreign 
person as it relates to their ``engagement'' in a covered activity, 
below which the definition of covered foreign person would not apply. 
Several commenters stated that compliance challenges could arise 
without such a threshold, including ambiguity in the definition of 
covered foreign person. One commenter noted that such a threshold would 
be necessary to avoid unintended consequences for transactions that 
have no nexus to national security because the covered activity 
``engaged in'' by the investment target may be unrelated to the 
transaction itself.
    The Treasury Department declines to institute a de minimis 
exception with respect to the ``engages in'' language of Sec.  
850.209(a)(1). Setting a de minimis threshold based on the level of 
activity involving a covered technology or product would be challenging 
from a regulatory and administrative perspective and would likely 
introduce ambiguity. In response to comments regarding ambiguity in the 
Proposed Rule's formulation (which has been adopted without changes in 
the Final Rule), the Treasury Department reiterates that any amount of 
a covered activity by a person of a country of concern is sufficient 
for such person to be defined as a covered foreign person in the Final 
Rule. This is because the Treasury Department has determined that 
national security concerns arise in the context of any amount of such 
activity by a person of a country of concern, particularly in the 
context of early-stage companies and/or emerging technologies, the 
rapid expansion of which could be significantly aided by the intangible 
benefits provided by a U.S. person investor. Regarding one commenter's 
contention that without a de minimis threshold transactions that lack a 
national security nexus but where the transaction counterparty 
undertakes de minimis covered activities completely unrelated to the 
transaction would be prohibited, the commenter does not provide a 
specific suggestion for how a de minimis threshold would be defined or 
operationalized, or how the Treasury Department could ascertain that a 
transaction is ``completely unrelated'' to the covered activity given 
that intangible benefits often accompany investments by U.S. persons 
that help companies succeed, and there is no apparent mechanism by 
which the company-wide benefits conferred by a U.S. person could be 
relegated only to those operations of an investment target that do not 
raise national security concerns. However, the definitions of covered 
activities in Sec. Sec.  850.217 and 850.224 are narrow and precise, 
and in the context of Sec.  850.209(a)(1) they apply directly to a 
given person of a country of concern and not to an investment target's 
holding companies or other members of a corporate group.
Section 850.209(a)(2)
    Commenters made suggestions related to the scope of Sec.  
850.209(a)(2) or requested clarification of this paragraph's 
application. Commenters discussed the costs related to conducting due 
diligence to determine whether Sec.  850.209(a)(2) applies to a person 
receiving investment from a U.S. person. One commenter noted that a 
U.S. person may need to rely on an investment target to supply the 
information required to determine the applicability of Sec.  
850.209(a)(2). The Treasury Department has provided further information 
in the discussion of the knowledge standard (see discussion under 
Subpart A above) to address a ``reasonable and diligent inquiry'' in 
situations where a U.S. person may have no source other than an 
investment target to supply information necessary to determine the 
applicability of the Final Rule.
    Several commenters requested that the Treasury Department clarify 
whether an investment in a parent or holding company would be defined 
as an indirect covered transaction only when a downstream entity meets 
one of the thresholds set forth in Sec.  850.209(a)(2) and further 
requested that the Treasury Department provide additional guidance as 
to how certain transactions, such as acquisitions through special 
purpose vehicles, would be treated under the rule. These commenters 
also requested that the Treasury Department clarify that if the 
acquisition of a company that is not a person of a country of concern 
does not meet the thresholds in Sec.  850.209(a)(2), then both the 
direct acquisition of the company and the indirect acquisition of its 
interest in its subsidiary are not covered transactions. One such 
commenter wrote that Sec.  850.209(a)(2) would be ``meaningless'' 
unless the definition of an indirect covered transaction was clarified 
to exclude investments into targets that have subsidiaries that fall 
short of the financial thresholds specified in Sec.  850.209(a)(2)(i) 
through (iv) because,

[[Page 90411]]

for example, ``investing in a parent company outside a country of 
concern would be `indirectly' investing in any of its subsidiaries that 
was a covered company, even if such a subsidiary only accounted for 1 
percent of its revenues and expenses.''
    The Treasury Department notes that the bright-line criteria set 
forth in Sec.  850.209(a)(2) are for purposes of determining whether a 
person is a covered foreign person but are not intended to exclude the 
possibility that other transactions involving intermediary entities 
could be a covered transaction under Sec.  850.210, and therefore the 
Treasury Department declines to categorically exclude from coverage any 
and all indirect transactions through persons falling outside of Sec.  
850.209(a)(2). As explained in the Proposed Rule and as further 
addressed in the Final Rule (see Note 1 to Sec.  850.210), the 
definition of covered transaction includes indirect transactions, 
including when a U.S. person uses an intermediary entity or acquisition 
vehicle to engage in a transaction that would be a covered transaction 
if engaged in directly by the U.S. person. See the discussion of Sec.  
850.210 (covered transaction) below for additional discussion of an 
``indirect'' covered transaction.
    Furthermore, meaningful distinctions exist between the scope of 
Sec.  850.209(a)(2) and an indirect covered transaction under Sec.  
850.210(a) in both the Proposed Rule and in the Final Rule. Section 
850.209(a)(2) defines certain investment targets, wherever located, as 
covered foreign persons given the significance of their financial ties 
with one or more covered foreign persons. In such a case, absent an 
exception, a U.S. person's acquisition of an equity interest in such 
entity is a covered transaction.
    One commenter requested clarification as to whether the application 
of Sec.  850.209(a)(2) ``goes through the group or the portfolio 
company'' as well as guidance as to the treatment of subsidiaries and 
affiliates of the company in which a U.S. person invests. Because this 
comment lacks specific information about the relationship between and 
among a ``group,'' a ``portfolio company,'' or ``subsidiaries and 
affiliates,'' the Treasury Department is unable to provide the specific 
information requested beyond the bright-line definitions provided in 
the Final Rule. As to the general topic of a U.S. person investment 
into a ``group'' but not a portfolio company, various parts of the 
Final Rule, including but not limited to Sec.  850.209(a)(2), specify 
those scenarios in which an investment could be a covered transaction 
even if the immediate investment target is not itself a person of a 
country of concern engaged in a covered activity.
    One commenter asked whether, if a U.S. person owns an entity in a 
country of concern that is engaged in a covered national security 
technology or product, the U.S. person as well as the entity in a 
country of concern would be a covered foreign person and whether ``the 
50% rule described in the [Proposed Rule]'' would be applicable. This 
query contains insufficient information about the relationships between 
and among the U.S. person, the other entity, and a country of concern--
for example, information that would aid determination of whether an 
entity ``in'' a country of concern would meet the definition of a 
person of a country of concern, and information that would aid 
determination of whether the U.S. person's relationship with the former 
entity would meet the definition of a controlled foreign entity in 
Sec.  850.206--for the Treasury Department to provide specific guidance 
on the hypothetical given. However, as a general matter, Sec.  
850.209(a)(2) could apply to a U.S. person entity that meets the 
criteria in that provision regarding interest in, and financial metrics 
attributable to, a covered foreign person.
    Two commenters requested additional guidance regarding how the 
financial metrics cited in the Proposed Rule, i.e., revenue and 
operating expenses, are calculated for the purposes of the application 
of Sec.  850.209(a)(2). The Treasury Department notes that Section 
850.209(b) refers to an ``audited financial statement,'' and the 
Treasury Department anticipates that such statements, which typically 
include those financial metrics covered by Sec.  850.209(a)(2), will 
have been prepared in accordance with the applicable accounting rules 
and conventions of the relevant jurisdiction. (The Treasury Department 
also notes that Sec.  850.209(b) provides for alternatives in the event 
an audited financial statement is unavailable.)
    Several commenters suggested that the Treasury Department attribute 
the requirement in Sec.  850.209(a)(2) to a single entity, rather than 
aggregating among entities, or provide clarification for how 
aggregation would be applied. Additionally, commenters requested that 
the rule institute a de minimis threshold for a person's vested 
interest in a covered foreign person that would narrow the scope of 
Sec.  850.209(a)(2). Suggested approaches included de minimis 
thresholds for a covered activity (discussed above in connection with 
Sec.  850.209(a)(1)) or a de minimis threshold connected to the 
investment target's ownership interest in a covered foreign person. One 
commenter suggested excluding from such calculations entities in which 
a U.S. person owns less than 10 percent of the outstanding voting power 
or equity because a transaction counterparty's finances may aggregate 
revenues or expenses across a substantial number of unrelated companies 
and assets, while another suggested that any voting or equity interest 
under 25 percent held by an entity be excluded from the calculations 
under Sec.  850.209(a)(2). One commenter suggested that as an 
alternative, the Treasury Department could draw on certain definitions 
from the CFIUS regulations related to controlling transactions and 
certain non-controlling, non-passive investments to more clearly 
explain when a person that is not a covered foreign person would have a 
requisite interest in a covered foreign person to qualify under this 
provision.
    In response to the comments, the Treasury Department has modified 
Sec.  850.209(a)(2) of the Final Rule to note that for the purposes of 
calculating whether one or more persons of a country of concern engaged 
in a covered activity exceed the financial thresholds enumerated in 
Sec.  850.209(a)(2)(i) through (iv), only those persons of a country of 
concern engaged in a covered activity in which the relevant person 
directly or indirectly holds an interest specified in (a)(2) will be 
considered. Such an interest as specified in Sec.  850.209(a)(2) is any 
of the following: a board seat on, a voting or equity interest (other 
than through securities or interests that would satisfy the conditions 
in Sec.  850.501(a) if held by a U.S. person) in, or any contractual 
power to direct or cause the direction of the management or policies of 
such person of a country of concern engaged in a covered activity.
    In response to comments on considerations for a U.S. person 
conducting due diligence to assess the application of Sec.  
850.209(a)(2), the Final Rule includes in the aggregation calculations 
of the financial thresholds in Sec.  850.209(a)(2)(i) through (iv) only 
those persons of a country of concern (engaged in a covered activity) 
that account for at least $50,000 (or equivalent) of the relevant 
financial metric of the U.S. person's investment target or relevant 
counterparty (such as a JV partner). The $50,000 and above threshold 
for inclusion in the calculation for any given financial metric is 
intended to ensure there is a meaningful financial relationship between 
the investment target and a person of a country of concern and that

[[Page 90412]]

de minimis contributions to any of the financial metrics are not 
required to be included, to address commenter's stated concerns about 
the diligence burden of the calculations required by Sec.  
850.209(a)(2)(i) through (iv).
    For example, if an investment target holds a board seat on a person 
of a country of concern engaged in a covered activity and such person 
of a country of concern contributed $100,000 to the investment target's 
revenue for the most recent year, this contribution will be included in 
determining whether the 50 percent threshold in Sec.  850.209(a)(2)(i) 
is exceeded. However, if an investment target holds a board seat on a 
person of a country of concern engaged in a covered activity and such 
person of a country of concern contributed $25,000 to the investment 
target's revenue for the most recent year, this contribution will not 
be included in determining whether the 50 percent threshold in Sec.  
850.209(a)(2)(i) is exceeded. Each metric will be evaluated 
independently in applying this rule. For example, if an investment 
target holds a board seat on a person of a country of concern engaged 
in a covered activity and such person of a country of concern engaged 
in a covered activity contributed $25,000 of the investment target's 
revenue for the most recent year and accounted for $100,000 of the 
investment target's capital expenditure for the most recent year, the 
revenue contribution will not be considered for purposes of applying 
Sec.  850.209(a)(2)(i) but the capital expenditure allocation will be 
considered for purposes of applying Sec.  850.209(a)(2)(iii).
    The Treasury Department determines that the above change will make 
necessary information easier for a U.S. person to ascertain, and 
addresses issues raised by commenters regarding due diligence 
considerations. Such minimum financial thresholds on which 
contributions are to be included in the aggregations may reduce the 
number of persons of a country of concern engaged in a covered activity 
that must be considered for the purposes of aggregating across such 
persons of a country of concern with respect to a given financial 
metric calculation, and, consistent with the intent of the provision to 
capture investment targets or transaction counterparties with 
substantial ties to persons of a country of concern engaged in covered 
activities, such thresholds help ensure that only significant financial 
ties are included.
    The Treasury Department declines to adopt a de minimis threshold, 
as suggested by some commenters, for an investment target or 
transaction counterparty's equity or voting interest in a person of a 
country of concern engaged in a covered activity. Thresholds such as 10 
percent or 25 percent, as suggested by some commenters, could exclude 
downstream investments in a covered foreign person with which the 
immediate investment target has a significant relationship. A minimum 
financial threshold, rather than excluding entities based on an 
investment threshold, addresses this issue, and additionally and 
independently, such a financial threshold is comparatively difficult to 
manipulate for the purpose of avoiding or evading this provision. The 
Treasury Department also declines to incorporate the suggested 
definitions from the CFIUS regulations given the differences in these 
programs. For example, the concept of ``control'' in the CFIUS context 
is a heavily fact dependent determination that is assessed by CFIUS for 
every transaction filed with CFIUS, whereas the Treasury Department 
uses a threshold approach in Sec.  850.209(a)(2) for ease of 
administrability for transaction parties who will be determining 
coverage under this rule themselves.
    One commenter requested that for the purposes of determining 
covered foreign person status under Sec.  850.209(a)(2), a person who 
receives more than 50 percent of revenue or net income from publicly 
traded securities, or index funds, mutual funds, exchange-traded funds, 
or similar instruments (including associated derivatives) should be 
excepted. The Treasury Department views the likelihood of a U.S. person 
transferring intangible benefits in such a situation where an 
investment target's only relationship with a person of a country of 
concern engaged in a covered activity is the holding of certain 
securities identified in the exception set forth in Sec.  850.501(a) to 
be similar to the situation where a U.S. person directly acquires or 
holds such securities. The Treasury Department has therefore modified 
Sec.  850.209(a)(2) in the Final Rule to specify that, for purposes of 
determining whether an entity holds an equity or voting interest within 
the meaning of Sec.  850.209(a)(2), the holding of securities or 
interests that would satisfy the conditions in Sec.  850.501(a) if held 
by a U.S. person will not be included.
    The Treasury Department has made additional changes to Sec.  
850.209(a)(2) to reflect comments and enhance clarity. These include 
the removal of an explicit reference to ``one or more contractual 
arrangements, including, for the avoidance of doubt, variable interest 
entities'' from the Proposed Rule, which modified the reference to a 
person's having ``any power to direct or cause the direction of the 
management or policies of'' a person of a country of concern engaged in 
a covered activity. This change is to enhance readability and is not 
intended to alter the meaning of this provision. The Treasury 
Department emphasizes that ``contractual power to direct or cause the 
direction of the management or policies'' can be granted through 
variable interest entities.
    As modified in the Final Rule, Sec.  850.209(a)(2) continues to 
focus on the significance of the financial relationship between an 
investment target and one or more covered foreign persons while 
addressing commenter concerns related to diligence of the downstream 
entities' activities. 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 
Treasury Department expects that through a ``reasonable and diligent 
inquiry'' a U.S. person will be able to determine whether a potential 
investment target meets the applicable conditions. The Treasury 
Department understands that multiple entities may need to be considered 
in this aggregation, but investment targets with significant financial 
ties with downstream entities, as demonstrated by meeting any of the 
thresholds in 850.209(a)(2)(i)-(iv), should be able to answer questions 
from a U.S. person investor during due diligence about the application 
of Sec.  850.209(a)(2), and/or to provide relevant representations and 
warranties. The Treasury Department has also made additional changes to 
Sec.  850.209(a)(2) for clarity; no additional substantive changes were 
intended.
    One commenter suggested that Sec.  850.209(a)(2) consider only 
consolidated revenue and net income because, among other things, they 
are easier to obtain in the ordinary course of business than the other 
metrics. The Treasury Department declines to adopt this change because 
information about capital expenditure and operating expenses should 
generally be available. In addition, and independently, considerations 
related to the ease of obtaining this information are outweighed by the 
national security concerns that would be implicated by not covering an 
entity under Sec.  850.209(a)(2) that incurs more than 50 percent of 
its capital expenditure or operating expenses through a covered foreign 
person. In addition, and independently, the Treasury Department wishes 
to address situations in which a U.S. person is investing in an 
intermediate entity that acts as a vehicle for investment into early-
stage

[[Page 90413]]

companies engaged in capital-intensive covered activities. Such 
companies may generate little or no revenue or income in their early 
stages, and yet the Final Rule is designed to prevent the transfer of 
U.S. person intangible benefits to such investment targets given the 
significance of the financial ties that do exist between the U.S. 
person and the person of a country of concern engaged in a covered 
activity.
    One commenter suggested that the Final Rule ``harmonize'' the 
thresholds in Sec.  850.209(a)(2) with other parts of the rule, such as 
the threshold for determining control in the case of a controlled 
foreign entity, in order to avoid confusion. The Treasury Department 
has set bright-line thresholds in various provisions in the Final Rule 
and each threshold set forth in the Final Rule serves a distinct 
function and is underpinned by distinct considerations, such that 
adjusting them to be identical would not serve the policy goals of the 
Final Rule.
    One commenter stated that this provision aligned with the policy 
goals of the Proposed Rule and suggested that because the thresholds in 
850.209(a)(2) are based on the most recent available financial 
statement, U.S. persons should have a grace period to reduce their 
financial ties with covered foreign persons. Because the analysis to 
determine the application of Sec.  850.209(a)(2) must occur at the time 
of a transaction, the Treasury Department does not determine that a 
grace period is necessary; if a transaction would be a prohibited 
transaction, it should not be entered into, while an investment that is 
permitted at the time of the transaction does not need to be divested 
later due merely to post-transaction changes in an investment target's 
finances or activities of which the U.S. person did not have knowledge 
at the time of the investment. In addition, and independently, an 
entity into which U.S. person investment may be a covered transaction 
under Sec.  850.209(a)(2) that wishes not to meet the criteria of Sec.  
850.209(a)(2) can take as little or as much time as it needs to reduce 
its underlying exposure to relevant covered foreign person(s), 
obviating the need for a set grace period.
    Commenters also raised suggestions relating to the time at which a 
determination of the applicability of Sec.  850.209(a)(2) is made. One 
commenter noted that the financials of a given target company could 
change over time, which could complicate compliance for investors that 
wish to participate in multiple funding rounds and could ``have a 
dramatic chilling effect.'' The commenter also suggested exempting 
subsequent funding rounds from the notification requirements absent a 
material change or allowing an amendment of a prior notification. In 
response to this comment, the Treasury Department clarifies that 
because the analysis to determine the application of Sec.  
850.209(a)(2) must occur at the time of a transaction using the 
information set forth in Sec.  850.209(b), in the context of a single 
investment, fluctuations in an investment target's finances prior or 
subsequent to the relevant time period are not relevant to the 
operation of Sec.  850.209(a)(2). With respect to notifiable 
transactions, the Treasury Department is interested in understanding 
the volume and nature of investments involving the identified 
technologies and products and therefore exempting or excepting 
subsequent funding rounds from the notification requirement will not 
serve the objectives of the Outbound Order. As discussed more below 
(see content of notifications), the Treasury Department is exploring 
the ability to allow follow-on notifications involving the same U.S. 
person and covered foreign person to be able to incorporate information 
from a prior notification within the electronic system for submission 
of notifications.
    The Treasury Department declines to create an exemption or 
exception for a transaction simply because it is part of a subsequent 
funding round, in Sec.  850.209(a)(2) or elsewhere. Such an exception 
or exemption could reduce U.S. Government visibility into certain 
follow-on investments and open a loophole by permitting investments 
that would otherwise be prohibited transactions.
    One commenter suggested that the measurements set forth in Sec.  
850.209(a)(2) be applied at the time of final closing in the case of a 
closed-end fund, but at the time of an investment by a U.S. person in 
the case of an open-end fund. Due to the ambiguities such an approach 
might introduce, as well as the potential for evasion or avoidance that 
such a differentiated approach could create, the Treasury Department 
declines to adopt this suggested change in the Final Rule.
    One commenter requested that the Treasury Department consider 
making U.S. person transactions in entities meeting the criteria of 
Sec.  850.209(a)(2) notifiable only, even in cases where an underlying 
entity is engaged in a covered activity enumerated in Sec.  850.224 and 
a prohibition would therefore otherwise apply. The Treasury Department 
declines to adopt this suggestion, as doing so would open a significant 
loophole whereby the intercession of an intermediate entity could, in 
certain circumstances, be used to convert an otherwise prohibited 
transaction into a notifiable transaction, undermining the national 
security objectives that motivate prohibition of certain transactions.
    One commenter suggested striking Sec.  850.209(a)(2) in its 
entirety. Among the reasons given for this suggestion is that a U.S. 
person scoped in as a covered foreign person by this prong may itself 
not be directly engaging in a covered activity, and because this 
coverage could have adverse effects on U.S. companies, including those 
with important commercial sales relationships or technology licensing 
agreements with a person of a country of concern that is engaged in a 
covered activity. This commenter suggested replacing the Proposed 
Rule's Sec.  850.209(a)(2) language with the following: ``(2) Any 
entity in which a foreign national, foreign government, foreign entity, 
or another covered foreign person holds a 50% ownership interest and 
engages in a covered activity.'' In response to this comment, the 
Treasury Department notes that in order for a U.S. person to be scoped 
in as a covered foreign person under Sec.  850.209(a)(2), the U.S. 
person would first have to have a specified relationship with a person 
of a country of concern that is engaged in a covered activity and 
second, also be significantly financially connected, as discussed 
above. The mere fact that a U.S. company has commercial sales 
relationships or technology licensing agreements, without more, is 
unlikely to meet the criteria. However, where the criteria under Sec.  
850.209(a)(2) is met even in the case of a U.S. person, there is a 
policy desire to address that situation given there is a meaningful 
relationship with, one or more persons of a country of control engaged 
in covered activities. This approach addresses both the potential for 
evasion and accounts for the range of geographic and organizational 
structures commonly used by multinational firms to manage their 
business activities. As one commenter stated, ``most investments are 
made through holding companies and not directly in operating 
companies,'' underscoring the importance of retaining this provision. 
Further, the alternate definition for Sec.  850.209(a)(2) suggested by 
the commenter referring to, e.g., a ``foreign national'' or ``foreign 
person,'' could regulate transactions that involve a person of a third 
country but do not involve a person with any relationship to a person 
of a country of concern and therefore exceeds the authorities granted

[[Page 90414]]

to the Treasury Department by the Outbound Order.
    Commenters noted the potential extraterritorial application of 
Sec.  850.209(a)(2). One commenter stated that a third-country entity 
``should not be regarded as the same as a person of a country of 
concern.'' Another commenter stated that including entities 
incorporated outside of a country of concern but that have subsidiaries 
in a country of concern could limit investments that draw manufacturers 
of semiconductor components and suppliers away from the PRC market, 
negatively impacting U.S. competitive and national security interests. 
The Treasury Department assesses that certain transactions with an 
entity that is not a person of country of concern engaged in a covered 
activity but nevertheless has an interest in, as well as a significant 
financial relationship with, a person of country of concern engaged in 
a covered activity, have a similar potential of exacerbating the threat 
identified in the Outbound Order as do transactions with persons of a 
country of concern engaged in a covered activity, and notes that Sec.  
850.209(a)(2) addresses a common transaction structure whereby 
investments are made into parent companies or holding companies. In 
addition, and independently, Sec.  850.209(a)(2) does not, in fact, 
treat non-country of concern entities the same as country of concern 
entities, because an entity that is not a person of a country of 
concern, and engages in a covered activity, would not be a covered 
foreign person under Sec.  850.209(a)(1) of the Final Rule, whereas a 
person of a country of concern would be.
    One commenter stated that Sec.  850.209(a)(2) may prevent a U.S. 
person from making investments in the national security interest of the 
United States, and multiple commenters suggested the Treasury 
Department may wish to create a licensing regime to facilitate the 
approval of investments where appropriate. In response, the Treasury 
Department notes that a U.S. person could seek a national interest 
exemption from the notification requirement or prohibition set out in 
the Final Rule by following the process described in Sec.  850.502 and 
further discussed below. The Treasury Department anticipates that this 
exemption of a covered transaction where in the national interest would 
be granted by the Secretary in exceptional circumstances, unlike a 
licensing regime which is typically more frequent.
    The Final Rule also makes changes to Sec.  850.209(b), which 
establishes how a person's revenue, net income, capital expenditure, 
and operating expenses are to be ascertained. One commenter suggested 
that where an annual financial statement is unavailable, a U.S. person 
could be permitted to rely on independent appraisals or good faith 
estimates. The Treasury Department has adopted language similar to this 
suggestion in Sec.  850.209(b)(1) of the Final Rule, as it 
pragmatically addresses situations in which no financial statement is 
available. Under Sec.  850.209(b)(1) of the Final Rule, for purposes of 
identifying any of a person's overall revenue, net income, capital 
expenditure, operating expenses, and the relevant contributions of one 
or more covered foreign persons, calculations are to be based on an 
audited financial statement from the most recent year. If an audited 
financial statement is not available, the most recent unaudited 
financial statement is to be used instead. If no financial statement is 
available, an independent appraisal is to be used instead. If no 
independent appraisal is available, a good-faith estimate is to be used 
instead.
    This provision is intended to apply independently to the 
ascertainment of each metric or figure. For example, if overall revenue 
is available in an audited financial statement from the most recent 
year, but the specific contributions of persons of a country of concern 
engaged in a covered activity are only available via good-faith 
estimates, then an audited financial statement is to be used to 
calculate overall revenue, but a good-faith estimate is to be used to 
calculate the individual revenue contributions of such persons of a 
country of concern engaged in a covered activity.
    The Final Rule also adds Sec.  850.209(b)(2) to address the 
calculation of exchange rates for the purpose of determining whether 
the contribution of a person of a country of concern engaged in a 
covered activity falls beneath the $50,000 (or equivalent) threshold in 
cases where the relevant amounts were not in U.S. dollars or where a 
financial statement did not already convert such figures into U.S. 
dollar equivalent. In such cases, the most recent published rate of 
exchange available on the Department of the Treasury's website is to be 
used instead. Such rates are published quarterly and are not spot 
exchange rates.
    Finally, the Final Rule adds a Note 1 to Sec.  850.209 to clarify 
that references in that section to revenue, net income, capital 
expenditure, or operating expenses refer to overall revenue, net 
income, capital expenditure, or operating expenses, as applicable, 
without subtracting amounts attributable to a person of a country of 
concern engaged in a covered activity of less than $50,000 (or 
equivalent).
    A number of commenters requested the Treasury Department reconsider 
its decision in the Proposed Rule not to issue a list of entities that 
are covered foreign persons. The Treasury Department has further 
considered these commenter requests and declines to issue such a list 
in the Final Rule. Compiling and then publishing 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. For 
example, such a list may not capture early-stage companies that would 
meet the definition of a covered foreign person but may not have come 
to the attention of the Treasury Department. Even if such a list were 
illustrative or non-exhaustive, market actors may incorrectly determine 
that entities not listed are therefore not covered foreign persons and 
may decline to undertake the ``reasonable and diligent inquiry'' 
described in the Final Rule. Another independent reason for this 
decision is that providing a list of covered foreign persons could also 
result in attempts to evade the Final Rule through corporate 
restructuring, creating a greater enforcement burden, undermining the 
national security goals of the Outbound Order, and adding the burden of 
maintaining such a list. Additionally, a list of entities may be 
misleading, because some investments in a given entity may be permitted 
(e.g., a purchase of a small number of publicly traded shares in such 
entity) while another investment in the same entity (e.g., a 
controlling stake) may be prohibited. Finally, the Treasury Department 
has determined that in the case of early-stage companies, market actors 
making investments have access to more detailed and up to date 
information than the U.S. Government and are therefore in a better 
position to determine whether a transaction is covered under the Final 
Rule, including whether any covered foreign person is involved.
Covered Foreign Person--Final Rule Summary
    The definition of covered foreign person in the Final Rule 
describes three sets of circumstances that will cause a person to be a 
covered foreign person.
    First, under Sec.  850.209(a)(1), a person is a covered foreign 
person if it is a person of a country of concern that is engaged in a 
covered activity.
    Second, under Sec.  850.209(a)(2), a person is a covered foreign 
person even

[[Page 90415]]

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 must meet two conditions. First, the relevant person must 
hold a specified interest in a person of a country of concern that 
engages in a covered activity. That interest can take the form of a 
voting interest or equity interest (other than through securities or 
interests that would satisfy the conditions in Sec.  850.501(a) if held 
by a U.S. person), board seat (voting or observer), or the contractual 
power to direct or cause the direction of the management or policies of 
the person of a country of concern (this could occur, for example, 
through any contractual arrangement with respect to a variable interest 
entity). 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 need to be attributable to the person of a 
country of concern for Sec.  850.209(a)(2) to apply. The first person 
also meets this condition if the person holds a specified 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. However, any 
contributions of less than $50,000 (or equivalent) to any given 
financial metric from any given person of a country of concern engaged 
in a covered activity are not included in the relevant calculations as 
they relate to contributions from such persons toward the relevant 50 
percent thresholds.
    Relatedly, the Treasury Department 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 holds a specified interest in a 
person of a country of concern and such person of a country of concern 
represents 20 percent of the first person's revenue and 31 percent of 
its capital expenditure, these metrics will be evaluated independently 
and not combined to equal 51 percent.
    Under Sec.  850.209(a)(2), the Treasury Department 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 Treasury 
Department 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 Treasury 
Department considers that the investment target itself shall be treated 
as a covered foreign person. Moreover, in setting the 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 Treasury Department expects that through a ``reasonable 
and diligent inquiry'' a U.S. person will be able to determine whether 
a potential investment target meets the applicable conditions.
    Lastly, under Sec.  850.209(a)(3), a person of a country of concern 
will 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.
Sec.  850.210--Covered Transaction
    The Proposed Rule defined a covered transaction to include a U.S. 
person's direct or indirect:
    [ssquf] Acquisition of an equity interest or contingent equity 
interest, or their equivalent, in a covered foreign person;
    [ssquf] 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;
    [ssquf] Conversion of a contingent equity interest or convertible 
debt in a covered foreign person;
    [ssquf] 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 engage in a covered 
activity;
    [ssquf] 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
    [ssquf] Investment as an LP into a non-U.S. person pooled 
investment fund that invests in a covered foreign person.
    Importantly, for each of the above transaction types, the Proposed 
Rule included a specific requirement for what a U.S. person would have 
needed to know or intend for a transaction to be a covered transaction. 
As set forth in the Proposed Rule, a transaction that otherwise had the 
attributes of a covered transaction ordinarily would have been treated 
as a covered transaction only if the relevant U.S. person knew at the 
time of the transaction that the transaction involved, or would have 
resulted in the establishment of, a covered foreign person (or would 
have resulted in a person of a country of concern's engagement in a new 
covered activity). Knowledge for this purpose included both actual 
knowledge and ``reason to know'' of the relevant facts or 
circumstances, as set forth in Sec.  850.216.
Covered Transaction--General Scope
    A few commenters expressed the view that the Proposed Rule expanded 
the scope of transactions that would have been considered covered 
transactions as compared to the ANPRM, with one such commenter noting 
the inclusion of brownfield investment and joint ventures in 
particular. The scope of covered transactions in the Proposed Rule 
addressed a set of circumstances in which a U.S. person could have 
provided intangible benefits to a covered foreign person. Brownfield 
investment was included within the scope of the Proposed Rule because 
the Treasury Department assessed that such an investment, that is, an 
investment into an existing entity that shifts its operations into a 
new covered activity, risked undermining the national security goals of 
the Outbound Order. Similar to brownfield investment, a joint venture 
was included within the scope of covered transaction to cover 
situations in which the transaction structure presented 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.
Acquisition of Equity Interest or Contingent Equity Interest; 
Conversion of Contingent Equity Interest
    The proposed definition of covered transaction in the Proposed Rule 
included the acquisition of an equity interest (or equivalent) in a 
covered foreign person and the acquisition of a contingent equity 
interest, which was defined in 850.205 as a financial instrument that 
did not constitute an

[[Page 90416]]

equity interest at the time of the covered transaction but was 
convertible into, or provided the right to acquire, an equity interest 
in a covered foreign person upon the occurrence of a contingency or 
defined event.
    The proposed definition of covered transaction included as a 
separate basis of coverage the conversion of a contingent equity 
interest or convertible debt in a person that the U.S. person knew at 
the time of conversion was a covered foreign person. As discussed in 
the Proposed Rule, 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 was to gain 
visibility into the circumstances in which contingent interests in a 
covered foreign person would convert. Including the conversion of a 
contingent equity interest or convertible debt in the scope of covered 
transaction would also have addressed circumstances where the 
investment target or borrower was not a covered foreign person at the 
time of the acquisition of the relevant interest but was 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 new 
relationship with a person of a country of concern engaged in a covered 
activity).
    The Treasury Department received a number of comments in connection 
with Sec.  850.210(a)(1) and (3) of the Proposed Rule, which covered 
the acquisition or conversion of a contingent equity interest. One 
commenter indicated that Sec.  850.210(a)(1) of the Proposed Rule, via 
the coverage of indirect acquisitions, could apply to LP investments 
into U.S. funds that are not captured by Sec.  850.210(a)(6). The Final 
Rule clarifies in Note 1 to Sec.  850.210 that for purposes of Sec.  
850.210(a)(1), a U.S. person is not considered to have indirectly 
acquired an equity interest or contingent equity interest in a covered 
foreign person when the U.S. person acquires an LP interest in a 
venture capital fund, private equity fund, fund of funds, or other 
pooled investment fund and that fund then acquires an equity interest 
or contingent equity interest in a covered foreign person. Accordingly, 
absent other facts (such as an intent to evade this rule), a U.S. 
person LP's investment into a U.S. person pooled investment fund would 
not itself be assessed to be a covered transaction. The U.S. person 
pooled investment fund's transaction with or involving a covered 
foreign person is, however, covered by this rule if such a transaction 
meets the definition of a covered transaction, and hence the U.S. 
person pooled investment fund is responsible for making any required 
notification and for refraining from engaging in any prohibited 
transaction. The Treasury Department further clarifies that Sec.  
850.210(a)(6), and not Sec.  850.210(a)(1), describes the types of 
investment made as an LP in a pooled investment fund that are defined 
as a covered transaction, namely acquisitions of an LP interest in a 
venture capital fund, private equity fund, fund of funds, or other 
pooled investment fund where the fund is not a U.S. person and where 
the other criteria set out in Sec.  850.210(a)(6) are met.
    Several commenters requested that the Treasury Department either 
delete or clarify the phrase ``interest equivalent to an equity or 
contingent equity interest.'' In response, the Treasury Department is 
removing references to an ``interest equivalent to an equity or 
contingent equity interest'' from Sec.  850.210(a)(1) and (3) of the 
Final Rule.
    One commenter stated that the Treasury Department should revise the 
definition of a covered transaction such that it does not include a 
transaction whereby a U.S. person underwriter of an initial public 
offering (IPO) takes a ``short-term residual position in the issuer's 
shares in the event of a shortfall in demand'' where the issuer is a 
covered foreign person or otherwise takes possession of the shares of a 
covered foreign person as a market-maker in connection with an IPO. 
(Other commenters requested that similar transactions be excepted 
transactions in the rule; see also discussion of an excepted 
transaction below.) In response to this comment, the Treasury 
Department emphasizes that a U.S. person's acquisition of an equity 
interest in a covered foreign person that is not yet publicly traded 
for the purpose of facilitating an IPO, such as a purchase with the 
intent to create a market for the security or to resell the security on 
a secondary market (e.g., as part of an underwriting arrangement), is a 
covered transaction. The Treasury Department declines to modify the 
definition of covered transaction to exclude such fact patterns, which 
combine the acquisition of an equity interest with the transfer of 
intangible benefits, including enhanced standing and prominence, 
managerial assistance, access to investment and talent networks, market 
access, and enhanced access to additional financing. However, absent 
additional facts, the provision of a service ancillary to an IPO that 
does not include the acquisition of an equity interest (or other 
interests set forth in the definition of Sec.  850.210) is not a 
covered transaction.
    The Treasury Department is modifying the definition of contingent 
equity interest at Sec.  850.205 of the Final Rule, which is referenced 
in Sec.  850.210(a)(1) and (3). (See discussion above under Contingent 
equity interest.) The definition of contingent equity interest in the 
Final Rule refers to a ``financial interest,'' rather than a 
``financial instrument'' as in the Proposed Rule. This change is 
intended to more accurately reflect the Treasury Department's intent to 
cover the acquisition or conversion of interests that are convertible 
into an equity interest or provide the right to acquire equity 
interests. The definition of contingent equity interest in the Final 
Rule also clarifies that debt can constitute a financial interest that 
is convertible into, or provides the right to acquire, an equity 
interest. Because the definition of a contingent equity interest now 
explicitly refers to debt, the reference to the ``conversion of debt to 
an equity interest'' has been removed from Sec.  850.210(a)(3) of the 
Final Rule. Accordingly, to avoid duplication, the Final Rule deletes 
Sec.  850.210(a)(2)(i) (i.e., the reference to the provision of debt 
financing that is convertible to an equity interest, as was included in 
the Proposed Rule) since such a transaction is now covered in the Final 
Rule by Sec.  850.210(a)(1) as an acquisition of a contingent equity 
interest.
    Several commenters stated that the rule should not apply to 
convertible debt financing more broadly or, in the alternative, should 
include a safe harbor for any debt financing provided prior to the 
effective date of the rule. One commenter recommended that debt 
financing should be a covered transaction only if the borrower/
recipient receives proceeds from the transaction or if the debt 
automatically converts upon the occurrence of a specific event. One 
commenter indicated appreciation for the Proposed Rule's clarity that 
the acquisition of a contingent equity interest and subsequent 
conversion of that interest are separate covered transactions. Another 
commenter highlighted that because the acquisition of a contingent 
equity interest and the conversion of that interest are each a covered 
transaction, a U.S. person investor may find itself unable to convert 
its interest if an investment target that is a person of a country of 
concern begins engaging in a covered activity described in Sec.  
850.224 (which defines a prohibited transaction) after the interest was 
initially acquired, such that the conversion would now be prohibited.

[[Page 90417]]

Another commenter asserted that covering both the acquisition and the 
conversion of a contingent interest would have a chilling effect on 
acquisitions of contingent equity that would be notifiable 
transactions, as a U.S. person investor would be uncertain whether it 
would be able to convert its interest in cases in which the covered 
foreign person investment target subsequently pivots to a covered 
activity. The commenter also noted that venture capital firms generally 
begin providing non-monetary benefits as soon as they acquire a 
contingent equity interest and thus, any conversion would not trigger 
the provision of additional intangible benefits. For these reasons, the 
commenter requested that the Treasury Department provide a safe harbor 
(or, in the alternative, a licensing regime) that would permit 
conversion of a contingent equity interest provided that, at the time 
the contingent interest was acquired, the U.S. person did not have 
knowledge that the target intended to engage in covered activities that 
would make conversion of the instrument prohibited.
    The Treasury Department recognizes that the activities of an 
investment target in which a U.S. person holds a contingent equity 
interest could change during the period between a U.S. person's 
acquisition and conversion thereof, and that this could cause a U.S. 
person either to decide not to enter into an investment or to be unable 
to convert an existing contingent interest. To avoid a situation in 
which a U.S. person is prohibited from converting a contingent equity 
interest that was obtained prior to the effective date of the Final 
Rule, the Final Rule provides in Sec.  850.210(a)(3) that conversion of 
a contingent equity interest into an equity interest in a person that 
the U.S. person knows at the time of conversion is a covered foreign 
person is a covered transaction only where the contingent equity 
interest was acquired by the U.S. person on or after the effective date 
of the Final Rule. Permitting a U.S. person to acquire an equity 
interest in a covered foreign person engaged in one of the specific 
covered activities described in the definition of a prohibited 
transaction as a result of converting a contingent equity interest 
acquired on or after the effective date of the Final Rule would create 
a significant loophole that could be exploited and would run counter to 
the goals of the Outbound Order. Like a U.S. person that has obtained 
an equity interest directly, a U.S. person that has obtained an equity 
interest as a result of converting a contingent equity interest is 
positioned to provide intangible benefits that often accompany 
investments by U.S. persons and that help companies succeed. Given this 
outcome, neither a safe harbor beyond the cutoff date for acquisitions 
specified above and in the Final Rule nor a licensing regime would be 
appropriate. The Treasury Department also recognizes that an investor 
that acquires a contingent equity interest in an investment target may 
be able to obtain contractual assurances from the investment target as 
to the nature of its future activities, addressing a situation where 
the activities of the investment target change such that the U.S. 
person would be unable to convert its interest and the target could 
obtain a windfall. In response to one commenter's contention that 
venture capital firms generally begin providing non-monetary benefits 
as soon as they acquire a contingent equity interest, even if this 
statement is descriptively correct as it relates to some investments, 
it does not mean that the Final Rule should not also cover conversions 
of contingent interests given the direct channel for the transfer of 
intangible benefits that such conversions establish between a U.S. 
person and a covered foreign person in many transaction structures. 
Accordingly, the Treasury Department declines to adopt such a 
recommendation.
Provision of Debt Financing
    The Proposed Rule provided that a U.S. person's provision of a loan 
or similar debt financing arrangement to a person that the U.S. person 
knew at the time of the provision was a covered foreign person would 
have been a covered transaction when the debt financing was convertible 
to an equity interest or afforded or would have afforded 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. 
The intent of this provision was to capture lending by a U.S. person 
lender only where such lending involved the acquisition of equity or 
equity-like rights by the U.S. person lender with respect to a covered 
foreign person.
    The Proposed Rule explained that while the issuance of debt secured 
by equity in a covered foreign person would not, absent other 
circumstances, have been a covered transaction, foreclosure on 
collateral that constituted an equity interest in a covered foreign 
person would have constituted the acquisition of an equity interest 
under the Proposed Rule and would have been a covered transaction.
    Several commenters provided input on Sec.  850.210(a)(2) of the 
Proposed Rule. Several commenters focused on a scenario whereby a U.S. 
person lender issues debt for which equity is pledged as collateral and 
forecloses on that collateral at some subsequent point. Some commenters 
urged that the rule not apply to either debt financing secured by 
equity or to foreclosure on such equity. One commenter requested the 
Final Rule permit U.S. lenders to foreclose on or restructure existing 
debt that may be otherwise prohibited if the lender provides a 
notification under the program and attempts to divest as soon as 
practicable. One commenter suggested that the Treasury Department 
clarify that a loan or similar debt financing that is secured using 
equity held as collateral not be considered ``convertible to an equity 
interest'' under Sec.  850.210(a)(2)(i). One commenter indicated 
appreciation for the Proposed Rule's clarity that foreclosure on equity 
in a covered foreign person that secures debt would have been a covered 
transaction. A few commenters recommended that the Treasury Department 
make explicit in the rule that foreclosure on equity used as collateral 
for debt is not a covered transaction.
    One commenter noted that the Proposed Rule could have limited the 
ability of U.S. persons to create supplier relationships with 
counterparts in whom investment was not otherwise prohibited by the 
Proposed Rule--e.g., where convertible equity interests were used for 
purposes of commercial risk mitigation--and requested that supply 
contracts secured through convertible equity interests be carved out of 
the rule.
    Other commenters requested that the rule not apply to secondary 
debt market transactions involving debt secured by equity. A few 
commenters highlighted that purchasers in the debt market do not have 
access to diligence materials or the power to negotiate representations 
from the underlying issuer, while another commenter stated that 
secondary debt market transactions should be carved out because the 
borrower would not receive any proceeds from that secondary 
transaction.
    Commenters also discussed the description in Sec.  
850.210(a)(2)(ii) of the Proposed Rule regarding a lender's ability to 
make management decisions. Several commenters argued that when a lender 
seeks to restructure a delinquent loan, for example to change the 
borrower's management or appoint a

[[Page 90418]]

board member, such actions should not be considered a covered 
transaction. Another commenter sought clarification regarding the 
phrase ``make management decisions'' and inquired as to whether this 
language would encompass standard debt covenants. The commenter asked 
that either such covenants be carved out of the rule or that the rule 
provide further clarity with respect to what activities constitute 
``mak[ing] management decisions.'' In response to the above comments, 
the Final Rule contains changes to Sec.  850.210(a)(2) as well as to 
Note 2 to Sec.  850.210. Note 2 to Sec.  850.210 of the Final Rule 
clarifies that neither the issuance of debt financing secured by equity 
collateral nor the acquisition of such secured debt on the secondary 
market is an ``acquisition of an equity or contingent equity interest'' 
and hence will not, absent other facts, constitute a covered 
transaction. That note also further clarifies, however, that 
foreclosure on collateral where the debtholder takes possession of the 
pledged equity does constitute an acquisition of an equity interest. 
This is so because where a U.S. person obtains an equity interest in a 
covered foreign person, whether as a result of the conversion of a 
convertible interest or foreclosure on collateral that was pledged as 
security, the U.S. person assumes the position of an equity holder in 
the covered foreign person and therefore has the opportunity and 
incentive to provide the types of intangible benefits that the Outbound 
Order and this rule are intended to address.
    As such, foreclosure on equity taken as collateral continues to be 
considered an acquisition of equity for purposes of Sec.  850.210. 
However, in response to relevant comments, Note 2 further clarifies 
that foreclosure on collateral where the U.S. person does not know at 
the time of issuing or acquiring the secured debt that the pledged 
equity was in a covered foreign person does not constitute a covered 
transaction. This addresses the concerns raised by commenters that a 
debtholder may be prevented from foreclosing on equity that was pledged 
as collateral if the entity whose equity was pledged was not engaged in 
a covered activity at the time the debt financing was provided but 
pivots into a covered activity while the debt is outstanding. With this 
change, foreclosure on equity pledged as collateral will constitute a 
covered transaction when a U.S. person has knowledge at both the time 
of the issuance or acquisition of the secured debt, and at the time of 
foreclosure, that the equity is that of a covered foreign person.
    Further, as highlighted by the comments, the Treasury Department 
does not intend to define as a covered transaction foreclosure on 
equity that was taken as collateral prior to the effective date of the 
Final Rule. As such, Note 2 to Sec.  850.210 of the Final Rule 
clarifies that foreclosure on equity pledged prior to the effective 
date of the Final Rule as collateral for secured debt is not a covered 
transaction. Therefore, ``existing'' debt as highlighted by one 
commenter, i.e., a convertible interest acquired in connection with 
debt financing provided prior to the effective date of the Final Rule, 
could be restructured in ways that involve the conversion of such an 
interest without triggering the definition of a covered transaction.
    The Treasury Department agrees with commenters' request for 
clarification of the Proposed Rule's reference to ``mak[ing] management 
decisions'' in Sec.  850.210(a)(2)(ii). The Final Rule revises Sec.  
850.210(a)(2) to specify that the provision of debt financing to a 
person that the U.S. person knows at the time of the provision is a 
covered foreign person is a covered transaction where the debt 
financing affords or will afford the U.S. person an interest in profits 
of the covered foreign person, the right to appoint members of the 
board of directors (or equivalent) of the covered foreign person, or 
other comparable financial or governance rights characteristic of an 
equity investment but not typical of a loan. In the Final Rule, the 
Treasury Department does not intend to cover debt financing unless it 
has these equity-like characteristics or is convertible into an equity 
interest. As noted above, to avoid duplication in light of the revision 
in the Final Rule to the definition of contingent equity interest in 
Sec.  850.205, the Final Rule removes from Sec.  850.210(a)(2) the 
reference to the provision of debt financing that is convertible to an 
equity interest, as was included in the Proposed Rule, since such a 
transaction is covered in the Final Rule by Sec.  850.210(a)(1) as an 
acquisition of a contingent equity interest.

Greenfield or Brownfield Investment

    Under Sec.  850.210(a)(4) of the Proposed Rule, the definition of 
covered transaction included 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 knew that such acquisition, leasing, or 
development would, or the U.S. person intended it to, either (1) 
establish a covered foreign person, such as the acquisition of land in 
a country of concern with the intent to build 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 volume 
advanced packaging. A U.S. person's intent (as distinct from knowledge) 
would have been sufficient in these cases for the transaction to be a 
covered transaction. This was because in the greenfield and brownfield 
context, a U.S. person may not have known at the time of the 
transaction that the investment would result in a covered activity, yet 
the Treasury Department nevertheless sought 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 was likely to convey intangible 
benefits from the U.S. person to a covered foreign person. That a 
covered foreign person ultimately would have resulted from a greenfield 
or brownfield investment would not have been necessary for coverage 
under the Proposed Rule, as long as the intent to establish a covered 
foreign person was present at the time of the transaction. The Treasury 
Department 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 would have risked undermining the national security 
goals of the program. For the avoidance of doubt, the Treasury 
Department did not intend to scope in a real estate transaction where 
the U.S. person did not have the requisite knowledge or intent.
    One commenter requested clarification that the word ``development'' 
in Sec.  850.210(a)(4) does not encompass a U.S. person's modification, 
configuration, or testing of a piece of technology acquired from a 
third-party for the company's own use. This request reflects confusion 
about the way in which develop, as a defined term relating to the 
activities of a person of a country of concern (see Sec.  850.211), 
interacts with the use of the word ``development'' in Sec.  
850.210(a)(4) related to greenfield and brownfield investments. The 
latter usage is intended to refer to the plain English meaning of the 
term in the greenfield and brownfield context, i.e., to refer to 
activities such as the build-out,

[[Page 90419]]

expansion, or retrofitting of facilities or land, and not carry the 
meaning set forth in Sec.  850.211. In response to this comment, the 
Treasury Department made a change to the definition of develop in Sec.  
850.211 of the Final Rule to expressly carve out Sec.  850.210(a)(4) 
from its application.
    Multiple commenters asked for clarification regarding what 
constitutes a change in activity under Sec.  850.210(a)(4)(ii). One 
commenter stated that an activity ``not previously engaged in'' should 
refer to a person engaging in a new category of covered activity, 
rather than engaging in a new activity within the same category. 
Another commenter sought clarification as to when a person that engaged 
in a covered activity prior to the issuance of the Outbound Order would 
be deemed to have shifted to a new activity.
    One commenter requested that the Treasury Department justify its 
assessment that including investments intended to result in the 
establishment of a covered foreign person or the engagement of a new 
covered activity is necessary to accomplish the national security goals 
of the Outbound Order. That commenter stated that the Treasury 
Department should eliminate the ``intent'' element from the relevant 
section of the rule and cover only transactions resulting in the 
establishment of a covered foreign person. Several other commenters 
requested that the text of the rule explicitly include objective 
criteria, such as the commitment of capital, as evidence of an intent 
on the part of a U.S. person that its investment result in the 
engagement of a person of a country of concern in a covered activity in 
which it was not previously engaged. A few commenters requested 
clarification regarding the intent element of Sec.  850.210(a)(4), 
including how it differs from the knowledge standard described in Sec.  
850.104. One commenter noted ambiguity as to whose intent is relevant 
and how intent is to be established.
    In response to the above comments, the Treasury Department has 
revised Sec.  850.210(a)(4) in the Final Rule. Rather than referring to 
the ``intent'' of the U.S. person, the Final Rule refers to the 
``plans'' of the U.S. person. In assessing whether a U.S. person 
``plans'' for its actions to result in the establishment of a covered 
foreign person or to shift an existing entity's operations into a 
covered activity, the U.S. person is responsible for the information it 
had or could have had through a ``reasonable and diligent inquiry'' at 
the time of the transaction. Indicators relevant to what the U.S. 
person plans include, for example, correspondence with the investment 
target or relevant government, business plans, and presentations to 
potential investors.
    In addition, the Treasury Department responds to the comments 
through modification to Sec.  850.210(a)(4)(ii) of the Final Rule to 
specify that it relates to the ``engagement of a person of a country of 
concern in a covered activity.'' The Final Rule's coverage of a 
``brownfield'' investment is intended to capture a U.S. person's 
acquisition, leasing, or other development of operations that the U.S. 
person knows will result in, or the U.S. person plans to result in, an 
existing person of a country of concern engaging in a covered activity.
    Continuing to capture a forward-looking element in the context of 
the transactions addressed in Sec.  850.210(a)(4) is important to the 
national security goals of the Outbound Order. Without such a 
provision, a U.S. person may not be able to invest in an entity that is 
a covered foreign person but could instead establish or contribute to 
the engagement of such a person in a covered activity. With respect to 
a greenfield or brownfield investment, the Treasury Department assesses 
that waiting until such an investment has achieved its aims before 
covering it is insufficient to achieve the national security aims of 
the Outbound Order. Therefore, the Treasury Department declines to 
eliminate entirely the forward-looking element of this provision, as 
one commenter requested.
    Multiple commenters also requested clarification of the interplay 
between Sec.  850.210(a)(4) and the exception for an intracompany 
transfer at Sec.  850.501(c). As further discussed regarding the 
definition of an excepted transaction (see below), Sec.  850.501(c) of 
the Final Rule provides an exception for certain intracompany transfers 
between a U.S. person and its controlled foreign entity to support 
ongoing operations with respect to covered activities or other ongoing 
or new activities that are not covered activities. Because of this 
change to the text of 850.501(c), the Treasury Department determined 
that the Proposed Rule's reference to Sec.  850.210(a)(4) in Sec.  
850.501(c) was no longer necessary as the text of Sec.  850.501(c) 
itself now makes clear that the exception does not apply to covered 
transactions involving new covered activities, which remain subject to 
Sec.  850.210(a)(4).
Entrance Into a Joint Venture
    Several commenters provided views on Sec.  850.210(a)(5) of the 
Proposed Rule, which defined as a covered transaction 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 knew or intended that 
the joint venture would have engaged in a covered activity. Like the 
greenfield or brownfield investment prong discussed above, this 
provision was intended to capture situations in which a covered foreign 
person did not exist at the time of a transaction, but the transaction 
structure presented 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 have been sufficient for coverage in the joint venture 
context because a U.S. person may not have known at the time of the 
transaction that the joint venture would engage in a covered activity, 
yet the Treasury Department sought to capture transactions likely to 
convey intangible benefits to a covered foreign person. The joint 
venture would not have had to 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 intended for it to do so.
    Commenters requested that the Treasury Department define ``joint 
venture'' to provide greater clarity on the application of the 
provision, and suggested definitions for the Treasury Department's 
consideration and urged defining this term narrowly. One commenter 
requested clarity on what constitutes ``intent'' for the purposes of 
Sec.  850.210(a)(5) and whether ``intent'' would be found where a U.S. 
person had a speculative idea versus a formal business plan.
    Two commenters suggested that ``joint venture'' should include only 
the acquisition of an equity interest and not other forms of commercial 
cooperation, whereas one commenter recommended that ``joint venture'' 
only include the establishment of a new legal entity. Two other 
commenters recommended that the Treasury Department list certain 
``routine'' activities that would not be covered as joint ventures.
    Several commenters recommended that the Treasury Department provide 
guidance clarifying that certain transactions, relationships, or 
activities are not considered to constitute a joint venture for 
purposes of this provision.
    One commenter requested that the Treasury Department clarify 
whether certain actions related to existing joint ventures are 
permissible, including participation in an existing joint venture, 
acquisition of additional interest in an existing joint venture, and 
engagement in a covered activity by an

[[Page 90420]]

existing joint venture. Another commenter expressed concern that the 
coverage of joint ventures would negatively impact the ability of U.S. 
companies to acquire majority stakes in their competitors in the PRC.
    The Treasury Department declines to define the term ``joint 
venture'' in the Final Rule, after considering whether other regulatory 
regimes define the term. 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 term as generally understood in the market does not cover 
``any business relationship'' as was of concern to one commenter. 
Indeed, most of the activities that commenters request be excluded from 
the application of the term ``joint venture'' are prima facie not joint 
ventures. For example, absent other facts, a ``joint venture'' would 
not ordinarily result simply where there is a licensing arrangement, 
the sale or barter of goods and services, or resale of goods and 
services.
    In response to the comments to Sec.  850.210(a)(5), the Treasury 
Department is modifying this provision by striking ``the U.S. person 
intends to engage in a covered activity.'' Instead, in the Final Rule, 
Sec.  850.210(a)(5) applies when ``the subject 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 covered activity.'' This modification 
is intended to focus on the knowledge of the U.S. person with respect 
to the goals of the joint venture at the time the U.S. person enters 
into the joint venture, rather than applying the definition of a 
covered transaction to situations where a U.S. person may have an 
intent that is not shared by the joint venture.
    The Treasury Department clarifies that, as with the Proposed Rule, 
Sec.  850.210(a)(5) of the Final Rule is intended to cover situations 
in which a covered foreign person does not exist prior to 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. Further, 
the plain language of the provision does not (absent additional facts) 
cover activities related to an existing joint venture into which a U.S. 
person has already entered, as the Final Rule applies only on a 
forward-looking basis. However, certain transactions such as the 
acquisition of an additional equity interest in a joint venture that 
meets the definition of a covered foreign person may nevertheless be a 
covered transaction pursuant to other parts of the definition of this 
term, and the fact that a U.S. person is acquiring equity in a joint 
venture in which it has already entered does not remove all 
transactions with such a joint venture entirely from the application of 
Sec.  850.210.
Investment Made as an LP
    Several commenters provided views on Sec.  850.210(a)(6) of the 
Proposed Rule, which related to an LP interest in certain pooled 
investment funds. One commenter expressed doubt with respect to the 
ability of an LP to determine whether a pooled investment fund is 
``likely'' to invest in a person of a country of concern engaged in one 
or more of the three specified sectors and sought clarity with respect 
to the meaning of ``likely'' in this context.
    Commenters requested additional clarity with respect to when an LP 
may be deemed to know that a pooled investment fund is likely to 
undertake a covered transaction. One such commenter suggested that the 
Treasury Department provide a safe harbor for LPs that engage in good 
faith diligence. The same commenter took the position that a previous 
covered transaction by a general partner (GP) should not in and of 
itself be dispositive in determining coverage. Another commenter 
recommended that the Treasury Department narrow the application of the 
provision because, according to the commenter, it undermines GP 
controls on information disclosure.
    One commenter stated that the provision is overbroad and expressed 
concerns with what the commenter perceived as burdensome compliance 
requirements, particularly with respect to post-closing diligence. This 
commenter also stated that U.S. persons might be deterred from 
investment as an LP because they cannot control the post-investment 
actions of third parties.
    Two commenters stated that LPs should be permitted to rely on the 
assurances of GPs and one commenter took the position that the GP 
should bear any and all requirements related to compliance with the 
rule. Another commenter requested that the Treasury Department issue 
guidance related to this provision.
    One commenter requested clarity with respect to requirements for 
LPs subject to agreements made prior to the Outbound Order.
    The Final Rule adopts the Sec.  850.210(a)(6) from the Proposed 
Rule without any changes. The Final Rule, as with the Proposed Rule, 
provides that an LP investment in a non-U.S. person pooled investment 
fund constitutes a covered transaction when two things are true: (1) 
the U.S. person knows at the time of the investment that the pooled 
investment fund will likely invest in a person of a country of concern 
that is in one or more of the three specified sectors, and (2) the fund 
in fact undertakes a transaction that would be a covered transaction if 
undertaken by a U.S. person. The Final Rule also provides an exception 
under Sec.  850.501(a)(1)(iii) for certain LP investments (see 
discussion in Subpart E below), which is intended to provide options 
for LP investors to obtain clarity regarding the application of the 
Final Rule to their investments into pooled investment funds. The 
Treasury Department understands that it may not be practicable for a 
U.S. person LP to know the specific investment target entity or 
entities of a pooled investment fund even following a ``reasonable and 
diligent inquiry'' at the time of its LP investment. However, it is the 
Treasury Department's understanding that it may be possible for such LP 
to know, through a ``reasonable and diligent inquiry,'' the country and 
general sector in which the pooled investment fund is likely to invest. 
Thus, the Treasury Department declines to provide a safe harbor related 
to this provision because doing so is unnecessary given an LP's ability 
to engage in a ``reasonable and diligent inquiry.'' Whether an inquiry 
is a ``reasonable and diligent inquiry'' will be assessed through the 
evaluation of various considerations described in the Final Rule.
    In response to issues commenters identified related to post-
transaction monitoring and compliance in the LP context, the Treasury 
Department reiterates that the knowledge standard as applied to Sec.  
850.210(a)(6) of the Final Rule relates to a U.S. person's knowledge at 
the time of its LP investment in the pooled investment fund. With 
respect to whether a U.S. person knows at the time of its investment 
that a pooled investment fund is likely to invest in a person of a 
country of concern that is in any of the three specified sectors, the 
LP would ascertain whether the fund is likely to invest in a relevant 
geographic area and sector through engaging in a ``reasonable and 
diligent inquiry'' at the time of the investment into the pooled 
investment fund.
    With respect to whether such pooled investment fund actually 
undertakes a transaction that would be a covered transaction if 
undertaken by a U.S. person, if the LP knows 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

[[Page 90421]]

any of the three relevant sectors, and such fund subsequently makes an 
investment that would have been a notifiable transaction if made by a 
U.S. person, the U.S. person will be required to file the relevant 
notification no later than 30 calendar days following the earliest date 
of the pooled investment fund's investment in a covered foreign person. 
If the LP knows 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, and such fund 
subsequently makes an investment that would have been a prohibited 
transaction if made by a U.S. person, then the LP would have made a 
prohibited transaction, which would be a violation of the Final Rule.
Indirect Covered Transaction
    To address a potential loophole, Sec.  850.210(a) of the Proposed 
Rule defined a U.S. person's transaction that was indirect, as well as 
direct, to be a covered transaction. Under Note 1 to Sec.  850.210 of 
the Proposed Rule, an indirect transaction would have been a covered 
transaction regardless of the number of intermediary entities involved 
in such transaction if it met the elements of the definition. For 
example, if a U.S. person owned a special purpose vehicle organized in 
a non-U.S. jurisdiction, 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 
have been a covered transaction.
    Several commenters provided views on Sec.  850.210 as it related to 
indirect transactions. One commenter expressed concern that this 
provision would place a significant compliance burden on U.S. persons. 
Another commenter stated that this provision would be overbroad and 
suggested that the definition of covered transaction not include 
indirect transactions. Instead, the commenter recommended utilizing the 
definition of covered foreign person to cover indirect transactions.
    One commenter requested that the Treasury Department clarify that 
an indirect covered transaction does not include an LP investment into 
a U.S. person fund. The commenter requested that the Treasury 
Department clarify how intermediate entities are treated in tiered 
ownership structures and further requested guidance on how this 
provision is applied with respect to certain complex transactions.
    Upon review and consideration of these comments, the Treasury 
Department is revising Note 1 to Sec.  850.210. The Final Rule provides 
that an indirect covered transaction includes a U.S. person's use of an 
intermediary (either a legal entity or natural person) to engage in a 
transaction that would be a covered transaction if engaged in directly 
by a U.S. person. It is common in mergers and acquisitions transactions 
to use one or more intermediary legal entities, or so-called 
``acquisition vehicles,'' to facilitate a transaction. The Final Rule 
covers both direct and indirect transactions such that a U.S. person 
that is investing directly into or through an intermediary cannot avoid 
the notification requirement or prohibition where that intermediary, to 
facilitate the transaction, then invests in a covered foreign person. 
In such a case, as with the Proposed Rule, a U.S. person's investment 
that is indirect would be a covered transaction under the Final Rule 
regardless of the number of intermediaries involved in such transaction 
if the transaction meets the elements of covered transaction. By 
contrast, absent other facts (such as intent to evade the application 
of the Final Rule), where a U.S. person has, for example, previously 
invested in a non-U.S. person entity, and later in time and unrelated 
to the original transaction by the U.S. person, that entity 
subsequently invests in a covered foreign person, that later 
transaction will generally not constitute an indirect covered 
transaction, subject to Sec. Sec.  850.210(a)(6), 850.303, and 850.604. 
In addition, in response to comments, Note 1 to Sec.  850.210 further 
clarifies that for purposes of Sec.  850.210(a)(1), a U.S. person is 
not considered to have acquired an indirect equity interest or 
contingent equity interest in a covered foreign person when the U.S. 
person acquires an LP interest in a venture capital fund, private 
equity fund, fund of funds, or other pooled investment fund and that 
fund then acquires an equity interest or contingent equity interest in 
a covered foreign person (see the discussion of an acquisition of 
equity interest above). Consistent with requests from commenters, the 
Treasury Department anticipates making additional information available 
via the Treasury Department's Outbound Investment Security Program 
website.
Stock Options and Other Equity-Based Compensation
    Several commenters expressed views with respect to the scope of the 
definition of covered transaction and specifically whether employee 
compensation in the form of equity would be covered. Multiple 
commenters stated that compensation in the form of equity should not be 
a covered transaction. One commenter requested clarity as to whether 
receipt of equity compensation is a covered transaction, and several 
commenters recommended that the Treasury Department either provide 
clarification within the definition of covered transaction or within 
the definition of excepted transaction.
    Multiple commenters also requested that carried interest be 
clarified as beyond the scope of covered transaction as it is a form of 
compensation to a U.S. person rather than the acquisition of an equity 
interest.
    The Treasury Department agrees with commenters that while the 
receipt of compensation by an employee of a covered foreign person in 
the form of equity or an option to purchase equity, as well as the 
exercise of such an option, would fall within the definition of a 
covered transaction, it should be removed from coverage of the Final 
Rule. In accepting or converting employee compensation, a U.S. person 
employee is generally not providing capital to a covered foreign person 
employer in a manner implicating the same policy concerns as covered 
transactions that are within the scope of the Final Rule. Considering 
the potential implications for U.S. person individuals, such as 
employment prospects and personal finances, that could result from the 
coverage of stock options and other equity-based compensation under the 
Final Rule, the Treasury Department has added an exception to Sec.  
850.501(f) to that effect (see the discussion of an excepted 
transaction below).
    As to comments regarding carried interest, the Treasury Department 
agrees that absent other relevant facts, the payment of carried 
interest to a U.S. person would not trigger any of the prongs of the 
definition of covered transaction because it ordinarily involves a cash 
payment to a U.S. person. However, the fact that carried interest is 
awarded to a U.S. person making an investment (or working at a U.S. 
person entity making an investment) in a covered foreign person does 
not insulate the transaction giving rise to such payments from the 
application of the Final Rule.
Covered Transaction--Final Rule Summary
    The Final Rule defines a covered transaction to include a U.S. 
person's direct or indirect:
    [ssquf] Acquisition of an equity interest or contingent equity 
interest (including convertible debt) in a covered foreign person;

[[Page 90422]]

    [ssquf] Provision of debt financing that affords the lender certain 
management or governance rights in a covered foreign person that are 
characteristic of an equity investment but not typical of a loan;
    [ssquf] Conversion of a contingent equity interest (including 
convertible debt) in a covered foreign person where the contingent 
equity interest was acquired on or after the effective date of the 
Final Rule;
    [ssquf] Acquisition, leasing, or other development of land, 
property or other assets that will result in or the U.S. person plans 
to result in the establishment of a covered foreign person, or the 
engagement of an existing person of a country of concern in a covered 
activity;
    [ssquf] Entrance into a joint venture, wherever located, with a 
person of a country of concern where the joint venture will engage in 
or plans to engage in a covered activity; and
    [ssquf] Acquisition of an LP interest in 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 knows (or plans) 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 and, consistent with the 
Outbound Order and the Proposed Rule, does not include a transaction 
for the conduct of the official business of the U.S. Government by 
employees, grantees, or contractors thereof. Note that the mere act of 
receiving a U.S. Government grant does not make a person an employee, 
grantee, or contractor of the U.S. Government.
Acquisition of Equity Interest or Contingent Equity Interest
    The definition of covered transaction includes the acquisition of 
an equity interest in a covered foreign person and the acquisition of a 
financial interest, including debt, that does not constitute an equity 
interest at the time of acquisition but is convertible into, or 
provides the right to acquire, an equity interest, either upon the 
occurrence of a contingency or defined event or at the discretion of 
the U.S. person holding the interest. As clarified in the Final Rule, 
neither the issuance of a secured loan or similar debt financing for 
which equity is pledged as collateral, nor the acquisition of such 
secured debt on the secondary market, is an acquisition of an equity 
interest. However, foreclosure on collateral where the debtholder takes 
possession of the pledged equity is an acquisition of an equity 
interest; provided that such an acquisition is not a covered 
transaction where the equity was pledged prior to the effective date of 
the Final Rule or where the U.S. person did not know at the time of 
issuing or acquiring the debt that the pledged equity was in a covered 
foreign person.
Debt With Equity-Like Characteristics
    The definition of covered transaction includes the provision of a 
loan or similar debt financing arrangement to a covered foreign person 
that affords or will afford an interest in profits of the covered 
foreign person, the right to appoint members of the board of directors 
(or equivalent), or other comparable financial or governance rights 
characteristic of an equity investment but not typical of a loan.
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, including 
debt, in a covered foreign person where the contingent equity interest 
was acquired by the U.S. person on or after the effective date of the 
Final Rule. As stated above, in addition to the conversion, the 
original acquisition of such an interest is a covered transaction. With 
respect to a notifiable transaction, the policy objective of including 
the conversion of a contingent equity interest 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 also addresses 
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. 
The Treasury Department anticipates that if the original acquisition 
was a notifiable transaction and was timely notified, the second 
notification submitted with respect to the conversion will likely be 
similar to the first notification and thus less time-consuming to 
prepare.
    The Treasury Department considered alternative approaches such as 
covering only the acquisition and not the conversion of contingent 
interests or covering only the conversion. However, each alternative is 
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. Because the Final Rule does 
not define a conversion of a contingent equity interest as a covered 
transaction in situations where the U.S. person acquired the interest 
prior to the effective date of the Final Rule, no U.S. person is 
disadvantaged for having acquired a contingent interest without first 
knowing of the scope of the Final Rule.
Greenfield or Brownfield Investment
    The definition of covered transaction includes 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 result in, or that the 
U.S. person plans to result in, either (1) the establishment of 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 (generally known as a ``greenfield'' investment) or 
(2) a person of a country of concern's engagement in a covered activity 
(generally known as a ``brownfield'' investment).
    A U.S. person's plans are sufficient in these cases for the 
transaction to be a covered transaction. This is so 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 Treasury Department 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 
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 is not necessary for coverage under the Final 
Rule, so long as the specified action coupled with the specified plan 
is present at the time of the transaction.
    The Treasury Department has assessed that requiring a greenfield or 
brownfield investment to result in the establishment of a covered 
foreign person before triggering obligations associated with covered 
transaction status risks undermining the national security goals of the 
program. For the avoidance of doubt, the Treasury Department does not 
intend to scope in transactions, including real estate transactions, 
where the U.S. person does not have the requisite knowledge or plan. 
The Treasury Department will

[[Page 90423]]

assess a U.S. person's plans via objective indicators, including, for 
example, correspondence with the investment target or relevant 
government, business plans, and any presentations to potential 
investors.
Entrance Into a Joint Venture
    The definition of covered transaction includes 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 knows the joint venture either 
will engage, or plans to engage, in a covered activity. Like the 
greenfield or brownfield investment prong discussed above, this prong 
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, 
the joint venture does need not to engage in a covered activity for the 
establishment of the joint venture to be a covered transaction under 
the Final Rule as long as the U.S. person knows the joint venture will 
do so, or plans to do so.
Sec.  850.211--Develop
    Under the Proposed Rule, develop was defined as engagement in any 
stages prior to serial production, including 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. One commenter requested that the 
Treasury Department clarify the meaning of ``development'' in Sec.  
850.210(a) and develop as defined in Sec.  850.211 of the Proposed 
Rule. The same commenter also requested that the Treasury Department 
clarify that develop at Sec.  850.211 of the Proposed Rule would not 
include a company's modification, configuration, or testing of a piece 
of technology acquired from a third party for the company's own use.
    In consideration of these comments, the Final Rule modifies the 
definition of develop from the Proposed Rule. First, the Final Rule now 
clarifies that the definition of develop in Sec.  850.211 applies to 
all provisions of the Final Rule except for Sec.  850.210(a)(4). This 
change is being made because develop as defined at Sec.  850.211 is 
primarily related to the development of technologies and products 
referenced at Sec. Sec.  850.217 and 850.224. As described above in the 
discussion regarding Sec.  850.210(a)(4), the term ``development'' is 
often used when describing brownfield investments and has the plain 
English meaning of the term as commonly used in that context (e.g. to 
refer to activities such as the build-out, expansion, or retrofitting 
of physical facilities or land). Second, the Final Rule adds the term 
``substantive'' to qualify ``modification'' so that making a 
modification to a third-party technology or product that is 
``substantive'' constitutes developing that technology or product, but 
making a non-substantive modification to it does not. For example, the 
Treasury Department considers routine maintenance or repair of a third-
party product to constitute a non-substantive modification. In 
contrast, the Treasury Department considers modification to advance or 
repurpose the performance, function, or capability of a third-party 
technology or product, or impact its security features (e.g., by 
removing security measures or safeguards from a third-party AI model), 
to be a substantive modification.
Sec.  850.213--Excepted Transaction
    The Proposed Rule included a definition of excepted transaction 
that would refer to a transaction that is not a covered transaction 
because it meets specified criteria that were described in proposed 
Sec.  850.501. The Treasury Department received several comments 
related to the definition of excepted transaction that focused on the 
specific criteria described in the operative provision for excepted 
transactions in Sec.  850.501. Those comments are discussed below in 
the discussion related to Sec.  850.501. The Final Rule adopts Sec.  
850.213 without change from the Proposed Rule.
Sec.  850.216--Knowledge
    The Proposed Rule specified that certain provisions, including the 
definition of covered transaction, would apply only if a U.S. person 
had knowledge of the relevant facts or circumstances at the time of a 
transaction. The Proposed Rule defined knowledge as either actual 
knowledge that a fact or circumstance existed or was 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. As discussed in the Proposed Rule, 
this language was similar to the definition of knowledge found in the 
Export Administration Regulations (EAR) at 15 CFR 772.1.
    The Treasury Department received one comment on this section. The 
commenter suggested that the definition of knowledge be based on 
objective criteria concerning due diligence efforts and stated that 
including an ``awareness of a high probability of a fact or 
circumstance's . . . future occurrence'' in Sec.  850.216(b) was 
concerning especially in connection with greenfield and brownfield 
investments where new facts may come to light throughout the lifecycle 
of a project.
    The Final Rule adopts the definition of knowledge in Sec.  850.216 
without change from the Proposed Rule. As noted above, the language of 
this definition is similar to the definition of knowledge found in the 
EAR, and retaining this language is consistent with the goals and 
structure of the Final Rule, which implicates certain future events--
for example, in Sec.  850.210(a)(5), the entrance into a joint venture 
where the joint venture will engage in a covered activity. In addition, 
where the Final Rule implicates knowledge of a future event, such as 
the definition of covered transaction in Sec.  850.210, such knowledge 
is to be assessed ``at the time'' of the relevant transaction. This 
language makes clear that the evaluation of knowledge as to the 
relevant facts or circumstances--including in the context of greenfield 
or brownfield investments--is at the time of the transaction.
Sec.  850.217--Notifiable Transaction
    As discussed in the Proposed Rule, a notifiable transaction would 
have been a covered transaction in which the relevant covered foreign 
person undertook (or in the case of certain greenfield, brownfield, or 
joint venture investments, the U.S. person knew would or intended to 
undertake) any of several specified covered activities listed in the 
proposed definition of notifiable transaction.
    In the Proposed Rule, the Treasury Department 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 references to end uses in the proposed 
definition were designed to achieve the national security policy 
objectives of the Outbound Order, and the Proposed Rule noted that the 
Treasury Department 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 Treasury Department regarding 
a notifiable transaction would increase the U.S. Government's 
visibility into transactions involving technologies and products 
relevant to the threat to the

[[Page 90424]]

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 
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.
    Commenters provided feedback on the nature and scope of notifiable 
transactions defined in Sec.  850.217.
Notifiable Transaction--Integrated Circuit Design and Production
    Sections 850.217(a), (b), and (c) of the Proposed Rule defined 
notifiable transactions involving integrated circuits to include any 
covered transaction in which a relevant covered foreign person or joint 
venture designed, fabricated, or packaged any integrated circuit that 
was not described in the definition for prohibited transaction (i.e., 
an integrated circuit did not meet the performance parameters or 
criteria set forth in paragraphs (c), (d), and (e) of Sec.  850.224 of 
the Proposed Rule, as applicable). Commenters suggested that the 
definition for notifiable transaction involving integrated circuits was 
broad and could implicate integrated circuits at ``legacy'' or 
``mature'' process nodes that are commercially available and pose 
limited national security risk. Commenters cited the administrative or 
compliance burden for U.S. semiconductor companies adhering to the 
notification requirement, with one commenter suggesting that the 
notification and disclosure requirements could lead a company to focus 
on compliance at the expense of research and development. Commenters 
suggested narrowing the criteria for notifiable transactions involving 
integrated circuits by aligning the scope of integrated circuits in the 
rule to integrated circuits controlled under the EAR. One commenter 
requested the Treasury Department consider expanding the scope of 
notifiable transactions to those that do not involve a country of 
concern. One commenter also noted the importance of timely updates to 
regulations in the future and engagement with the private sector to 
ensure that notification requirements involving integrated circuits 
keep pace with technological and industry developments.
    The Final Rule implements Sec.  850.217(a) through (c) without 
change from the Proposed Rule. In considering comments on the breadth 
of Sec.  850.217(a) through (c), the Treasury Department assesses that 
the design, fabrication, and packaging of integrated circuits, 
including those at ``legacy'' or ``mature'' process nodes, have the 
potential to contribute to and advance the capability of countries of 
concern in sensitive technologies and products critical for such 
countries' military, intelligence, surveillance, or cyber-enabled 
capabilities. The potential intangible benefits of U.S. investment are 
particularly relevant in the semiconductor industry given the complex 
and resource-intensive nature of semiconductor research, development, 
manufacturing, and scaling, as well as the importance of the 
semiconductor supply chain to national security applications. The 
Treasury Department determines that visibility into these transactions 
is important and thus maintains a notification requirement. The 
Treasury Department also notes that technical thresholds set forth in 
the Final Rule, developed in consultation with the Department of 
Commerce and other agencies, are in many cases consistent with but may 
not precisely match with the EAR, International Traffic in Arms 
Regulation (ITAR), or other export control regimes due to differences 
in policy objectives and legal authorities. Addressing the threat posed 
by the advancement by countries of concern in areas critical for 
military, intelligence, surveillance, or cyber-enabled capabilities may 
require restricting transactions in persons engaged in technologies 
that are upstream of, at different technical thresholds than, or 
otherwise distinct from those controlled for export. Moreover, the 
definition of country of concern is set forth in the Outbound Order 
(listed in the Annex) and is not independently defined by the Treasury 
Department in the Proposed Rule. The Treasury Department intends to 
continue engaging with stakeholders in the semiconductor industry and 
other industries to inform any future updates to the notification 
requirements involving integrated circuits or related technologies.
Notifiable Transaction--AI System--Overall Approach
    Section 850.217(d) of the Proposed Rule defined notifiable 
transactions involving AI systems to include any covered transaction in 
which a relevant covered foreign person or joint venture developed any 
AI system that was not described in Sec.  850.224(j) or (k) of the 
Proposed Rule and that was designed to be used for any government 
intelligence, mass-surveillance, or military end use; intended by the 
covered foreign person or joint venture to be used for cybersecurity 
applications, digital forensics tools, penetration testing tools, or 
the control of robotic systems; or trained using a quantity of 
computing power greater than a numerical threshold. A few commenters 
recommended that the Treasury Department revise the AI-related 
notification requirements to focus on only technical criteria (i.e., 
the computing power thresholds, rather than the end-use thresholds) 
when determining whether a target is engaging in covered activities 
involving AI systems. One commenter suggested that the definition of a 
notifiable transaction involving an AI system revert to the language 
discussed in the ANPRM, which focused on AI systems designed to be 
exclusively used for certain non-military applications. Another 
commenter noted that the scope of AI systems covered by the 
notification requirement and prohibition should be defined to avoid 
negative impacts on investment cooperation between the United States 
and the PRC in certain sectors such as healthcare, education, and 
agriculture.
    The definition of a notifiable transaction involving an AI system 
in the Final Rule includes both end-use thresholds under Sec.  
850.217(d)(1) and (2) and technical thresholds under Sec.  
850.217(d)(3). This approach captures for notification those 
transactions involving AI systems that are relevant to national 
security either because of their end use--they are designed for 
government intelligence, mass-surveillance, or military end use or are 
intended to be used for cybersecurity applications, digital forensics 
tools, penetration testing tools, or the control of robotic systems 
end--or because they meet the technical threshold of greater than 
10[supcaret]23 computational operations. The Treasury Department 
considered and assessed that limiting notifiable transactions involving 
AI systems to systems designed to be exclusively used for certain non-
military applications would be too narrow to capture dual-use 
technologies of potential concern. Similarly, the Treasury Department 
assessed that sectoral carveouts for notifiable transactions would 
undermine the goals of the Outbound Order, since AI systems designed or 
intended for a listed end use or trained

[[Page 90425]]

on greater than 10[supcaret]23 computational operations are by nature 
designed or trained with an objective or a level of sophistication that 
could contribute to capability development in areas critical for 
military, intelligence, surveillance, or cyber-enabled capabilities by 
countries of concern.
    Substantive changes are discussed below. The Final Rule also 
implements stylistic changes in conformance with the substantive 
changes discussed below.
Notifiable Transaction--AI System--End Use--Design Intent
    Regarding the end-use thresholds for notifiable transactions 
involving AI systems, commenters also noted the challenge of 
distinguishing between AI systems that are ``designed'' for government 
intelligence, mass-surveillance, or military end uses (which are 
subject to the notification requirement) from AI systems that are 
``exclusively designed'' for the same end uses (which are subject to 
the prohibition). A commenter suggested allowing U.S. investors to rely 
on information or representations of the target, which would be able to 
assess the design intent and end use of a given AI system. Another 
commenter suggested clarifying the requirement by replacing ``designed 
to be used'' with ``may be used'' in Sec.  850.217(d)(1), which would 
broaden the notification requirement to encompass any AI systems with 
the potential for any of the listed end uses without the need for 
investors to assess ``design'' or ``exclusive design'' intent. Another 
commenter requested that the Treasury Department define ``design'' in 
relation to a covered activity.
    Sections 850.217(d) and 850.224(j) in the Final Rule retain the use 
of ``design'' and ``exclusive design'' as an end-use threshold for 
identifying certain notifiable and prohibited transactions, 
respectively, that involve AI systems. The Treasury Department notes 
that the end-use thresholds for AI systems are complemented by the 
technical threshold for computing power at Sec.  850.217(e), which 
provides criteria for notifiable transactions involving AI systems 
trained using a quantity of computing power greater than 10[supcaret]23 
computational operations. In some instances, the technical thresholds 
would therefore obviate the need for an investor to assess design 
intent of AI systems. The Treasury Department recognizes that while 
design intent may not always be easy to ascertain, especially in early-
stage startup companies, the assessment of the investor is based on 
information available at the time of the transaction, consistent with 
the knowledge standard described at Sec.  850.104. The Treasury 
Department further notes that assessing a given AI system for 
``design'' or ``exclusive design'' may involve considering an AI 
developer's source of funding, customer base, nature and extent of 
model customization, performance indicators from testing and 
evaluation, and relevant training data, among other factors. The Final 
Rule does not adopt a specific definition for ``design,'' since the 
specific applications of ``design'' may vary through their usage in the 
regulatory text depending on the relevant technology. The Treasury 
Department notes that the plain English meaning of ``design'' should 
apply, including but not limited to the process of conceiving, 
defining, or planning a system for a specific function or end use, such 
as laying out elements, interfaces, and other characteristics in 
accordance with identified requirements or architecture.
    Commenters also noted that the first parenthetical list under Sec.  
850.217(d)(1) in the Proposed Rule seemed to suggest that any AI system 
incorporating any of the features in the serial list would 
automatically qualify as ``designed to be used for'' mass-surveillance 
end use. Commenters were concerned that such an approach would 
implicate many exclusively commercial AI systems capable of ``mining 
text, audio, or video; image recognition; location tracking; or 
surreptitious listening,'' since such features are more commonplace.
    The Final Rule makes an adjustment in the first parenthetical list 
under Sec.  850.217(d)(1) to clarify that the list is illustrative of 
the types of features that could contribute to mass-surveillance end 
use.
    One commenter sought clarification regarding whether the terms 
``designed to be used'' and ``intended . . . to be used for'' in Sec.  
850.217(d)(1) and (2), respectively, are meant to have different 
meanings. The commenter suggested that the Treasury Department use a 
single term if the meanings are identical or, alternatively, provide 
clarification regarding how the terms are meant to operate differently 
in the regulatory text.
    The Treasury Department notes that the terms ``designed to be 
used'' and ``intended . . . to be used for'' operate distinctly from 
one another in Sec.  850.217(d). The phrase ``design to be used'' 
refers to any AI system where the development of such system, including 
for example, research and design considerations, is undertaken in view 
of potential government intelligence, mass-surveillance, or military 
end use. The phrase ``intended . . . to be used'' captures AI systems 
that may or may not have been developed specifically for cybersecurity 
applications, digital forensics tools, penetration testing tools, or 
the control or robotic systems, but are nevertheless intended by a 
covered foreign person to be used for such purposes.
    The Final Rule also adds parenthetical text to Sec.  850.217(d)(1) 
to clarify that weapons design includes, but is not limited to, 
chemical, biological, radiological, or nuclear weapons.
Notifiable Transaction--AI System--End Use--Scope
    Several commenters requested that the Treasury Department 
distinguish between AI systems with end uses that are offensive in 
nature from those that are defensive (e.g., the cybersecurity-related 
applications under Sec.  850.217(d)(2) could include both applications 
that disrupt another computer network and those that protect one's own 
network). One commenter suggested that Sec.  850.217(d)(2) should 
exclude AI systems sold to commercial or civilian end users and that 
are restricted from military, surveillance, or law enforcement uses by 
technical and contractual safeguards.
    In response to the comments, the Final Rule includes Note 3 in 
Sec.  850.217, which carves out from notification requirements certain 
transactions involving a person engaged in certain development of an AI 
system that would otherwise result in the transactions being covered 
transactions, where such development is undertaken in a manner that is 
unlikely to pose a national security concern. Specifically, Note 3 
provides that customizing, configuring, or fine-tuning a third-party AI 
model or machine-based system strictly for internal, non-commercial use 
would not itself trigger the notification requirements delineated in 
Sec.  850.217 for covered transactions involving AI systems, unless 
such activity has a government intelligence, mass-surveillance, or 
military end use, or is for digital forensics tools, penetration 
testing tools, or the control of robotic systems. The effect of this is 
that a person customizing, configuring, or fine-tuning a third-party AI 
model or machine-based system strictly for its own internal, non-
commercial use for cybersecurity applications, or other end uses or 
applications not listed in Note 3, would not implicate the notification 
requirements solely on that basis.

[[Page 90426]]

Notifiable Transaction--AI System--End Use--Scope--Control of Robotic 
Systems
    Commenters suggested that the notification requirement for certain 
AI systems involving the ``control of robotic systems'' could be 
narrowed to exclude certain commercial or civilian applications, with 
commenters suggesting specific carveouts for medical and direct patient 
care, or automotive use.
    The Final Rule adopts the sub-paragraph (iv) pertaining to ``the 
control of robotic systems'' from Sec.  850.217(d)(2) of the Proposed 
Rule without changes. The Treasury Department recognizes that this 
provision may implicate certain consumer or civilian applications, due 
to the dual-use nature of controlling robotic systems, and considered 
options for rescoping the provision, including carveouts based on 
direct patient care or robotic systems with lower levels of autonomy. 
Given the potential and significant capability enhancement afforded by 
AI systems in the area of controlling robotic systems, however, the 
Treasury Department assesses in consultation with U.S. Government 
subject-matter experts that a sectoral carveout for medical or 
automotive applications in the notification requirement would reduce 
the U.S. Government's visibility into transactions involving dual-use 
technologies and products relevant to national security.
Notifiable Transaction--AI System--Technical Computing Power Thresholds
    Section 850.217(d)(3) of the Proposed Rule defined notifiable 
transactions involving AI systems to include any covered transaction in 
which a relevant covered foreign person or joint venture developed any 
AI system that is not described in Sec.  850.224(j) or (k) and that was 
trained on a specific quantity of computing power. Three alternates for 
such technical thresholds were provided for consideration in the 
Proposed Rule: 10[caret]23, 10[caret]24, or 10[caret]25 computational 
operations (e.g., integer or floating-point operations). The Treasury 
Department did not receive comments with specific preferences for any 
of the three alternate technical thresholds listed for notifiable 
transactions involving AI systems but did receive several comments on 
the general approach. One commenter suggested that investment 
restrictions should target AI systems trained on more than 10[caret]26 
floating-point operations of compute. Other commenters noted that the 
Treasury Department should seek to align the AI-related provisions of 
the Final Rule with other national security-related policies on AI and 
provide a clear rationale for the computing power threshold chosen. One 
commenter noted concern about using floating-point operations per 
second as a metric to assess risk.
    Regarding the computing power threshold for notifiable transactions 
involving the development of AI systems, the Final Rule sets the 
threshold at 10[caret]23 computational operations. As noted above, the 
technical threshold of greater than 10[caret]23 computational 
operations will capture for notification AI systems at the lower end 
(in terms of scale and capability) of large-scale AI models that have 
been released to date. The Treasury Department, in consultation with 
U.S. Government subject-matter experts, selected this threshold based 
on the current number of publicly known AI models originating from the 
PRC, which is identified as a country of concern in the Annex to the 
Outbound Order, that would be implicated by the Final Rule. The 
Treasury Department considered other metrics for measuring AI 
capability and selected computing power for training consistent with 
the AI Order. The Treasury Department recognizes that new and 
potentially improved benchmarks for evaluating AI capabilities may 
become available and will monitor these developments to incorporate, as 
appropriate, such metrics into future regulatory updates.
Notifiable Transaction--AI System--Changes to Technical Thresholds
    Three commenters noted that AI systems will evolve over time and 
that the computing power thresholds for both notifiable and prohibited 
transactions will likely need to be updated in the future, suggesting 
that the Treasury Department should engage with the private sector to 
ensure such thresholds and other definitions in the rule remain 
relevant. One commenter requested that the Treasury Department do so 
through a notice-and-comment process for any updates to the computing 
power thresholds, as well as other covered products and technologies, 
including provisions to ensure that such updates do not result in U.S. 
persons being penalized for investing in entities that become covered 
foreign persons. Another commenter recommended that the Treasury 
Department work closely with the National Institute for Standards and 
Technology and in line with the AI Order on a process for updating 
compute thresholds. One commenter suggested that transactions involving 
connected and electric vehicle technologies should be added to the 
notification and prohibition requirements, given pending legislation 
and rulemaking to control and secure connected vehicle, advanced driver 
assistance, autonomous vehicle, and electric vehicle technologies.
    The Treasury Department anticipates that the computing power 
thresholds included in the Final Rule will likely need to evolve to 
reflect developments in AI and relevant technologies. The Final Rule 
includes the note to Sec.  850.217 that was in the Proposed Rule, 
indicating that 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 and make updates, as 
appropriate, through public notice. The Treasury Department intends to 
continue engaging with stakeholders to inform future updates, as 
appropriate, to the notification requirements involving AI systems or 
related technologies. Regarding potential liability for a U.S. person 
that invests in an entity that was not a covered foreign person at the 
time of the transaction but becomes a covered foreign person because of 
a future regulatory update, the Treasury Department would not expect to 
apply such a regulatory update retroactively.
    Several commenters sought clarification regarding identification of 
notifiable and prohibited transactions based on how and when a person 
of a country of concern ``engages in'' the covered activities referred 
to in the definitions of notifiable and prohibited transactions. 
Multiple other commenters similarly requested that the Treasury 
Department confirm that covered activities would not extend to the 
provision of customer support in connection with the sale of a product 
to a covered foreign person.
    The Treasury Department notes that the covered person definition at 
Sec.  850.209(a)(1) is meant to capture persons of a country of concern 
that are engaging in the covered activities delineated in Sec. Sec.  
850.217 and 850.224 and would not implicate third-party entities that 
supply a product or service to a covered foreign person, so long as the 
third-party entity does not itself perform the covered activity.
    One commenter requested the Treasury Department develop a 
notification system requiring U.S. persons to file details about 
covered transactions that includes venture capital investments in 
countries of

[[Page 90427]]

concern that do not currently fall under the purview of other 
regulatory agencies. The Treasury Department declines to implement this 
suggestion to expand the notification requirement, as it would exceed 
the scope of covered transactions contemplated in the Outbound Order.
Sec.  850.219--Parent
    Section 850.219 of the Proposed Rule defined parent, with respect 
to an entity, as (1) a person that directly or indirectly held more 
than 50 percent of the outstanding voting interest in an entity or the 
voting power of the board of the entity; (2) the general partner, 
managing member, or equivalent of the entity; or (3) the investment 
adviser to any entity that was a pooled investment fund, with 
``investment adviser'' as defined in the Investment Advisers Act of 
1940 (15 U.S.C. 80b-2(a)(11)).
    The Treasury Department received one comment on this provision. The 
commenter stated that the definition of parent is too broad and should 
only include the direct or indirect holding of more than 50 percent of 
outstanding voting interest in an entity or voting power of the board 
of an entity. The Treasury Department declines to make this change to 
narrow the definition of parent in the Final Rule. The Treasury 
Department understands the commenter's suggested revision as requesting 
the removal of paragraphs (b) and (c) from Sec.  850.219. Doing so 
would narrow the application of the provision and not account for other 
types of entities such as limited partnerships or pooled investment 
funds that are structured differently than an entity with equity 
ownership or a board. Removing paragraphs (b) and (c) from Sec.  
850.219 would therefore result in a gap in coverage. In the Final Rule, 
the Treasury Department has added Note 1 to Sec.  850.219 to clarify 
that an entity which satisfies the conditions in paragraphs (a), (b), 
or (c) is a parent within the meaning of this section even where such 
an entity is the intermediate entity and not the ultimate parent. This 
addition is in response to a comment to Sec.  850.206 of the Proposed 
Rule which sought clarity as to whether an intermediate entity could be 
a U.S. person parent under paragraph (a) of that section for the 
purposes of determining whether an entity is a controlled foreign 
entity. Other than the addition of this note, Sec.  850.219 is 
finalized without change from the Proposed Rule. A parent under the 
Final Rule, with respect to any entity, is (1) a person that directly 
or indirectly holds more than 50 percent of the outstanding voting 
interest in an entity or the voting power of the board of the entity; 
(2) the general partner, managing member, or equivalent of the entity; 
or (3) 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.  850.221--Person of a Country of Concern
    Section 850.221 of the Proposed Rule described four sets of 
circumstances that would cause a person to be a person of a country of 
concern:
     An individual who is a citizen or permanent resident of a 
country of concern (excluding U.S. citizens and U.S. permanent 
residents);
     An entity with a principal place of business in, 
headquartered in, incorporated in, or organized under the laws of, a 
country of concern;
     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; or
     Any entity, wherever located, in which one or more persons 
of a country of concern, individually or in the aggregate, holds at 
least 50 percent of any outstanding voting interest, voting power of 
the board, or equity interest, regardless of whether the interest was 
held directly or indirectly.
    As stated in the Proposed Rule, this defined term is a component of 
the definitions of covered foreign person and covered transaction.
Person of a Country of Concern--General
    The Treasury Department received comments on several aspects of 
Sec.  850.221. A commenter stated that the Proposed Rule would increase 
the time and complexity of completing due diligence due to the breadth 
of the definition of person of a country of concern, and other 
commenters noted that regulatory restrictions in a country of concern 
or privacy concerns could impede or prevent a U.S. person from 
collecting information from a person of a country of concern. The 
Treasury Department notes that the definition of person of a country of 
concern is derived from section 9(e) of the Outbound Order and was 
crafted to cover a variety of persons with relationships to a country 
of concern. As previously discussed, the Treasury Department 
appreciates the dynamics of conducting due diligence regarding overseas 
investment targets. However, the Treasury Department 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 Final Rule. As in the 
Proposed Rule, the Final Rule sets forth a variety of non-exclusive 
factors that are relevant to conducting a ``reasonable and diligent 
inquiry.'' Further discussion of due diligence as it relates to how 
knowledge will be assessed can be found in Subpart A and the preamble 
to Subpart A.
    A commenter noted that other U.S. national security regulatory 
programs publish a list of foreign persons subject to certain 
transactional prohibitions, allowing due diligence to be carried out 
through automated processes. The commenter stated that a list-based 
approach would reduce the compliance burden for a U.S. person investing 
in publicly traded securities. The commenter also noted that a U.S. 
person would be required to establish a separate, manual compliance 
process in the absence of such an approach. In response to this 
comment, the Treasury Department notes that compiling a list as the 
commenter suggested 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. 
Additional discussion relevant to this point is above in the discussion 
of a covered transaction. The Treasury Department instead expects a 
U.S. person to conduct a ``reasonable and diligent inquiry'' to 
determine whether a transaction is covered under the Final Rule, 
including whether any person of a country of concern or covered foreign 
person is involved. Note, however, that the definition of prohibited 
transaction provides 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 (BIS) 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

[[Page 90428]]

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.
Citizen or Permanent Resident of a Country of Concern
    Section 850.221(a) of the Proposed Rule related to those 
individuals that are defined as a person of a country of concern. These 
included any individual that (1) was a citizen or permanent resident of 
a country of concern, (2) was not a U.S. citizen; and (3) was not a 
permanent resident of the United States. The Treasury Department adopts 
this paragraph in the Final Rule without changes.
    One commenter requested that the Treasury Department exclude from 
the definition of person of a country of concern individuals who are 
permanent residents or citizens of third countries and citizens of a 
country of concern (also known as dual citizens). The commenter also 
suggested excluding individuals who no longer ordinarily reside in a 
country of concern. While the Treasury Department understands that 
individuals who are citizens of a country of concern can have 
relationships to more than one country, the Treasury Department 
declines to amend this sub-paragraph. The fact that a person of a 
country of concern may be a dual citizen or permanent resident of a 
third country does not necessarily diminish their ties or allegiance to 
a country of concern, and they may still be subject to the laws of a 
country of concern that may compel the disclosure of information or 
other conduct. Creating an exception for such dual citizens could 
undermine the effectiveness of the Final Rule by introducing a loophole 
whereby a person of a country of concern could avoid coverage through 
taking up residency in or acquiring citizenship of a third country. The 
Treasury Department also notes that this sub-paragraph is derived from 
section 9(e)(i) of the Outbound Order.
    One commenter expressed concern that the scope of this sub-
paragraph, which includes individuals who are citizens or permanent 
residents of a country of concern, could prohibit U.S. investment in 
technology startups in the United States where the business was started 
by an individual who is a person of a country of concern. The Treasury 
Department interprets this comment to refer to a situation in which the 
person of a country of concern that has started a U.S. company both 
remains in the United States and continues to own a controlling stake 
such that the company is also defined as a person of a country of 
concern pursuant to Sec.  850.211(d). The Treasury Department notes 
that an individual who is a U.S. citizen or U.S. permanent resident is 
not a person of a country of concern as set forth in Sec.  850.221. 
However, where a person of a country of concern is merely in the United 
States (or a third country) and is engaged in a covered activity, 
capturing U.S. person transactions involving such persons is consistent 
with the objectives of the Outbound Order, given the ties between the 
entity accepting investment and a country of concern by virtue of its 
continued ownership by a citizen or permanent resident of a country of 
concern that is also neither a U.S. citizen nor a U.S. permanent 
resident.
    Another commenter stated that investments by a person of a country 
of concern enterprise in third countries do not usually pose national 
security risks and requested the definition be adjusted to exclude such 
investments. The Final Rule, like the Proposed Rule, does not generally 
regulate investments by a person of a country of concern entity into 
third countries, but rather regulates certain investments by a U.S. 
person into a person of a country of concern that engages in a covered 
activity. However, the Treasury Department declines to categorically 
exclude coverage of certain situations in which a person of a country 
of concern may also be a U.S. person (for example, because the entity 
is majority owned or controlled by persons of a country of concern but 
headquartered in the United States) because doing so could create a 
loophole that would undermine the national security goals of the Final 
Rule.
Entity of a Country of Concern
    Section 850.221(b) of the Proposed Rule defined as a person of a 
country of concern an entity with a principal place of business in, 
headquartered in, or incorporated in or otherwise organized under the 
laws of, a country of concern. The Treasury Department did not receive 
comments on this paragraph and adopts it in the Final Rule without 
changes.
Control by the Government of a Country of Concern; Acting for or on 
Behalf of the Government of a Country of Concern
    Section 850.221(c) of the Proposed Rule scoped into the definition 
of a person of a country of concern 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 held 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 possessed 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). 
The Treasury Department adopts this paragraph in the Final Rule without 
changes.
    Commenters requested that the Treasury Department clarify which 
actions taken for or on behalf of the government of a country of 
concern would fall within the scope of this provision. A commenter also 
requested clarity on (or specific examples of) what constitutes an 
instrumentality or any political subdivision, political party, or 
agency of the government of a country of concern. The Treasury 
Department notes that ``acting for or on behalf of the government of a 
country of concern'' may include formal or informal relationships 
between a person and a government of a country of concern resulting in 
such person engaging in conduct for the purpose of benefitting such 
government. This provision is not intended to capture persons, such as 
third-party consultants, operating in an arm's-length commercial 
relationship with a government.
Person of a Country of Concern--Aggregation and Voting Power
    Section 850.221(d) of the Proposed Rule scoped into the definition 
of a person of a country of concern any entity in which one or more 
persons identified in Sec.  850.221(a), (b), or (c), individually or in 
the aggregate, directly or indirectly, held at least 50 percent of any 
of the following interests of such entity: outstanding voting interest, 
voting power of the board, or equity interest. Section 850.221(e) of 
the Proposed Rule made explicit that when a person of a country of 
concern held any interest described in paragraph 850.221(d) in another 
person, which in turn held any interest described in paragraph 
850.221(d) in a third person, each of the three persons would be 
defined to be a person of a country of concern, and so on. The Treasury 
Department adopts these paragraphs in the Final Rule without changes.
    A commenter requested that the Treasury Department revise the 
definition of person of a country of concern to exclude those entities 
scoped in via the language of 221(d) and (e). The commenter asserted 
that the inclusion of ``in the aggregate'' and

[[Page 90429]]

``direct and indirect'' presents broad and impracticable diligence 
obligations for a U.S. person when determining whether an investment 
target is a person of a country of concern and recommended that the 50 
percent rule apply only if attributable to a single entity, rather than 
in the aggregate. Alternatively, the commenter recommended excluding 
the aggregation of unrelated parties' ownership stakes, and instead 
establishing a de minimis threshold for outstanding voting power or 
equity below 10 percent. Another commenter similarly suggested revising 
the rule to only require aggregation of voting interest, voting power 
of the board, or equity interest where the persons are related or 
affiliated parties. The commenter noted that this suggestion meant to 
reduce the burden on the U.S. Government in instances where a U.S. 
person submits a notification out of an abundance of caution due to 
incomplete information on transactions that may involve a person of a 
country of concern. The Treasury Department notes that the paragraphs 
requiring aggregation are intended to capture entities located outside 
of a country of concern that are at least 50 percent owned by a person 
of a country of concern or controlled by a government of a country of 
concern, because a U.S. person investment into such an entity could 
result in the transfer of capital and intangible benefits to or for the 
benefit of one or more persons of a country of concern or a government 
of a country of concern. As such, the Treasury Department declines to 
amend these provisions and reiterates that, as stated in the Proposed 
Rule, 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.
    One commenter recommended that the Treasury Department define 
``voting power of the board'' to avoid uncertainty as to whether it 
applies based on the citizenships of members of the board. The 
commenter suggested a definition for the Treasury Department's 
consideration. The Treasury Department declines to incorporate the 
definition provided by the commenter because whether it refers to an 
individual or entity depends on the context.
Person of a Country of Concern--Final Rule Summary
    The Final Rule adopts the definition of a person of a country of 
concern without change from the Proposed Rule. This definition includes 
an individual who is a citizen or permanent resident of a country of 
concern and excludes U.S. citizens and U.S. permanent residents. It 
also includes an entity with a principal place of business in, 
headquartered in, incorporated in, or organized under the laws of a 
country of concern. It also includes 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 Treasury Department 
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 
Final Rule. The definition includes 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.
    Finally, the definition includes 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 at 
least 50 percent 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 will need to determine whether a person 
of a country of concern, individually or in the aggregate, holds at 
least 50 percent of the entity's voting interest, voting power of the 
board, or equity interest, in which case the entity will be considered 
a person of a country of concern. If the entity meets these 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 will 
also be a person of a country of concern, and so on.
Sec.  850.224--Prohibited Transaction
    In the Proposed Rule, Sec.  850.224 defined a prohibited 
transaction as a covered transaction in which the relevant covered 
foreign person undertook (or in the case of certain greenfield, 
brownfield, or joint venture investments, the U.S. person knew would or 
intended to undertake) any of several specified covered activities 
listed in the proposed definition of prohibited transaction. These 
covered activities included:
     Developing or producing any electronic design automation 
software for the design of integrated circuits or advanced packaging, 
certain front-end semiconductor fabrication equipment, equipment for 
performing volume advanced packaging, or other items related to extreme 
ultraviolet lithography fabrication equipment;
     Designing any integrated circuit that meets or exceeds 
certain advanced technical thresholds identified by the Department of 
Commerce, Bureau of Industry and Security, or integrated circuits 
designed for operation at or below 4.5 Kelvin;
     Fabricating integrated circuits that meets specified 
technical criteria;
     Packaging of any integrated circuit using advanced 
packaging techniques;
     Developing, installing, selling, or producing any 
supercomputer enabled by advanced integrated circuits that provide a 
theoretical compute capacity above a specified threshold;
     Developing a quantum computer or producing any of the 
critical components required to produce a quantum computer;
     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 use;
     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; or (3) 
any other application that had military, government intelligence, or 
mass-surveillance end use;
     Developing an AI system that is designed to be exclusively 
used for, or which the relevant covered foreign person intends to be 
used for, any military, government intelligence, or mass-surveillance 
end use;
     Developing an AI system that is trained using a quantity 
of computing power above a technical threshold (for which the Proposed 
Rule offered three alternate thresholds for consideration), with a 
lower computing power technical threshold for AI systems using 
primarily biological sequence data (for which the Proposed Rule offered 
two alternate thresholds for consideration); and
     Any covered activity (either in the definition of 
notifiable transaction or prohibited transaction) if the covered 
foreign person is included on certain specified U.S. Government lists.

[[Page 90430]]

    The Treasury Department received several comments relating to these 
various aspects of the scope of prohibited transactions.
Prohibited Transaction--General
    One commenter requested that the Treasury Department revise the 
definition of prohibited transaction to distinguish between civilian 
and military technologies and products, which would have the effect of 
limiting the impact on U.S. firms seeking to enter certain civilian 
markets in a country of concern.
    The Treasury Department has determined that the specified covered 
activities listed in the definition of prohibited transaction pose a 
particularly acute national security threat to the United States 
identified in the Outbound Order. Each of the technical descriptions 
and references to end uses in the definition of prohibited transaction 
is designed to achieve the focused national security policy objectives 
of the Outbound Order. However, the Final Rule includes Note 3 in Sec.  
850.224, which carves out from prohibition certain transactions that 
involve a person engaged in certain development of an AI system that 
would otherwise result in the transactions being covered transactions, 
where such development is undertaken in a manner that is unlikely to 
pose a national security concern. Specifically, Note 3 provides that 
customizing, configuring, or fine-tuning a third-party AI model or 
machine-based system strictly for internal, non-commercial use would 
not itself trigger the prohibition delineated in Sec.  850.224 for 
covered transactions involving AI systems unless such activity has a 
government intelligence, mass-surveillance, or military end use, or is 
for digital forensics tools, penetration testing tools, or the control 
of robotic systems. The effect of this is that a person customizing, 
configuring, or fine-tuning a third-party AI model or machine-based 
system strictly for its own internal, non-commercial use for 
cybersecurity applications, or other end uses or applications not 
listed in Note 3, would not implicate a prohibition solely on that 
basis.
Prohibited Transaction--Integrated Circuits
    Commenters requested that the rule not prohibit but instead require 
notification for covered transactions involving any integrated 
circuits, including those described at Sec.  850.224(c), (d), and (e). 
One commenter stated that the prohibition of such transactions could 
prevent U.S. companies from diversifying critical supply chains to the 
benefit of U.S. national security by making investments in non-U.S. 
companies that have operations in the PRC.
    The Final Rule adopts the Proposed Rule's definition of prohibited 
transactions involving certain integrated circuits, including those 
described at Sec.  850.224(c), (d), and (e). The Final Rule does make a 
technical edit to the chapeau at Sec.  850.224(d), which was modified 
from ``Fabricates any integrated circuit that meets any of the 
following criteria'' to ``Fabricates any of the following.'' This is a 
technical edit for clarity in paragraph (d) and is not intended to 
affect the substance of the paragraph.
    The Treasury Department notes that the criteria for integrated 
circuits and related technologies were scoped to capture activities 
that pose an acute national security threat as described in the 
Outbound Order and Proposed Rule. The Treasury Department further notes 
that the Final Rule includes certain exceptions and exemptions at 
Sec. Sec.  850.501 and 850.502, respectively, that could except or 
exempt certain transactions involving advanced integrated circuits, 
including in the event the Secretary makes a determination regarding a 
national interest exemption for a covered transaction that the 
Secretary determines, in consultation with the heads of relevant 
agencies, as appropriate, to be in the national interest of the United 
States.
Prohibited Transaction--AI System--Technical Thresholds
    Several commenters requested the Treasury Department set the 
computing power thresholds for a prohibited transaction involving an AI 
system at 10[supcaret]26 computational operations, the least 
restrictive of the three potential alternates offered in the Proposed 
Rule (10[supcaret]24, 10[supcaret]25, or 10[supcaret]26). Commenters 
noted that this threshold would be more likely to target the type of AI 
systems that pose acute national security threats and be consistent 
with the thresholds set out in the AI Order. One commenter noted that 
some widely-available commercial AI models have been trained at 
10[supcaret]25 computational operations. For an AI system trained using 
primarily biological sequence data, one commenter recommended that the 
Treasury Department set the computing power threshold for a prohibited 
transaction at 10[supcaret]24 computational operations, while another 
noted that restrictions on the AI-related use of biological data would 
be better addressed through separate regulations focused on governing 
the use of biological sequence data. Another commenter suggested that 
AI systems trained using primarily biological sequence data should be 
subject to a notification requirement only, citing the inconclusive 
relationship between AI training compute and bio-related risks, the 
distinct characteristics and open-source nature of life sciences 
research, and the value of a notification regime towards better 
understanding this sub-category of AI models. One commenter remarked 
that, despite its limitations, the use of a computing power threshold 
was a more administrable benchmark than other criteria.
    The Final Rule sets the computing power threshold for a prohibited 
transaction involving an AI system at 10[supcaret]25 computational 
operations for an AI system generally, and at 10[supcaret]24 
computational operations for an AI system using primarily biological 
sequence data. These determinations are reflected at Sec.  
850.224(k)(1) and (2), respectively. In assessing the appropriate 
technical thresholds for computing power, the Treasury Department 
considered the comments received on the Proposed Rule and inputs from 
U.S. Government subject-matter experts; the thresholds identified in 
the AI Order and related rationales; estimates for how computing power 
may evolve as AI model development continues; and the nature, number, 
and origin of current large-scale AI models trained at each of 
10[supcaret]23, 10[supcaret]24, 10[supcaret]25, and 10[supcaret]26 
computational operations based on available information. The Treasury 
Department notes that the computing power thresholds identified in the 
Final Rule for a prohibited transaction involving an AI system capture 
a number of models, including models trained primarily on biological 
data, that originate from a country of concern and exhibit the scale 
and capability that have implications for national security. The 
Treasury Department will continue to monitor the development of the AI 
industry, including engagement with relevant stakeholders, to inform 
future updates to the prohibition involving AI systems, as appropriate.
    One commenter recommended that the Treasury Department add a 
prohibition requirement focused on targeting computing clusters 
required to train frontier AI systems. The commenter provided specific 
recommendations for technical criteria related to such computing 
clusters, including networking of over 100Gbits/s and a calculation of 
theoretical maximum computing capacity. The Treasury Department notes 
that the suggestion to add computing clusters to

[[Page 90431]]

the Final Rule aligns conceptually with a reporting requirement for AI 
clusters (with a certain networking bandwidth minimum and theoretical 
maximum computing capacity) under the AI Order. The Treasury Department 
intends to consider a similar addition in future updates to the Final 
Rule, since more time, information, and analysis are required to assess 
the nature and scope of such restrictions, including how to avoid 
unnecessary impact on computing clusters used for consumer or 
commercial applications.
    Another commenter recommended that the Treasury Department have a 
mechanism to reevaluate computing power thresholds in response to 
changes in technology and the development of AI systems in countries of 
concern. The Treasury Department notes that the Final Rule includes the 
note to Sec.  850.224 from the Proposed Rule indicating that 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) remain effective in addressing threats to the national security of 
the United States and make updates, as appropriate, through public 
notice.
Prohibited Transaction--AI System--General
    One commenter recommended that the Treasury Department develop a 
licensing system that would approve transactions where parties can 
demonstrate that a relevant AI system is not transferred to military, 
intelligence, or mass-surveillance end users or end uses. The same 
commenter also suggested publication of a list of AI applications 
``authorized'' for investment regardless of computing power. The Final 
Rule makes no change to Sec.  850.224 in response to this comment, 
since, as discussed above, a licensing system based on transaction-by-
transaction review would be resource- and time-intensive to administer 
and is unlikely to result in the approvals that the commenter 
anticipates due to the potential dual-use and national security 
implications of AI systems that meet the end use or computing power 
thresholds tied to the prohibition. The Treasury Department 
additionally notes that there are no restrictions on outbound 
investment involving AI applications that do not meet the relevant 
definitions and thresholds set forth in the Final Rule, even if there 
is not a definitive list of such applications. Such AI applications 
would be challenging to list comprehensively due to the evolving nature 
of the AI industry and cadence of new or updated AI applications being 
released. The Final Rule includes additional clarification in Sec.  
850.224(j)(2) regarding an AI system's government intelligence or 
surveillance use. The Final Rule also adds parenthetical text to Sec.  
850.244(j)(1) to clarify that weapons design includes, but is not 
limited to, chemical, biological, radiological, or nuclear weapons.
    One commenter also requested that the Treasury Department 
synchronize its definition of an AI system as used within prohibited 
transaction with other regulations, such as by basing its definition of 
AI systems on the EAR. The commenter noted that this would better align 
with companies' existing compliance operations, facilitating 
implementation of the rule and removing the need for companies to make 
subjective determinations about the intended use of AI systems.
    In response, the Treasury Department notes that certain 
technologies implicated by the Final Rule may be necessarily different 
from those implicated by the EAR, since the restrictions on certain 
outbound investments are meant to prevent a country of concern from 
developing or advancing the development of technologies critical to the 
next generation of military, intelligence, surveillance, or cyber-
enabled capabilities, including certain technologies that could be less 
advanced than, upstream of, or otherwise distinct from items controlled 
for export.
Prohibited Transaction--Quantum Computer
    One commenter expressed concern that Sec.  850.224(g), which 
defines a prohibited transaction to include a covered transaction in 
which the relevant covered foreign person or joint venture develops a 
quantum computer or produces any of the critical components of a 
quantum computer, could implicate research and commercial applications. 
The commenter requests that this provision exclude from its scope 
certain medical and geological applications.
    The Treasury Department considered the technologies identified in 
Sec.  850.224(g), including their potential use in research or 
commercial applications, and adopts this provision from the Proposed 
Rule in the Final Rule without changes. The Treasury Department notes 
that development of a quantum computer, or production of any of the 
critical components required to produce a quantum computer such as 
dilution refrigerators or two-stage pulse tube cryocoolers, by a 
country of concern has the potential to pose an acute national security 
threat to the United States. Advances towards more capable quantum 
computers, including incremental advances in quality and speed, would 
likely contribute to a country's capability to develop a 
cryptographically relevant quantum computer, among other applications, 
with acute national security implications. To the extent that a covered 
foreign person is engaged in developing a quantum computer or 
components critical to its function, the Treasury Department assesses 
that covered transactions involving such a covered foreign person 
should be prohibited to prevent a country of concern from accelerating 
its development of sensitive technologies and products critical for 
military end use.
Prohibited Transaction--Cross-Reference to U.S Government Lists and 
Programs
    Several commenters discussed Sec.  850.224(m) of the Proposed Rule, 
which provided that any covered transaction was prohibited when the 
transaction was with or involved 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 was included on one of several U.S. 
Government lists, such as the Entity List maintained by BIS. One 
commenter recommends expanding the coverage of this provision via 
executive order or a related authority. Conversely, multiple commenters 
expressed concern that the Proposed Rule was overbroad and conflicts 
with policy decisions made by the U.S. Government in administering the 
other programs referenced in Sec.  850.224(m).
    The Final Rule makes no changes to Sec.  850.224(m) as set forth in 
the Proposed Rule and adopts it in full. A covered foreign person's 
inclusion on these lists evidences a threat to the interests of the 
United States, such as the foreign policy or national security of the 
United States. The lists in the Proposed Rule were chosen because the 
transfer of capital and U.S. person intangible benefits to any covered 
foreign person on any such list 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.
    One commenter stated that, because some of the lists effectively 
already

[[Page 90432]]

prohibit U.S. persons from engaging in certain transactions with the 
listed persons, Sec.  850.224(m) may be duplicative. Another commenter 
reiterated its request that the Treasury Department base the 
prohibition on a list of entities that are engaged in certain 
activities rather than rely on the lists in Sec.  850.224(m). 
Additionally, one commenter requested clarification around the 
interplay between this program and other U.S. Government programs, 
particularly through guidance.
    As stated above, the Treasury Department considers that Sec.  
850.224(m) is necessary to address circumstances in which a U.S. person 
may not otherwise be prohibited from engaging in a covered transaction 
with a listed person. While a U.S. person may already be prohibited 
from undertaking certain types of transactions with a listed person, 
there may be covered transactions under the Final Rule that are not 
already addressed by the other programs of the programs referenced in 
Sec.  850.224(m).
    The Treasury Department further declines to establish and maintain 
a de novo list of entities that are engaged in certain activities for 
the purposes of prohibited transactions. As discussed in the Proposed 
Rule, developing and maintaining a list of entities 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. Providing a list of 
entities could also result in attempts to evade the rule through 
corporate restructuring and would be overly burdensome to maintain for 
the reasons discussed in relation to the definition of a covered 
transaction above. Instead, the Treasury Department expects 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.
    Lastly, the Treasury Department notes that Sec.  850.224(m) should 
not 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.
Sec.  850.229--U.S. Person
    Section 850.229 of the Proposed Rule defined a U.S. person to mean 
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.
    The Treasury Department received comments on certain aspects of 
this section. A commenter requested that the Treasury Department 
reconsider prohibiting or regulating investments by foreign-domiciled 
funds that are controlled or managed by U.S. companies. The Treasury 
Department reiterates that any branch of a U.S. entity would be a U.S. 
person. With respect to actions by foreign-domiciled funds, the 
Treasury Department notes that as required by Sec.  850.302, the U.S. 
person parent of a controlled foreign entity must take all reasonable 
steps to prohibit and prevent any transaction by such entity that would 
be a prohibited transaction if engaged in by a U.S. person. Further 
discussion of the requirements of a U.S. person related to its 
controlled foreign entity can be found in Subparts C and D and the 
preamble discussion for those subparts.
    A commenter expressed concern about the extraterritorial reach of 
the definition, particularly as related to U.S. citizens employed by 
companies operating in third countries. The Treasury Department notes 
that including U.S. citizens and permanent residents, wherever located, 
is critical to the effectiveness of the Final Rule, as narrowing the 
definition may present opportunities for circumvention. Furthermore, 
the scope of this section is derived from section 9(h) of the Outbound 
Order.
    A commenter requested that ``any person in the United States'' be 
removed from the definition of U.S. person, or that the Treasury 
Department provide greater clarity with respect to when a non-U.S. 
citizen or permanent resident in transit through the United States 
would be a U.S. person. The Treasury Department notes, as it did in the 
Proposed Rule, that 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 Treasury Department 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 coverage under the Final Rule, while possible, is not 
likely to be a frequent occurrence and can be reasonably managed with 
advance planning.
    One commenter requested that the Treasury Department supplement the 
definition of U.S. person with examples to illustrate when a non-U.S. 
entity with a subsidiary, employee, unincorporated branch office, or 
other fixed place of business in the United States would fall within 
the definition. The Treasury Department anticipates providing 
illustrative examples via its Outbound Investment Security Program 
website.
    The Final Rule adopts Sec.  850.229 from the Proposed Rule without 
changes. The Final Rule will apply to the conduct of a U.S. person 
only. Regarding Sec.  850.229 of the Final Rule, the Treasury 
Department reiterates that an entity organized in the United States 
will be considered a U.S. person even if its parent is a non-U.S. 
person. However, a non-U.S. person that happens to be a parent of a 
U.S. person will not be treated as a U.S. person for the purposes of 
this Final Rule solely because of its relationship to the U.S. person. 
Further, 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, will be considered a U.S. person under the Final Rule based 
on their presence in the United States, such person's non-U.S. person 
employer will not to be considered a U.S. person solely because of an 
employee's presence in the United States.
Subpart C--Prohibited Transactions and Other Prohibited Activities
    This subpart of the Final Rule describes activities that are 
prohibited. Such activities include a U.S. person engaging in a 
prohibited transaction unless an exemption has been granted and 
includes a U.S. person knowingly directing an otherwise prohibited 
transaction, as described below. A U.S. person is also 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.  850.302--Actions of a Controlled Foreign Entity
    Under the Proposed Rule, a U.S. person would have been required to 
take all reasonable steps to prohibit and prevent any transaction by 
its controlled foreign entity that would have been a prohibited 
transaction if engaged in by a U.S. person. The Proposed Rule set out 
an illustrative list of factors that Treasury would have considered in 
determining whether the relevant U.S. person took all reasonable steps.

[[Page 90433]]

    One commenter argued that the term ``all reasonable steps'' is 
overly broad and would impose an unachievable standard upon U.S. 
persons. In the commenter's view, this would result in second guessing, 
even when significant efforts were made to comply. The commenter 
requested removal of the word ``all'' from the regulations, which 
would, in the commenter's view, be more realistic and achievable as an 
obligation upon U.S. persons, while addressing the Treasury 
Department's objective of limiting the likelihood that a controlled 
foreign entity would engage in a prohibited transaction. One commenter 
requested that the Treasury Department clarify the shareholder rights 
that it will consider when determining compliance with this requirement 
and provide more specific guidance on what constitutes ``all reasonable 
steps'' for ensuring controlled foreign entities follow the 
requirements in the rule. Another commenter suggested the Treasury 
Department eliminate entirely the requirement for a U.S. person to take 
all reasonable steps to prohibit and prevent its controlled foreign 
entities from undertaking a transaction that would be a prohibited 
transaction if engaged in by a U.S. person. Instead, the commenter 
suggests that such transactions be permitted but require notification.
    The Treasury Department is finalizing Sec.  850.302 as proposed. 
The Treasury Department declines to eliminate the requirement for U.S. 
persons to take all reasonable steps to prohibit and prevent their 
controlled foreign entities from undertaking a transaction that would 
be a prohibited transaction if engaged in by a U.S. person. Doing so 
would create a loophole whereby a U.S. person would effectively be able 
to engage in prohibited transaction through its controlled foreign 
entity. Moreover, the phrasing ``all reasonable steps,'' which is 
consistent with section 8(d) of the Outbound Order, makes clear that if 
a particular measure is ``reasonable'' in the context of the specific 
facts and circumstances of the transaction, then the U.S. person should 
take it. Removing ``all'' could suggest that U.S. persons need only 
take ``some'' reasonable steps and create a risk that a U.S. person 
could permit its controlled foreign entity to engage in a transaction 
that would be a prohibited transaction if engaged in by a U.S. person 
and undermine the intent of the Outbound Order. As described in Note 1 
to Sec.  850.302, the Treasury Department will assess compliance based 
on a consideration of the totality of relevant facts and circumstances, 
and where a U.S. person has taken all steps, including those described 
in Sec.  850.302(b), that were reasonable given the relevant 
circumstances, the U.S. person would be found in compliance with this 
provision of the Final Rule. The Final Rule adjusts the text of Note 1 
to Sec.  850.302 by replacing the phrase ``given the size and 
sophistication of the U.S. person'' with ``in light of the relevant 
facts and circumstances'' to clarify that all relevant facts and 
circumstances may be considered.
    The specific measures identified in Sec.  850.302(b) of the Final 
Rule that a U.S. person may take include: (1) the execution of 
agreements with respect to compliance with the Final Rule between the 
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 the Final Rule; (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.
Sec.  850.303--Knowingly Directing an Otherwise Prohibited Transaction
    Section 850.303(a) of the Proposed Rule would have prohibited a 
U.S. person that possessed authority at a non-U.S. person entity from 
knowingly directing a transaction by that non-U.S. person entity that 
would have been a prohibited transaction if undertaken by a U.S. 
person. A U.S. person would have ``knowingly directed'' a transaction 
when such U.S. person had authority to make or substantially 
participate in decisions on behalf of a non-U.S. person entity and 
exercised that authority to direct, order, decide upon, or approve a 
transaction that would have been a prohibited transaction if engaged in 
by a U.S. person. The Proposed Rule specified that a U.S. person would 
have had such authority if such U.S. person was an officer, director, 
or senior advisor, or otherwise possessed senior-level authority, at 
such non-U.S. person entity.
    Section 850.303(b) of the Proposed Rule carved out from this 
prohibition a U.S. person who recused themself from an investment even 
if that person had the authority to make or substantially participate 
in decisions on behalf of a non-U.S. person entity.
    As the Treasury Department noted in the Proposed Rule, this 
provision was intended to address a potential loophole, such as a U.S. 
person senior manager at a foreign pooled investment fund that invested 
in a covered foreign person or otherwise directed a transaction that 
would have been prohibited if engaged in by a U.S. person. The approach 
in the Proposed Rule was 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) could determine whether its (or its employee's) conduct 
was 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.
    Commenters requested the Treasury Department amend Sec.  850.303 to 
narrow the scope of U.S. persons and activity covered, provide 
additional guidance on how ``knowingly directing'' would be applied to 
specific situations, and clarify how a U.S. person could recuse 
themself from an investment pursuant to Sec.  850.303(b). Some 
commenters stated that if interpreted broadly and in conjunction with 
other terms in the Proposed Rule, this provision could operate as a 
prohibition on a U.S. person holding an executive or other decision-
making role at a covered foreign person or any non-U.S. company and 
would be inconsistent with the objectives of other cross-border 
regulatory requirements.
    Several commenters requested that the Treasury Department narrow 
the scope of ``knowingly directing'' by removing ``or substantially 
participate in'' and ``or as part of a group'' from the second sentence 
in Sec.  850.303(a). Two commenters requested that the Treasury 
Department amend Sec.  850.303(a) to note that certain officers or 
directors ``may'' have such authority depending on the facts and 
circumstances, and that not all officers and directors have any 
authority or power with respect to investment decisions.
    Another commenter noted that the inclusion of ``senior advisor'' 
was unclear, as persons acting solely in an advisory capacity would not 
typically be able to ``exercise'' authority to direct, order, decide 
upon, or approve a transaction. Three commenters requested that the 
Treasury Department clarify that in addition to having the authority to 
make or substantially

[[Page 90434]]

participate in decisions on behalf of a non-U.S. person, the U.S. 
person must actually exercise that authority in regard to a transaction 
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.
    The Final Rule revises Sec.  850.303(a) in response to the 
comments. Under the Final Rule, a U.S. person that possesses authority 
at a non-U.S. person entity, individually or as part of a group, to 
make or substantially participate in decisions on behalf of such non-
U.S. person entity, is prohibited 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. As stated in the Final 
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 by that non-U.S. 
person entity that would be a prohibited transaction if engaged in by a 
U.S. person. The Treasury Department has modified the last sentence of 
Sec.  850.303(a) to specify that a U.S. person possesses such authority 
for a non-U.S. person when they are an ``officer, director, or 
otherwise possess executive responsibilities'' (emphasis added) at a 
non-U.S. person. This modified text removes ``or senior advisor'' and 
narrows the scope of persons who may knowingly direct a non-U.S. person 
to officers, directors, or their functional executive equivalents, and 
is consistent with how other national-security regulatory requirements 
administered by the Treasury Department apply a functional test to 
those occupying decision-making positions (see, e.g., 31 CFR 
800.402(b)(3)).
    The Final Rule does not make other changes recommended by 
commenters to 850.303(a), such as removing ``substantially 
participates'' or ``as part of a group'' from what it is to ``knowingly 
direct.'' The Treasury Department is seeking to balance concerns about 
potential evasion with concerns related to the scope of the provision, 
including impacts on employment of non-U.S. persons, and has determined 
that scoping the provision to apply to certain persons in key roles is 
the most effective way to do so. Furthermore, in entities where 
investment decisions are frequently made by committees or other 
governing bodies, applying the rule only to actions taken outside of a 
group context would exclude a significant amount of corporate activity 
that could be exploited to facilitate a prohibited transaction.
    The Treasury Department declines to adopt a formal ``facts and 
circumstances'' test in the Final Rule, because the existing two-step 
requirement that a U.S. person must have authority and then exercise 
it, combined with the specific language in Sec.  850.303(a) of the 
Final Rule regarding when such authority exists and the recusal 
carveout (discussed further below), is clearer than a ``facts and 
circumstances'' standard. Furthermore, the existing requirement in 
Sec.  850.303(a) that such authority actually be exercised with regards 
to a particular investment for the prohibition to apply recognizes the 
concern raised by commenters that some executives ``may'' have such 
authority but not exercise it.
    The Treasury Department has clarified that consistent with 
commenter views, to ``knowingly direct'' an otherwise prohibited 
transaction by a non-U.S. person, a U.S. person must both (1) have 
authority to make or substantially participate in decisions on behalf 
of the non-U.S. person and (2) exercise 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. In other words, a U.S. 
person with such authority will not be assessed to have ``knowingly 
directed'' an otherwise prohibited transaction unless they actually 
exercised that authority in decision-making regarding the transaction.
    The Treasury Department considered the potential impact of this 
provision on employment opportunities for U.S. persons at non-U.S. 
person entities, but notes that the provision does not broadly restrict 
U.S. persons from holding executive or other decision-making positions 
at non-U.S. persons. The Treasury Department reiterates that Sec.  
850.303(a) applies when a U.S. person both has and actually exercises 
decision-making authority. Along with the availability of the recusal 
provision at 850.303(b) (discussed further below), the provisions 
together establish a clear standard through which a U.S. person could 
perform executive level functions at non-U.S. person entities without 
unintentionally ``knowingly directing'' a prohibited transaction.
    Other commenters suggested exclusions for certain activities, 
including the provision of third-party services, such as banking, due 
diligence, and routine administrative work by a U.S. person, 
participation in a Limited Partnership Advisory Committee (LPAC), as 
well as the provision of legal advice and counsel with respect to the 
applicability of the Final Rule. One commenter requested the Treasury 
Department amend either Sec.  850.303(a) or the definition of covered 
transaction at Sec.  850.210(a)(4) so that the rule would apply more 
clearly to investment activity, and not routine business operations, 
pivots, or expansions. The Final Rule does not make any changes in 
response to these comments because, as explained in the Proposed Rule, 
routine business activities conducted by a U.S. person (whether that 
U.S. person is an employee of the non-U.S. person or a third party) are 
unlikely to rise to the level of substantial involvement in an 
investment decision. Furthermore, approval or decision-making by a U.S. 
person in routine business operations of a non-U.S. person, which could 
include approving an annual budget, staffing, or procurement, are 
unlikely to fall within the scope of this provision. The Treasury 
Department declines to except a business pivot or expansion by a non-
U.S. person, which may constitute a prohibited transaction (and would 
fall within the scope of this provision) because such a transaction is 
more likely to risk a transfer of intangible benefits to a covered 
foreign person.
    One commenter requested clarification on how Sec.  850.303 would 
apply to a U.S. person entity voting its interests or providing 
approvals, even if no U.S. person individual is involved, while another 
requested clarity on what activities of a private fund's Investment 
Committee would be covered by the provision.
    The Final Rule will apply to a U.S. person regardless of whether 
such U.S. person is an individual or an entity, as long as it meets the 
elements of Sec.  850.303(a) such that it possesses the authority 
described and exercises such authority as described. The Treasury 
Department notes that a U.S. person who participates in an advisory 
board or an advisory committee of a pooled investment fund would 
generally not have the authority to ``make or substantially participate 
in decisions'' about investments if the advisory board or committee 
itself does not have the ability to approve, disapprove, or otherwise 
control: (1) investment decisions of the investment fund; or (2) 
decisions made by the general partner, managing member, or equivalent 
related to entities in which the investment fund is invested. However, 
in some circumstances, an advisory board or committee may approve or 
disapprove certain transactions, such as those where conflicts of 
interest are present. In those circumstances, the advisory board or 
committee would have the authority to ``make or substantially

[[Page 90435]]

participate in decisions'' of the investment fund.
    Another commenter requested the Treasury Department clarify whether 
penalties apply to the relevant U.S. person or the non-U.S. person 
entity that undertakes a transaction that would be a prohibited 
transaction if undertaken by such U.S. person directly. Section 850.303 
specifically prohibits actions by a U.S. person. A violation of this 
provision would therefore result in penalties for that U.S. person.
Knowingly Directing--Recusal Carveout
    Several commenters requested additional clarification or guidance 
regarding the recusal provision at Sec.  850.303(b). A few commenters 
requested that the Treasury Department clarify at what point a U.S. 
person would be considered to be ``substantially participating'' in an 
investment decision, and when a U.S. person should recuse themself from 
an investment transaction to benefit from the carveout. Multiple 
commenters requested guidance on how the prohibition would apply to 
certain investment activity after the completion of an investment, or 
noted that the recusal should extend to negotiating and decision-making 
related to an investment and management and oversight of the investment 
after the completion date. One commenter stated that the prohibition on 
``knowingly directing'' should only apply to the decision to enter into 
the investment commitment and another stated the recusal carveout 
should ``apply no earlier than the stage of a `decision to undertake a 
transaction' '' and requested additional clarity on what such a 
decision would entail.
    The Final Rule implements Sec.  850.303(b) with modifications in 
response to comments. In particular, the Final Rule specifies in Sec.  
850.303(b) that a U.S. person that has the authority specified in Sec.  
850.303(a) will not be deemed to have ``knowingly directed'' a 
transaction by a non-U.S. person when the U.S. person recuses themself 
from each of the following activities:
    (1) Participation in formal approval and decision-making processes 
related to the transaction, including making a recommendation;
    (2) Reviewing, editing, commenting on, approving, and signing 
relevant transaction documents; and
    (3) Engaging in negotiations with the investment target (or, as 
applicable, the relevant transaction counterparty, such as a joint 
venture partner).
    Consistent with the requests of most commenters on this issue, the 
recusal carveout focuses on activities connected to an investment 
decision and does not reach post-transaction management and oversight 
of an investment (so long as such post-transaction activity does not 
fall under the description of activities in Sec.  850.303(b)). Because 
the definition of knowingly directing in Sec.  850.303(a) of the Final 
Rule does not cover post-transaction activity, a recusal carveout that 
covers such activity would be inapposite.
    Because the above carveout is conjunctive, a U.S. person that 
participates in any single activity specified in Sec.  850.303(b) would 
not be able to qualify under it. To clarify, while this carveout, if 
strictly adhered to, removes an individual U.S. person from the scope 
of the prohibition in Sec.  850.303(a), it does not confer any 
carveouts, protections, exceptions, exemptions, or safe harbors upon 
the U.S. person in connection with any other provision of this Final 
Rule or any other rule, nor does it affect the application of the 
Outbound Order, Final Rule, or guidance to a transaction itself or the 
actions of any other individual or entity.
Subpart D--Notifiable Transactions and Other Notifiable Activities
    This subpart of the Final Rule requires a U.S. person to notify the 
Treasury Department 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;
     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 is required to 
follow specified procedures that include requirements to submit 
detailed information to the Treasury Department 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 is also required to promptly notify the Treasury Department of 
any material omission or inaccuracy that the U.S. person learns about 
following any information submission.
Sec.  850.403--Notification of Post-Transaction Knowledge
    The Proposed Rule required a U.S. person to notify the Treasury 
Department if the U.S. person acquired 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. Section 850.403 would have 
applied to circumstances in which a U.S. person acquired actual 
knowledge after the window in which a Sec.  850.401 notification could 
have been timely submitted. Under Sec.  850.403 of the Proposed Rule, 
in such a circumstance a U.S. person would have been required to submit 
a notification pursuant to Sec.  850.404 within 30 days of acquiring 
such knowledge. Specifically, the Sec.  850.403 notification 
requirement would have applied 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 included 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. The 
requirement would have applied if the transaction would have been 
either a notifiable transaction or a prohibited transaction.
    The Treasury Department received several comments with respect to 
this section. Commenters requested revisions to Sec.  850.403 to remove 
the obligation to submit a notification in the case where a transaction 
counterparty has pivoted into a covered activity until the U.S. person 
is considering a follow-on or other subsequent investment in the target 
company. It was noted that without this limitation, the Proposed Rule 
would create an ongoing obligation to monitor and report on activities 
of the target company and questioned how far into the future an 
investor must assess a target company's activities and how mature those 
plans must be before the investment is brought within the scope of the 
rule. Some commenters requested clarity that there is not a requirement 
for ongoing monitoring obligations on behalf of a U.S. person. However, 
one commenter noted that because Sec.  850.403 only applies where the 
U.S. person has ``actual knowledge,'' ongoing monitoring or recurring 
diligence of existing investments would not be

[[Page 90436]]

necessary and requests that the rule state as much. Commenters also 
requested a clear exception from imposed divestment in situations in 
which a target company pivots into a prohibited covered activity, but 
the U.S. person performed reasonable due diligence at the time of its 
initial investment and satisfied the notification requirement if 
applicable.
    The Final Rule adopts Sec.  850.403 of the Proposed Rule largely as 
proposed. The only change is a technical edit to Note 1 of Sec.  
850.403 to remove the phrase ``For avoidance of doubt'' from the 
beginning of the note. This edit is for clarity and is not intended to 
affect the substance of the requirement. Section 850.403 applies where 
a U.S. person 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 the U.S. person had known of the 
relevant facts or circumstances as of the completion date. As to 
corporate pivots into covered activity that occur after the completion 
date of the relevant transaction, there are two main considerations 
with respect to the application of the Final Rule: first, whether the 
U.S. person had knowledge at the time of the transaction regarding the 
later corporate pivot into a covered activity, including whether the 
U.S. person had or should have had an awareness of a high probability 
of a fact or circumstance's existence or future occurrence (in which 
case the transaction would be a notifiable transaction or a prohibited 
transaction in the first instance under Subpart C or Subpart D, as 
applicable); and second, where a U.S. person does not satisfy the 
knowledge requirement at the time of the transaction, whether in the 
future the U.S. person acquires actual knowledge of a fact or 
circumstance that, if known to the U.S. person at the time of the 
transaction, would have resulted in a notifiable transaction or 
prohibited transaction (for example, that a greenfield entity was, at 
the time of the transaction, planning to engage in a covered activity). 
Because Sec.  850.403 requires actual knowledge, there is no obligation 
for a U.S. person to conduct recurring diligence or actively monitor 
the activities of the target of the transaction after the completion 
date for purposes of Sec.  850.403, assuming a ``reasonable and 
diligent inquiry'' had been conducted as of the time of the 
transaction.
    The purpose of this provision, consistent with the Outbound Order, 
is to increase the U.S. Government's visibility into U.S. person 
transactions involving the relevant technologies and products.
    Accordingly, under the Final Rule, a U.S. person who acquires 
actual knowledge following the completion date of a transaction of a 
fact or circumstance such that the transaction would have been a 
covered transaction had the fact or circumstance been known by the U.S. 
person at the time of the transaction will be required to submit a 
notification pursuant to Sec.  850.404 within 30 days of acquiring such 
knowledge. This requirement will apply if the transaction would have 
been a notifiable transaction or a prohibited transaction.
Sec.  850.404--Procedures for Notifications
    Section 850.404 of the Proposed Rule detailed the procedures that 
would have been required for submitting a notification regarding a 
covered transaction pursuant to Sec. Sec.  850.401, 850.402, and 
850.403. This included the method of submission via electronic filing 
in accordance with the instructions posted by the Treasury Department 
on its Outbound Investment Security Program website. Section 850.404(b) 
of the Proposed Rule authorized the Treasury Department to contact a 
U.S. person who files a notification with questions or document 
requests related to the transaction or compliance with the rule. Under 
Sec.  850.404(c) of the Proposed Rule, the U.S. person would have been 
required to file a notification no later than 30 calendar days after 
the completion date of a transaction that would have been required to 
be notified to the Treasury Department under Sec.  850.401 or Sec.  
850.402, and, with respect to Sec.  850.403, no later than 30 calendar 
days after it acquired the knowledge referred to in that section. If a 
U.S. person submitted a notification prior to the completion date of 
the transaction, then under Sec.  850.404(d) of the Proposed Rule, the 
U.S. person would have been required to update such notification no 
later than 30 calendar days following the completion date if there were 
material changes to the information in the original filing. Lastly, 
under Sec.  850.404(e) of the Proposed Rule, a U.S. person would have 
been required to inform the Treasury Department in writing no later 
than 30 calendar days following the acquisition of previously 
unavailable information required under Sec.  850.405.
    The Treasury Department received several comments on the 
notification procedures. One commenter requested that in the case of 
multiple funding rounds where a U.S. person would be required to submit 
notifications for substantially similar investments, that the Treasury 
Department either remove the notification requirement for subsequent 
funding rounds (absent a material change in the relevant activities of 
the target or relevant transaction counterparty) or allow the U.S. 
person to amend a previously submitted notification by updating it to 
reflect the subsequent investment. One commenter expressed concern 
about the Treasury Department's authority to request documents and 
information about a transaction beyond the information detailed in 
Sec.  850.405. The commenter requested that such follow-up be limited 
to instances where a notification is incomplete with respect to the 
information requirements in Sec.  850.405, that follow-up requests be 
limited to supporting documentation identified in Sec.  850.405(c), and 
that the time frame specified by the Treasury Department for responses 
be a ``reasonable'' time frame. Another commenter expressed the view 
that the timeline for notifications was too short and requested the 
timeline be extended to 90 or 180 days following the completion date of 
a notifiable transaction. One commenter requested clarification on 
specific recordkeeping and due diligence obligations that companies 
must undertake. One commenter on this section noted the absence of a 
mechanism through which a U.S. person is required to notify the 
Treasury Department of an instance where a person of a country of 
concern pivots into a new covered activity, but the U.S. person does 
not make a new contribution to this activity. The commenter suggested 
the rule require notification of such instances, irrespective of 
whether there is an additional investment made in the relevant entity, 
or alternatively, where a notification was previously submitted, a 
requirement to notify if at a future date the covered foreign person 
pivots into a covered activity described in the definition of a 
prohibited transaction.
    The Final Rule adopts Sec.  850.404 from the Proposed Rule without 
change. In the case of multiple funding rounds where the information is 
consistent across investments, the Treasury Department is exploring 
whether the electronic system for submission of notifications can allow 
a duplicate notification to be populated, updated as needed, and 
submitted, with a new certification under Sec.  850.203. A blanket 
exception for additional investments in the case of multiple funding 
rounds would be counter to the policy objective of increasing the U.S. 
Government's visibility into the volume and nature of

[[Page 90437]]

investments involving the identified technologies and products. With 
respect to the scope of follow-up questions or document requests, this 
is already qualified by the language ``related to the transaction or 
compliance with [part 850]'' and that provides sufficient focus. 
Limiting follow-up requests to only information necessary to comply 
with the requirements in Sec.  850.405 would be unduly restrictive and 
not allow the Treasury Department to ask for relevant information about 
the individual transaction that may not have been contemplated in the 
general information requirements set forth in Sec.  850.405, or as 
related to compliance. The commenter's request for the timeline to be 
extended from 30 days post-closing to 90 or 180 days did not justify 
why a three- or six-fold increase would be necessary. The Treasury 
Department expects a U.S. person to begin collecting the relevant 
information for the notification submission well before the completion 
date as diligence on the transaction is often conducted early in the 
transaction lifecycle. On specific recordkeeping and due diligence 
obligations, these are discussed in various provisions including 
Sec. Sec.  850.104, 850.405(c), and 850.904. In response to the comment 
recommending a mechanism through which a U.S. person is required to 
notify the Treasury Department where an investment target pivots into a 
new covered activity following an investment by a U.S. person, the 
Treasury Department declines to expand the Final Rule to require 
ongoing notification of post-transaction changes in an investment 
target or transaction counterparty's activities where the U.S. person 
did not know (including having reason to know) at the time of the 
relevant transaction of the investment target or transaction 
counterparty's planned engagement in a covered activity. While one 
purpose of the Outbound Order is to increase the U.S. Government's 
visibility into U.S. person transactions involving relevant 
technologies and products, the Treasury Department has balanced such 
policy considerations with compliance considerations related to a U.S. 
person. Relatedly, and as discussed above, in cases where a U.S. person 
acquires actual knowledge following the completion date of a 
transaction of a fact or circumstance such that the transaction would 
have been a covered transaction had the fact or circumstance been known 
by the U.S. person at the time of the transaction, the U.S. person will 
be required to submit a notification pursuant to Sec.  850.404 within 
30 days of acquiring such knowledge.
    The Final Rule describes at Sec.  850.404 the method of submission, 
that electronic filing instructions will be made available and that 
only such electronic filing will constitute the filing of a 
notification pursuant to the Final Rule. Under Sec.  850.404(b), the 
Treasury Department may contact a U.S. person who has filed a 
notification with questions or document requests related to the 
transaction or compliance with the rule. Under Sec.  850.404(c), the 
U.S. person is required to file a notification within 30 calendar days 
of the completion date of a notifiable transaction under Sec.  850.401 
or Sec.  850.402, and, with respect to Sec.  850.403, no later than 30 
calendar days after it acquires the knowledge referred to in that 
section. If a U.S. person submits a notification prior to the 
completion of a transaction, then under Sec.  850.404(d), it must 
update such notification no later than 30 calendar days following the 
completion date if there are material changes to the information in the 
original filing. Under Sec.  850.404(e), a U.S. person is required to 
inform the Treasury Department in writing no later than 30 calendar 
days following the acquisition of previously unavailable information 
required under Sec.  850.405.
Sec.  850.405--Content of Notifications
    Section 850.405 of the Proposed Rule detailed the specific 
information that a U.S. person would have been required to include as 
part of a notification pursuant to Sec.  850.401, Sec.  850.402, or 
Sec.  850.403 of the Proposed Rule. This included information about the 
U.S. person and the covered foreign person, information about the 
transaction, and a discussion of the covered activity or activities 
undertaken by the covered foreign person. If a notification would have 
been required pursuant to Sec.  850.403 of the Proposed Rule (relating 
to knowledge relevant to a transaction's status acquired after the 
transaction has closed), the information to be submitted would also 
have included identification of the fact or circumstance of which the 
U.S. person acquired knowledge post-closing, a statement explaining why 
the U.S. person did not possess such knowledge at or prior to closing, 
and a description of the due diligence that the U.S. person undertook 
prior to the completion of the transaction. Section 850.405(c) of the 
Proposed Rule would have required a U.S. person to maintain records 
related to a notification and supporting documentation for a period of 
10 years from the date of filing. Under Sec.  850.405(d) of the 
Proposed Rule, if the U.S. person did not provide the information 
required by Sec.  850.405(b), such U.S. person would have been required 
to provide a sufficient explanation for why the information was not 
available or otherwise could not be obtained and explain what steps it 
had taken to obtain the information.
    The Treasury Department received several comments on this section. 
One commenter suggested narrowing the information requirements or 
including a de minimis exception, particularly for smaller firms and 
minor transactions, to reduce the compliance burden for companies. The 
Treasury Department sought to address in Sec.  850.405 of the Proposed 
Rule the basic information necessary to analyze and increase the U.S. 
Government's visibility into U.S. person transactions involving the 
relevant technologies and products, while at the same time minimizing 
the compliance burden on U.S. investors. The information provided in 
the notifications will be helpful in highlighting aggregate sector 
trends and related capital flows as well as informing future policy 
development. The Treasury Department expects that many of the 
information requirements are standard for transactional due diligence 
and should be available to the U.S. person. Narrowing the information 
or creating a de minimis exception will not serve the objectives of the 
Outbound Order.
    A commenter requested additional guidance regarding a U.S. person's 
ability to provide ``sufficient explanation'' for why particular 
information is unavailable. The commenter stated that it was unclear 
whether the submission of a filing with certain information missing 
would be allowed, and in what circumstances an incomplete filing might 
be permissible. The obligation on a U.S. person is to provide accurate 
and complete information at the time of the filing. The Treasury 
Department anticipates there may be limited instances where the U.S. 
person does not have available all of the information required and 
nevertheless, receipt of the submission by the Treasury Department 
would be consistent with the objective of the Outbound Order. In such 
cases, an explanation for why the information is unavailable or cannot 
be obtained is important.
    Another commenter referred to practices in typical venture capital 
and private equity investments that would make meeting the content 
requirements of a notification difficult, and therefore requested that 
requirements be lifted regarding identities and ultimate owner 
disclosures. The commenter stated that certain parties are 
contractually prohibited from disclosing the identities

[[Page 90438]]

of other parties and that it can be difficult to ascertain the ultimate 
owner of a public company. The Treasury Department notes that carveouts 
typically are included in contracts for sharing relevant information 
with government investigations, and ascertaining the identity of co-
investors and ultimate owners of the relevant U.S. person and the 
relevant covered foreign person is important to the objectives of the 
Outbound Order.
    A commenter sought clarification on the record retention 
requirements, specifically as to whether such requirements would apply 
to non-covered transactions. The Proposed Rule at Sec.  850.405(c) 
provides that the U.S. person shall maintain a copy of the notification 
filed and supporting documentation for a period of 10 years from the 
date of the filing. This applies to transactions that are required to 
be notified.
    The Treasury Department is adopting Sec.  850.405 as set forth in 
Proposed Rule, with technical edits to paragraph (a) and paragraphs 
(b)(3) and (9). The technical edit to paragraph (a) clarifies that a 
notification submitted to the Treasury Department must be accurate and 
complete subject to paragraph (d), which discusses how a U.S. person 
should respond where the U.S. person cannot provide information 
required under paragraph (b), or where such information becomes 
available after the notification is filed with the Treasury Department. 
The technical edits to paragraphs (b)(3) and (9) add intermediate and 
ultimate parent entities for inclusion in the post-transaction 
organizational charts of the U.S. person and covered foreign person, 
respectively, as well as information related to such intermediate and 
ultimate parent entities, to include name, principal place of business, 
and place of incorporation or legal organization. Section 850.405 of 
the Final Rule details the specific information that must be submitted 
by a U.S. person as part of a notification, including information about 
the U.S. person and the covered foreign person, a brief description of 
the commercial rationale for the transaction, and a discussion of the 
covered activity or activities undertaken by the covered foreign 
person. If the notification is pursuant to Sec.  850.403, the 
notification must identify the fact or circumstance of which the U.S. 
person acquired actual knowledge post-transaction, a statement 
explaining why the U.S. person did not possess such knowledge at the 
time of the transaction, and a description of the due diligence that 
the U.S. person undertook prior to the completion of the transaction. 
Section 850.405 also identifies the records related to the covered 
transaction that the U.S. person must maintain for a period of 10 years 
from the date of filing. If the U.S. person does not provide 
information required by Sec.  850.405, then it must provide a 
sufficient explanation for why the information is not available or 
otherwise cannot be obtained and explain what steps it has taken to 
obtain the information.
Subpart E--Exceptions and Exemptions
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 
identified certain exceptions. A transaction that otherwise qualified 
as a covered transaction but met one of the enumerated exceptions was 
referred to as an excepted transaction. The Proposed Rule listed 
categories of excepted transactions based on the Treasury Department's 
determination that such transactions presented a lower likelihood of 
the transfer of intangible benefits to a covered foreign person or were 
otherwise less likely to raise national security concerns relative to 
other transactions covered by the Proposed Rule.
    The Proposed Rule identified the following categories of excepted 
transactions (subject to conditions in some instances, as summarized 
below):
    [ssquf] An investment by a U.S. person in a publicly traded 
security;
    [ssquf] An investment by a U.S. person in a security issued by a 
registered investment company, such as an index fund, mutual fund, or 
exchange traded fund, or issued by any company that has elected to be a 
business development company;
    [ssquf] An investment below a certain size by a U.S. person LP in a 
pooled investment fund or where the U.S. person LP has secured a 
binding contractual assurance that its capital in the fund will not be 
used to engage in a transaction that would be a prohibited or 
notifiable transaction, as applicable, if engaged in by a U.S. person;
    [ssquf] 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 does not 
constitute a covered foreign person following the transaction;
    [ssquf] 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);
    [ssquf] Fulfillment of a U.S. person's binding, uncalled capital 
commitment entered into prior to the date of the Outbound Order;
    [ssquf] 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
    [ssquf] Certain transactions with or involving a person of a 
country or territory outside the United States that has been designated 
by the Secretary in accordance with provisions set forth in the 
Proposed Rule.
    The Treasury Department received comments to Sec.  850.501 of the 
Proposed Rule, which are discussed below.
Excepted Transaction--General
    Commenters were generally supportive of the excepted transaction 
concept. While most commenters focused on one or more of the above 
categories--which are discussed in turn below--some commenters 
requested the inclusion of additional exceptions or the exclusion of 
certain activities from the definition of covered transaction. Citing 
to ambiguities and unintended consequences, such as imposing additional 
due diligence burdens, several commenters requested that the Treasury 
Department explicitly include in Sec.  850.501 a range of activities 
that were identified in the preamble to the Proposed Rule as not 
intended to fall within the definition of covered transaction: 
university-to-university research collaborations; contractual 
arrangements or the procurement of material inputs for any of the 
covered national security technologies or products (such as raw 
materials); intellectual property licensing arrangements; bank lending; 
the processing, clearing, or sending of payments by a bank; 
underwriting services; debt rating services; prime brokerage; global 
custody; equity research or analysis; or other services secondary to a 
transaction.
    One commenter requested clarification that the exceptions would 
apply to transactions undertaken by (1) a controlled foreign entity, or 
(2) a non-U.S. person knowingly directed by a U.S. person that would 
otherwise fall within the definition of an excepted transaction if 
engaged in by a U.S. person directly. Another commenter requested that 
any ``follow-on'' transactions be excepted from coverage, stating that 
if an original transaction was not a covered transaction, then any 
subsequent restructuring of that transaction or additional investments 
in the business should receive the same

[[Page 90439]]

treatment to preserve the value of the original, permissible 
investment. One commenter asked that sale-and-leaseback arrangements be 
included as an excepted transaction, raising the possibility that the 
transaction could be interpreted as a prohibited greenfield investment 
if the leasing party were engaged in covered activities. One commenter 
requested that the Treasury Department publish a list of transactions 
that are not covered transactions in guidance materials. Another 
commenter requested that the Treasury Department consider exemptions or 
special provisions for transactions made by U.S. semiconductor 
companies.
    Upon consideration of the requests to list activities or 
transactions that are not covered within the text of the Final Rule, 
either within the definition of a covered transaction or within the 
definition of an excepted transaction, the Treasury Department has 
determined that doing so is not necessary. The definition of covered 
transaction has been crafted to refer to a specific set of transaction 
types, and for any transaction to be a covered transaction, all of the 
elements in the relevant prong of the definition must be met. As such, 
it would be unnecessary and may be misleading to categorically identify 
a set of general activities as excepted from the provisions of the rule 
when some activities may not in the first place satisfy the elements 
needed to find coverage (and thus technically could not be excepted 
from coverage if they were never covered to begin with) or, depending 
on how the activity is undertaken, may meet the definitional elements 
and objective of the Outbound Order and thus should be evaluated as a 
covered transaction. Therefore, the Final Rule contains no such list of 
non-covered activities apart from the definition of excepted 
transaction. While U.S. persons subject to the rule may need to 
undertake due diligence to ensure compliance--i.e., to identify whether 
a contemplated transaction is a covered transaction--the Treasury 
Department has sought to tailor the Final Rule to address the national 
security threat identified in the Outbound Order.
    With respect to the application of the exceptions to a controlled 
foreign entity or to a non-U.S. person knowingly directed by a U.S. 
person, the Treasury Department notes the Final Rule, as with the 
Proposed Rule, places 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 Treasury Department 
if the controlled foreign entity undertakes a transaction that would be 
a notifiable transaction if undertaken by a U.S. person. If a 
transaction would not be prohibited or notifiable if undertaken by a 
U.S. person--as is the case with an excepted transaction--then there is 
no obligation on the U.S. person with respect to such transaction.
    Including an exception for restructurings or follow-on investments 
would substantially undermine the goals of the Final Rule. The national 
security objectives of the Outbound Order and Final Rule are implicated 
regardless of whether earlier investments may have been permitted. 
Creating a categorical exception for corporate restructuring would 
potentially open a loophole, and where a transaction meets the criteria 
of a covered transaction and a restructuring introduces an entity in a 
country of concern into the corporate chain, this may be a transaction 
relevant for purposes of the Final Rule.
    The Treasury Department assesses that an exception for sale-and-
leaseback arrangements would not be consistent with the national 
security goals of the Final Rule. To the extent that the U.S. person 
knows or plans that the lease will result in the establishment of a 
covered foreign person or the engagement of a person of a country of 
concern in a covered activity, then that transaction should be a 
covered transaction. If the U.S. person, after ``reasonable and 
diligent inquiry,'' does not have the requisite knowledge or plan, then 
the leaseback would not be a covered transaction.
    Several commenters requested a general de minimis exception be 
created in Sec.  850.501 based on the dollar value of the transaction 
or the percentage of outstanding equity acquired by the U.S. person. 
One commenter suggested excepting acquisitions of less than five 
percent of the equity interest of a covered foreign person. A second 
commenter suggested excepting transactions where a U.S. person invests 
no more than $10 million in a covered foreign person and receives no 
more than five percent of its equity. A third commenter requested that 
a presumption of an exception attach to any investment in publicly 
traded securities if such acquisition constitutes 10 percent or less of 
voting interest in the target. Several commenters stated that de 
minimis investments were, or were likely to be, passive, and therefore 
were unlikely to lead to a U.S. person transferring intangible benefits 
to the investment target.
    The Treasury Department declines to institute an exception across 
transactions based purely on their dollar value or the percentage of 
equity. One reason is that the various types of transactions already 
included in the definition of an excepted transaction in the Final Rule 
include investments with a lower likelihood of a U.S. person having the 
opportunity and incentive to transfer intangible benefits. Such 
transactions include publicly traded securities and LP investments 
below a certain threshold (as discussed further below). In addition, 
and independently, a de minimis threshold based on the financial 
significance of a covered activity in relation to any particular entity 
does not necessarily correspond to the national security significance 
of such activity. The Treasury Department continues to assess that 
investments of the kinds identified in the definition of covered 
transaction, which has been intentionally scoped to capture those 
investments more likely to raise national security concerns, may 
contribute to national security risks regardless of their size, as even 
relatively low-dollar investments can lead to the transfer of 
intangible benefits, particularly for early-stage companies seeking 
investor validation or access to professional networks as much as 
capital. In addition, investments that fall beneath the various 
thresholds proposed by commenters--such as those that comprise four 
percent of voting interest or equity in a covered foreign person--may 
nonetheless afford significant opportunity and incentive for a U.S. 
person to transfer intangible benefits to the investment target, 
illustrating the challenges of a blanket de minimis threshold.
    The Treasury Department additionally declines to create an 
exception specifically for the semiconductor industry. Given the 
likelihood that U.S. person participants in the semiconductor industry 
are often well-positioned to transfer intangible benefits to covered 
foreign persons, such an exception would create a significant gap in 
coverage under the Final Rule and thereby undermine the national 
security objectives of the Outbound Order.
    The Treasury Department has made one technical edit to the chapeau 
of Sec.  850.501. The phrase ``The following transactions are excepted 
transactions'' had been at (a) in the Proposed Rule, but this phrase is 
being moved into the chapeau in the Final Rule, and the phrase ``An 
investment by a U.S. person,'' which had been at (1) in the Proposed 
Rule, is now at (a)(1) in the Final Rule. This edit is for clarity and

[[Page 90440]]

is not intended to affect the substance of the provision.
Publicly Traded Security; Derivative; Equity Compensation
    Section 850.501(a)(1)(i) of the Proposed Rule defined as an 
excepted transaction an investment into a ``publicly traded security,'' 
with ``security'' as defined in section 3(a)(10) of the Securities 
Exchange Act of 1934, as amended. As noted in the Proposed Rule, this 
included 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 Treasury Department assessed that a U.S. person's 
purchase of securities traded on a public exchange or over the counter, 
whether inside or outside the United States, would present a lower 
likelihood of transferring intangible benefits to a covered foreign 
person.
    A few commenters supported the Proposed Rule's incorporation of 
elements from the definition of ``publicly traded security'' as it is 
used by the Office of Foreign Assets Control (OFAC) in connection with 
the Non-Specially Designated Nationals (SDN) Chinese Military-
Industrial Complex Companies List. One commenter supported the 
additional clarity offered in the Proposed Rule on the exception for 
investments into publicly traded securities.
    Several commenters discussed the definition of publicly traded 
security in the context of an excepted transaction. Multiple commenters 
requested that the definition of publicly traded security include 
derivatives, or that the definition of excepted transaction be expanded 
to include derivatives. One commenter recommended excluding derivatives 
unless the derivates trade involves the right to acquire equity or 
certain rights associated with equity in a covered foreign person.
    One commenter suggested exceptions for investments in securities be 
expanded to cover a variety of additional instruments, including index 
funds, mutual funds, and exchange-traded funds ``involving'' publicly 
traded securities of a covered foreign person, instruments that 
reference such securities (e.g., swaps, futures, or options), or 
instruments that are convertible into or exchangeable for such publicly 
traded securities or index funds, mutual funds, and exchange-traded 
funds. Another commenter requested that Treasury clarify that the 
exception includes rights, warrants, and derivative contracts with 
``publicly traded security'' reference assets, as well as futures on 
broad-based indexes. Another commenter called on the U.S. Government to 
close what it referred to as the ``passive-index loophole,'' requesting 
that the Treasury Department work with the U.S. Securities and Exchange 
Commission (SEC) to do so and referenced support for certain 
legislative efforts on this matter. One commenter questioned whether a 
U.S. person's receipt of equity or an equity-related instrument from a 
covered foreign person that is a public company would qualify as an 
exception.
    One commenter requested that the Final Rule consider subscriptions 
to IPOs as a ``publicly traded security'' or otherwise exempt 
subscriptions to IPOs, while others sought clarification whether 
initial purchasers would qualify for the exception. Other commenters 
requested clarity regarding whether transactions by underwriters, 
advisers, and other providers of ``ancillary services'' participating 
in or assisting with an IPO of covered foreign persons would qualify as 
an excepted transaction.
    The Final Rule implements Sec.  850.501(a)(1)(i) from the Proposed 
Rule without change. Under the Final Rule, an excepted transaction 
includes an investment into a ``publicly traded security,'' with 
``security'' defined as set forth in section 3(a)(10) of the Securities 
Exchange Act of 1934, as amended. This includes 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. In response to 
comments, the Treasury Department is adding an additional exception at 
Sec.  850.501(a)(1)(iv) in the Final Rule that excepts an investment in 
a derivative so long as the derivative does not confer the right to 
acquire equity, rights associated with equity, or any assets in or of a 
covered foreign person.
    In response to the comment regarding a ``passive-index loophole,'' 
the exception for publicly traded securities as well as that for 
securities issued by an investment company (further discussed below), 
are not loopholes but rather represent a considered decision to carve 
out investments that are unlikely to contribute to the national 
security risks connected to the transfer of intangible benefits 
identified in the Outbound Order. In response to one commenter's 
request to except the receipt of equity or an equity-related instrument 
from a public company, the Treasury Department has created an exception 
for receipt of employment compensation in the form of stock or stock 
options in the Final Rule discussed more above (see covered 
transaction). This exception is reflected in the text at Sec.  
850.501(f).
    The Treasury Department considers the acquisition of an equity 
interest in a covered foreign person that is not yet publicly traded 
for the purpose of facilitating an IPO, such as a purchase with the 
intent to create a market or to resell the security on a secondary 
market (e.g., as part of an underwriting arrangement), to be a covered 
transaction and declines to create an exception for such a transaction. 
Such transactions provide both capital to the covered foreign person 
and the opportunity to transfer intangible benefits, such as increased 
market access. (See the discussion regarding covered transaction above 
for more.) Furthermore, services ancillary to IPOs that do not include 
the acquisition of an equity interest (or other interests set forth in 
the definition of Sec.  850.210), including underwriting services that 
do not entail acquiring such an interest, are not a covered transaction 
and thus do not require an exception.
Security Issued by an Investment Company
    Section 850.501(a)(1)(ii) of the Proposed Rule defined as an 
excepted transaction an investment by a U.S. person in a security 
issued by an investment company as defined in section 3(a)(1) of the 
Investment Company Act of 1940, as amended (ICA), that is registered 
with the SEC, such as an index fund, mutual fund, or exchange traded 
fund, as well as a company that has elected to be a business 
development company pursuant to the ICA. The Treasury Department 
considered such investments to carry with them a lower likelihood of 
exacerbating the threat to national security identified in the Outbound 
Order.
    The Treasury Department received a few comments on this section of 
the Proposed Rule. One commenter requested that the Treasury Department 
consider requiring index providers to engage in public consultation 
prior to undertaking methodological changes to indexes. Another 
commenter indicated their support for the proposed exception and 
requested that it be expanded to include common and collective 
investment funds that are exempt from the definition of ``investment 
company'' under the ICA, pursuant to section 3(c)(3) or section 
3(c)(11) thereof, but are subject to regulation by Federal or state 
banking authorities (also known as collective investment trusts or 
CITs), arguing that they, like index funds, are unlikely to present the 
kind of risks contemplated by the Outbound Order. One commenter 
requested that the exceptions for investments in securities

[[Page 90441]]

issued by registered investment companies be expanded to cover 
securities issued by companies with equivalent status under the 
securities laws of non-U.S. countries.
    The Treasury Department is implementing Sec.  850.501(a)(1)(ii) 
with three changes from the Proposed Rule. The first is the insertion 
of ``elected to be regulated as or is regulated as a business 
development company'' in place of ``elected to be a business 
development company.'' This is a technical edit and is not intended to 
alter the substance of the rule. The second change is an updated 
statutory reference to 15 U.S.C. 80a-53 in place of 15 U.S.C. 8a-54 and 
a reference to the Investment Company Act of 1940 ``as amended.'' This 
is also a technical edit and is not intended to alter the substance of 
the rule. The third is the removal of the reference to ``or any 
derivative thereon,'' given the exception for derivatives discussed 
above and located at Sec.  850.501(a)(1)(iv) of the Final Rule. Under 
this provision of the Final Rule, an investment by a U.S. person in a 
security issued by a registered investment company, such as an index 
fund, mutual fund, or exchange traded fund, as well as a business 
development company under the ICA, are excepted from the definition of 
covered transaction.
    The Treasury Department recognizes the policy goal underpinning the 
request to impose a requirement on index funds to engage in public 
consultation prior to making methodological changes. However, the 
request exceeds the scope of authority delegated to the Treasury 
Department by the Outbound Order, and thus cannot be addressed in this 
rulemaking. With respect to CITs, while CITs serve a similar purpose to 
registered investment companies, they are not themselves separate legal 
entities, but a type of fiduciary account maintained by a Federal or 
state bank or trust company. CITs are investment funds available mainly 
in employer-sponsored retirement plans and unregulated by the SEC, so 
adding an exception for CITs would undermine this separate treatment 
for pooled investment funds under Sec.  850.501(a)(1)(iii). The 
Treasury Department declines to expand the exceptions for investments 
in securities issued by registered investment companies to cover 
securities issued by companies with equivalent status under the 
securities laws of non-U.S. countries given a desire to keep the 
exception limited and the complexities in assessing the equivalence of 
non-U.S. securities laws, which can vary considerably across 
jurisdictions.
Investment Made as an LP
    The Proposed Rule presented two alternates for Sec.  
850.501(a)(1)(iii) for commenters to consider. Under proposed Alternate 
1, a U.S. person's investment made as an LP in a pooled investment fund 
would have constituted 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 (AUM) of the pooled investment fund. If the U.S. person LP's 
committed capital were to constitute more than 50 percent of the total 
AUM of the pooled investment fund, its investment would have qualified 
as an excepted transaction only if the U.S. person secured a binding 
agreement that the pooled investment fund would not use its capital for 
a prohibited transaction. Under proposed Alternate 2, a U.S. person's 
investment made as an LP in a pooled investment fund would have 
constituted an excepted transaction if the LP's committed capital is 
not more than $1 million.
    A number of commenters expressed a preference for Alternate 1. No 
commenters expressed a preference for Alternate 2. Several commenters 
noted that Alternate 2 would make the exception for an LP investment 
effectively unavailable to most U.S. persons (including U.S. 
institutional investors) investing in a pooled investment fund as an 
LP. One commenter noted that the size of an LP's capital commitment in 
a particular fund may not align to the size of the LP's investment 
allocated specifically to a covered foreign person. Several commenters 
stated that Alternate 1 was better aligned with the policy goals of the 
rule because by focusing on an LP's relative share of a given pooled 
investment fund as a percentage of AUM, which relates to the LP's 
influence within the pooled investment fund, it focused more on the 
potential transfer of intangible benefits from a non-passive U.S. 
person investor via such fund than the absolute dollar threshold in 
Alternate 2. Two commenters stated that Alternate 1 aligned with the 
goals of the Outbound Order because the AUM threshold of 50 percent was 
aligned with the threshold for control of a pooled investment fund. One 
commenter stated that Alternate 2 would disadvantage U.S. person LPs 
and facilitate the entrance of non-U.S. person LPs into pooled 
investment funds in their place.
    Two commenters requested that if the Treasury Department adopts 
Alternate 2, it should raise the dollar threshold to be significantly 
higher, such as $20 million. One commenter stated that there should be 
no de minimis threshold for the exception for LP investments at all 
because LPs only have limited liability as long as they remain passive 
investors. One commenter suggested that an exception for all passive 
investment, similar to the approach taken for LPs in Alternate 1, be 
included in the rule. One commenter requested that the Treasury 
Department remove the exception for LP investments altogether.
    In discussing the effects of Alternate 2, one commenter stated that 
some fund managers do not accept investments under $1 million to comply 
with SEC laws and regulations related to ``sophisticated investors.'' 
The commenter also stated that a range of investors rely on investment 
in private funds as a source of diversification and strong returns for 
investing the retirement savings of tens of millions of American 
workers and that if Alternate 2 were selected, these investors may 
forgo such investments, disrupting cross-border investment and causing 
them to lose an essential source of diversification for the retirement 
savings of tens of millions of American workers. One commenter stated 
that based on a review of a random sample of 400 LP investments across 
all its funds, 255 contributed in excess of $1,000,000 per fund.
    A number of commenters requested that, regardless of which 
alternate the Treasury Department selects for the final rule, an 
excepted transaction include a transaction in which a U.S. person LP 
has secured a binding contractual assurance that its capital will not 
be used to engage in a transaction that would cause the LP to have made 
an indirect prohibited transaction. However, one commenter stated that 
this language would create a loophole unless it required the fund to 
make an assurance that none of the fund's capital would be used for 
such a purpose.
    Several commenters discussed challenges to compliance with either 
or both alternates. Multiple commenters requested further details 
regarding how the percentage of AUM would be calculated for the 
purposes of Alternate 1 given, for example, multiple co-investments in 
a single target by the same LP via multiple funds as well as the fact 
that fundraising from multiple LPs occurs over a period of time, 
causing a given LP's percentage of total contributed capital to 
fluctuate during the fundraising period. Several comments related to 
whether the factors enumerated in Sec.  850.501(a)(1)(iii)(A)(1)

[[Page 90442]]

through (5) via Alternate 1 (which would have excluded an investment 
from the definition of excepted transaction related to certain LP 
investments) or in Sec.  850.501(a)(2) (which would have excluded an 
investment from the definition of excepted transaction related to a 
publicly traded security, a security issued by an investment fund, or 
an LP investment) apply to a given LP investment. Other commenters 
requested that certain types of LP engagement in a fund be conferred a 
safe harbor. One commenter discussed compliance costs for a non-U.S. 
person fund that has a mix of LPs that fall above and below the 
excepted transaction threshold. Another commenter stated that 
compliance with Alternate 2 would not be possible for a U.S. person 
investor contributing a smaller amount as they would lack leverage to 
gain access to the information necessary to determine whether a pooled 
investment fund had made an investment that would result in an indirect 
covered transaction by the LP.
    The Treasury Department notes commenter preferences for Alternate 
1, as well as the comments and data stating that a $1 million dollar 
threshold could make the exception practically unavailable to many 
larger or institutional investors. However, the fact that an 
institutional investor generally makes investments as an LP investor 
that exceed a given dollar threshold is not dispositive to the analysis 
of that threshold. As discussed in the Proposed Rule, the rationale for 
excepting an LP investment by a U.S. person under a specified threshold 
into a pooled investment fund that then invests in a covered foreign 
person 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. The Treasury Department has determined that an 
exception threshold based purely on an investment's proportion of a 
fund's overall AUM could be overinclusive by permitting large U.S. 
person investments that could be significantly allocated to underlying 
investments in one or more covered foreign persons. Even if an 
institutional U.S. person LP remained passive and did not provide 
managerial assistance to investment targets, a covered foreign person 
benefiting from the indirect investment could exploit the affiliation 
with an established U.S. person LP for legitimacy and access to 
additional financing, among other benefits. In addition, given the size 
of certain investments that would be permitted under a pure AUM-based 
exception threshold, a U.S. person LP may have greater incentive and 
potentially greater ability to impact the success of a covered foreign 
person in which the relevant pooled investment fund invests.
    To address this risk of intangible benefits, the Treasury 
Department declines to adopt the element of Alternate 1 linked to a 
pooled investment fund's AUM. Instead, in response to requests to raise 
the dollar threshold in Alternate 2, the Treasury Department has 
determined to apply an exception at $2,000,000, or double that 
discussed in the Proposed Rule. This higher threshold is intended to 
facilitate compliance by U.S. person investors that are generally 
smaller in size and less likely to confer standing and prominence on an 
underlying covered foreign person by virtue of their association as an 
LP investor. The Treasury Department declines to eliminate the LP 
exception in the Final Rule, as suggested by one commenter, because the 
Final Rule is scoped to prevent the transfer of capital that is 
accompanied by intangible benefits, and certain de minimis U.S. person 
investments into pooled investment funds likely do not provide 
sufficient incentive or opportunity for the U.S. person to transfer 
such intangibles to a covered foreign person.
    The Treasury Department has also considered the continued interest 
of institutional investors to have exposure to a wide variety of pooled 
investment funds in search of returns on capital. In response to 
commenter requests to maintain an exception for a U.S. person LP 
investor that has received a binding contractual assurance that its 
capital invested in the fund will not be used to engage in an indirect 
prohibited transaction, the Treasury Department has determined to 
modify the Final Rule to except U.S. person investments into a pooled 
investment fund if the U.S. person has obtained a binding contractual 
assurance that its capital in the fund will not be used to engage in a 
transaction that would be a prohibited transaction or notifiable 
transaction, as applicable, if engaged in by a U.S. person. For 
example, if a U.S. person LP investor invests in a fund that is not a 
U.S. person and that it knows is likely to invest in a person of a 
country of concern engaged in one or more of the three specified 
sectors, and the investor obtains a binding contractual assurance that 
its capital in the fund will not be used to engage in a transaction 
that would be a prohibited transaction if engaged in by a U.S. person, 
the U.S. person LP investor's investment into the fund is not 
prohibited under the Final Rule. However, unless the U.S. person LP 
investor has also obtained a binding contractual assurance that its 
capital in the fund will not be used to engage in a transaction that 
would be a notifiable transaction if engaged in by a U.S. person, then 
the U.S. person LP investment is not excepted from the applicable 
notification requirements, and would be required to submit a 
notification when the fund undertakes a transaction that would be a 
notifiable transaction if undertaken by a U.S. person. Any assurance 
would need to be obtained prior to the U.S. person investment into the 
pooled investment fund for the exception to apply. If timely obtained, 
the exception would apply regardless of the overall dollar amount of 
the U.S. person's investment--that is, the test for an excepted 
transaction is disjunctive such that either an investment of $2,000,000 
or less, or an investment with the foregoing contractual assurance, is 
sufficient to trigger the exception.
    This approach aligns with the goals of the Outbound Order because 
the covered foreign person would not benefit from a U.S. person's 
capital, and a U.S. person whose capital is not invested in a covered 
foreign person likely lacks the opportunity or incentive to provide 
intangible benefits to such covered foreign person that it might have 
provided had its capital been invested. The Treasury Department expects 
that such a binding contractual assurance would result in the U.S. 
person LP not receiving investment returns from those investments in a 
covered foreign person for which the U.S. person's capital was not used 
pursuant to such assurance.
    The overall hybrid approach adopted in the Final Rule--that is, 
defining excepted transaction as any LP investment of $2,000,000 or 
less, or any LP investment accompanied by a binding contractual 
assurance that the LP's capital invested in the pooled investment fund 
would not be made to effect an indirect prohibited transaction or 
notifiable transaction, as applicable--provides two distinct avenues to 
meet the criteria of an exception, addressing several issues raised by 
commenters.
    Finally, the hybrid approach adopted in the Final Rule makes the 
exception accessible to a wide variety of investor sizes and types but 
retains the bright-line simplicity of Alternate 1. It eliminates the 
need to interpret and

[[Page 90443]]

apply the exclusionary factors enumerated in Sec.  
850.501(a)(1)(iii)(A)(1) through (5) of the Proposed Rule to particular 
LP agreements or participation in an LPAC or committee of an investment 
fund, and likewise obviates the complexities discussed by commenters of 
calculating a specific LP's percentage of AUM. As such, the Treasury 
Department removes from the Final Rule Note 1 to Sec.  850.501 of the 
Proposed Rule, which described the application of those exclusionary 
factors no longer included in the Final Rule. The Treasury Department 
notes that an LP's participation on an advisory board or a committee of 
an investment fund does not, as a general matter, exclude such LP from 
the exception described in Sec.  850.501(a)(1)(iii).
Rights Beyond Standard Minority Shareholder Protections
    Under Sec.  850.501(a)(2) of the Proposed Rule, certain 
transactions that otherwise qualified as excepted transactions would 
not qualify if a U.S. person obtained certain rights beyond standard 
minority shareholder protections as part of its investment. The 
Proposed Rule listed six minority shareholder protection rights:
     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;
     The power to prevent an entity from entering into 
contracts with majority investors or their affiliates;
     The power to prevent an entity from guaranteeing the 
obligations of majority investors or their affiliates;
     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 issued additional instruments 
conveying interests in the entity;
     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
     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 Sec.  
850.501(a)(2)(i) through (v) of the Proposed Rule.
    A few commenters provided responses to this section of the Proposed 
Rule. One commenter noted that in certain jurisdictions, including the 
PRC, rules for listed companies give shareholders owning no more than 3 
percent of shares the right to put forward for a shareholder vote a 
proposal to nominate directors. The commenter asked that the Treasury 
Department either make explicit that such a right is a standard 
minority shareholder protection or that an otherwise excepted 
transaction does not lose that status unless and until the U.S. person 
investor exercises their right to nominate. One commenter asked that 
the Treasury Department explicitly affirm that a transaction that 
provides only minority shareholder provisions is excepted. Another 
commenter suggested removing the restriction that any investment that 
affords a U.S. person rights outside standard minority shareholder 
rights will not constitute an excepted transaction.
    The Treasury Department acknowledges that certain jurisdictions, 
including the PRC, may provide proposal rights to relatively low 
percentage shareholders in companies listed in those jurisdictions. The 
Treasury Department, however, does not consider these rights to be 
standard minority protection rights and declines to modify the Final 
Rule to accommodate this scenario. Standard minority protection rights 
are typically defensive in nature and are aimed at protecting minority 
shareholders' investments from actions taken by majority investors. A 
right to propose a slate of directors is a positive, not negative 
right, and goes beyond just protecting the investment of the minority 
shareholders. Being afforded such a right with respect to an investment 
in a covered foreign person would go beyond standard minority 
shareholder protections; as such, if provided as part of an investment 
that would otherwise be an excepted transaction, the investment will 
not have that excepted status.
    The Treasury Department does not support the inclusion of an 
explicit affirmation that transactions providing only minority 
shareholder protections are excepted. The text of the Final Rule is 
clear that if an investment falls within the definition of 
850.501(a)(1), it is an excepted transaction, unless it affords rights 
beyond standard minority shareholder protections.
    Section 850.501(a)(2) of the Final Rule, therefore, remains largely 
unchanged from the Proposed Rule, with the exception of a technical 
edit discussed below. An investment in a covered foreign person that 
would otherwise be an excepted transaction under Sec.  850.501(a) that 
affords a U.S. person rights beyond standard minority shareholder 
protections with respect to the covered foreign person (such as the 
rights listed above) is not an excepted transaction. The Final Rule 
adds the phrase ``standard minority shareholder'' to the last sentence 
of Sec.  850.501(a)(2) to clarify the reference to the ``protections'' 
described in paragraphs (a)(2)(i) through (vi). This edit is not 
intended to affect the substance of the requirement.
Buyout of Person of a Country of Concern Interest(s)
    Section 850.501(b) of the Proposed Rule defined as an excepted 
transaction those transactions in which a U.S. person acquired all of 
the equity or other interests in an entity held by one or more persons 
of a country of concern, provided that following the acquisition, the 
entity no longer constituted a covered foreign person. The objective of 
the exception was to carve out from coverage a transaction that 
eliminated the likelihood that intangible benefits of a U.S. person 
could transfer to a covered foreign person because following the 
transaction, a person of a country of concern no longer would have any 
interest in the buyout target.
    The Treasury Department received two comments on this section of 
the Proposed Rule. Both commenters recommended that the exception be 
expanded to include any acquisition of equity or other interest by a 
U.S. person in an entity if, following the acquisition, the entity no 
longer meets the definition of a person of a country of concern. 
According to the commenters, modifying the exception would be 
consistent with the Proposed Rule, which would permit U.S. persons to 
invest in entities that are minority-owned by persons of a country of 
concern.
    The Treasury Department declines to expand the exception and adopts 
the text of the Proposed Rule without changes. Expanding the exception 
in the manner recommended by commenters would open a potential loophole 
with respect to joint ventures--if, for example, a U.S. person 
purchases a 51 percent interest in a covered foreign person, and a 
person of a country of concern retains 49 percent ownership, that 
transaction closely resembles the establishment of a joint venture. The 
exception, if expanded in the manner requested by commenters, would 
threaten to undermine Sec.  850.210(a)(5), because U.S. person 
investors could effectively create joint ventures with persons of a 
country of concern in contravention of the Final Rule.
Intracompany Transfer
    Section 850.501(c) of the Proposed Rule excepted from the 
definition of covered transaction certain intracompany transactions--
that is, a transaction between a U.S. person and

[[Page 90444]]

its controlled foreign entity to support ongoing operations or other 
activities that are not covered activities. The goal of this exception 
was to avoid unintended interference with the ongoing operations of a 
U.S. person's controlled foreign entity even when that controlled 
foreign entity also met the definition of covered foreign person. The 
Treasury Department expected that the initial acquisition or 
establishment of the subsidiary would already have constituted a 
covered transaction, and where it did not, the potential impacts on the 
U.S. person from covering such intracompany transactions under the 
Proposed Rule likely would have outweighed the benefit in terms of the 
objectives of the Outbound Order. Although the definition of covered 
transaction in the Proposed Rule would not have usually applied 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 would have excepted intracompany transactions 
that would have been covered transactions but supported activities that 
were not covered activities. However, the exception would not have 
applied to greenfield investments or joint ventures, in order to 
prevent the exception from being exploited, e.g., via the use of an 
existing controlled foreign entity to shift operations into new covered 
activities or the acquisition of a person of a country of concern 
entity not engaged in a covered activities that then shifted operations 
into a covered activity for the first time.
    Several commenters sought clarification regarding the application 
of the exception, stating that the Proposed Rule was ambiguous with 
respect to the line between transactions that would support ongoing 
operations and those that would fund covered activities. To rectify the 
ambiguity, one commenter stated that the rule should be revised to 
allow companies (1) to provide ongoing support for existing operations 
(i.e., predating the Outbound Order) in the prohibited category, so 
long as they provide notice; and (2) to be excepted from the 
notification requirement for ongoing operations (i.e., predating the 
Outbound Order) if they would not be prohibited under the Outbound 
Order.
    One commenter interpreted the Proposed Rule to limit the exception 
to only transactions between a U.S. person parent and a direct 
controlled foreign entity subsidiary. Another suggested that the rule 
should apply to any intracompany transaction between a U.S. person 
parent and controlled foreign entity subsidiary, except transactions 
that would be covered under Sec.  850.210(a)(4).
    Multiple commenters sought to expand the reach of the exception 
beyond the parent-subsidiary relationship between a U.S. person and its 
controlled foreign entity. A few commenters asked for expansion of the 
exception to include transactions between a U.S. person and its 
subsidiaries, both wholly-owned and less-than-wholly-owned. One 
commenter requested that the exception apply to all transactions 
between a U.S. person parent and any wholly owned subsidiary. Others 
suggested expanding the exception to include any transaction between a 
U.S. person and a corporate affiliate, or a transaction involving 
affiliates that are knowingly directed by a U.S. person, or a 
transaction undertaken by a controlled foreign entity of a U.S. person. 
One commenter suggested extending the exception to where a U.S. person 
knowingly directs a transaction by a foreign parent that is a publicly 
traded company. One commenter suggested establishing a threshold based 
on the financial significance of the transaction. Another commenter 
stated that the exception should apply to categories of covered 
activities, which would allow a controlled foreign entity to continue 
its activities within a particular category.
    Some commenters suggested that the exception should extend to U.S. 
person investment in any controlled foreign entity, even if the U.S. 
person were not the parent. Others asked that the exception apply to 
transactions between entities operating in a verein network or other 
non-corporate forms that have the same purpose of facilitating routine 
operational activities.
    One commenter asked for an illustrative list of intracompany 
transactions that would fall within the exception, and those that would 
not--i.e., when the controlled foreign entity begins engaging in a new 
covered activity.
    The Treasury Department notes the requests for clarification with 
respect to the Proposed Rule regarding the intended scope of the 
exception for intracompany transfers under Sec.  850.501(c). The 
purpose of the exception in the Final Rule is to carve out from the 
definition of covered transaction a transaction between a U.S. person 
parent and a controlled foreign entity subsidiary that supports new 
operations that are not covered activities or that maintains ongoing 
operations (including ongoing covered activities) in which the 
controlled foreign entity is engaged at the time of the effective date 
of the Final Rule. The Final Rule amends this provision to make this 
explicit.
    As written, the intracompany transfer exception in the Final Rule 
does not include an exception for intracompany transfers that support 
new operations that are covered activities. Because such transfers are 
not excepted, the exclusions for greenfield, brownfield, and joint 
venture investments in the exception in the Proposed Rule that cross 
reference to Sec.  850.210(a)(4) and (5) have been removed.
    In other words, the intracompany transfer exception in the Final 
Rule allows a U.S. person parent to continue to support its controlled 
foreign entity in maintaining any covered activities in which it has 
been engaging prior to the effective date of the Final Rule as well as 
any new non-covered activities. The intracompany transfer exception in 
the Final Rule also allows a U.S. person parent to support its 
controlled foreign entity that was established after the effective date 
of the Final Rule in its new or ongoing operations that are not covered 
activities. It does not permit a U.S. person parent to use its covered 
foreign person subsidiary to engage in new covered activities, nor does 
it allow a U.S. person parent to acquire control of a person of a 
country of concern and shift such entity's operations such that it 
engages in a new covered activity. Neither such activity is excepted by 
Sec.  850.501(c) of the Final Rule, and both such activities are 
covered by the language of Sec.  850.210(a)(4) (see the discussion of 
covered transaction above, specifically as regards ``greenfield'' and 
``brownfield'' investments).
    The Treasury Department does not support extending the intracompany 
transfer exception beyond the U.S. person parent-controlled foreign 
entity relationship--i.e., to other subsidiaries or affiliates, where a 
U.S. person knowingly directs a transaction involving an affiliate or a 
foreign parent to support ongoing operations of a subsidiary, or 
between a U.S. person and any controlled foreign entity, including 
those for which the U.S. person is not a parent. This exception is 
intended to be limited in scope and to avoid unintended consequences 
for the existing operations of a U.S. person that is already the parent 
of a covered foreign person in a country of concern and, importantly, 
can control such entity. Extending the exception beyond a controlled 
foreign entity could open significant loopholes and could result in 
transfers of intangible benefits to an entity in a country of concern 
that the relevant U.S. person does not control,

[[Page 90445]]

heightening concerns that such enhanced standing and prominence, 
managerial assistance, access to investment and talent networks, market 
access, and enhanced access to additional financing, could be shared 
onward with government authorities. Similarly, the Treasury Department 
declines to expand the exception to allow any intracompany transfer to 
a wholly-owned subsidiary, as one commenter requested, as this could 
open a loophole in the rule by extending the exception to the use of 
existing wholly-owned subsidiaries to fund operations in new line of 
covered activities, for example.
    The Treasury Department also does not support the establishment of 
a threshold for the exception based on financial significance; the 
exception applies to any transaction of any value between a U.S. person 
parent and controlled foreign entity subsidiary to support new non-
covered activities or maintain ongoing operations, including ongoing 
covered activities. The purpose of the Final Rule, consistent with the 
Outbound Order, is to require notification of, and prohibit, certain 
transactions that can be exploited by countries of concern to develop 
sensitive technologies and products. Therefore, the Treasury Department 
assesses that it is important to keep this exception, which would 
permit investments in an entity that constitutes a covered foreign 
person, narrow, with the intention of avoiding unnecessary disruption 
to operations of entities of which the U.S. person is a parent. Given 
the myriad varieties of intracompany transactions that could be 
excepted under this provision, the Treasury Department declines to 
provide an illustrative list in this Final Rule. To be clear, the 
exception under the Final Rule is not limited to direct U.S. person 
parent-controlled foreign entity relationships, as Sec.  850.206(b) 
contemplates and captures a tiered ownership structure scenario where a 
U.S. person is an ultimate (but not immediate) parent. For the 
avoidance of doubt, to the extent that a U.S. person entity's 
subsidiaries or affiliates are also U.S. persons, then they have an 
independent obligation to comply with the Final Rule.
Binding, Uncalled Capital Commitment
    The Proposed Rule included an exception for transactions made in 
fulfillment of a U.S. person's binding, uncalled capital commitment 
entered into prior to August 9, 2023, the effective date of the 
Outbound Order. The Treasury Department included this exception because 
a U.S. person could not have been aware of the scope of the Outbound 
Order or the President's directive to the Treasury Department to 
implement the prohibition and notification requirements before the 
Outbound Order was issued. Indeed, the ANPRM, issued on the same day as 
the Outbound Order, included a discussion of the possible exception for 
transactions made pursuant to such commitments made prior to the 
issuance of the Outbound Order. The Proposed Rule, therefore, aimed to 
avoid a significant disruption to a U.S. person who entered into a 
binding capital commitment prior to August 9, 2023, and would have 
applied to any transaction made in fulfillment of a binding, uncalled 
capital commitment entered into prior to such date.
    Multiple commenters provided responses to this section of the 
Proposed Rule. A few commenters expressed support for the Treasury 
Department's decision to provide for only prospective application of 
the rule, while several requested that the Treasury Department revise 
the exception for commitments entered into before August 9, 2023, to 
instead except commitments entered into before the effective date of 
the Final Rule. One commenter asked to revise the exception for 
transactions made pursuant to a binding, uncalled capital commitment 
entered into before August 9, 2023, to instead except commitments that 
the investor did not know were prohibited at the time the commitments 
were entered into.
    A few commenters stated that limiting the exception to binding, 
uncalled capital commitments made prior to August 9, 2023, could lead 
to retroactive application if terms defined elsewhere, like covered 
activities and ``covered national security technologies and products,'' 
were later broadened to cover more transactions without changing the 
applicable lookback date.
    In response to the comments, and given certain fairness 
considerations raised by the commenters, the Treasury Department has 
revised Sec.  850.501(d) of the Final Rule to provide an exception for 
transactions made after the effective date of the Final Rule (January 
2, 2025) pursuant to a binding, uncalled capital commitment entered 
into before the effective date of the Final Rule.
    If the Treasury Department broadens the scope of what is covered in 
subsequent rulemaking, the Treasury Department expects to consider 
whether it is appropriate to amend this provision to take into account 
binding commitments made after the specified date. The Treasury 
Department notes that the exception in Sec.  850.501(d) is limited to 
transactions pursuant to binding capital commitments made before the 
effective date (i.e., where the U.S. person has made a binding capital 
commitment to a fund or similar investment entity prior to January 2, 
2025 and the capital is then called after the effective date), 
recognizing that often a fund's investment targets have yet to be 
determined at the time of the capital commitment. This is in contrast 
to the situation where a U.S. person signs a binding agreement with or 
with respect to the investment target. In the later scenario, the 
exception in 850.501(d) will not apply and, if the transaction's 
completion date is after January 2, 2025, the notification and 
prohibition requirements are applicable, even if the binding agreement 
was executed prior to January 2, 2025. The Treasury Department notes 
that following the Outbound Order and the ANPRM, the Proposed Rule 
additionally put the public on notice that the Treasury Department 
intended to require notifications for certain transactions and prohibit 
other transactions, and the Final Rule includes a delayed 
effectiveness, allowing transaction parties time to ensure compliance 
with the Final Rule.
Loan Syndication Upon Default
    Section 850.501(e) of the Proposed Rule included in the definition 
of excepted transaction 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 could not initiate action 
vis-[agrave]-vis the debtor on its own and did not have a lead role in 
the syndicate. Consistent with the objectives of the Outbound Order, it 
excepted a narrow set of circumstances in which a U.S. person lender 
would have passively received an interest in a covered foreign person 
and, even after receiving such interest, lacked a role in the lending 
syndicate that would have been likely to create the opportunity for a 
U.S. person lender to convey intangible benefits to the covered foreign 
person debtor.
    The Treasury Department received multiple comments on this 
provision of the Proposed Rule, including one expressing general 
support of the exception. Several comments requested revisions to the 
Proposed Rule, while one sought to remove the exception entirely. With 
respect to requested revisions, one commenter stated that, if 
foreclosures on collateral remain within the scope of the rule, then 
the Treasury Department should revise Sec.  850.501(e)(2) to state that 
the

[[Page 90446]]

exception applies to any U.S. person bank that ``is not the syndication 
agent,'' because ``lead role'' is not common industry terminology. The 
Treasury Department intends to maintain this exception in the Final 
Rule, as the Treasury Department assesses that a U.S. person bank 
passively receiving an equity interest by virtue of a role in a lending 
syndicate is unlikely to result in the national security concerns 
identified in the Outbound Order. The Treasury Department agrees with 
the proposed revision to Sec.  850.501(e)(2) to replace ``lead role'' 
with ``syndication agent'' and has made such change in the Final Rule. 
To the extent that a U.S. person lender in the syndicate is not the 
syndication agent yet can still initiate action on its own with respect 
to the debtor, then the exception would not apply.
    A few commenters sought to expand the scope of the exception. One 
commenter requested the exception be broadened to include instances 
where the U.S. person lender has a larger role in the lending 
syndicate. Another commenter requested that the Treasury Department 
revise the rule to recognize that exercising control to protect an 
investment does not always create the intangible benefits the rule 
seeks to eliminate.
    The Treasury Department declines to expand the exception to include 
U.S. bank lenders that play a larger role in the syndicate. With such a 
role comes a greater opportunity to cause the transfer of the equity 
and potentially to transfer intangible benefits to the covered foreign 
person debtor, which would undermine the goals of the Outbound Order 
and Final Rule. Although exercising control over an investment may not 
always result in the conveyance of intangible benefits, the Treasury 
Department assesses that greater control leads to a higher likelihood 
of such conveyance the rule seeks to address.
    A few commenters requested that the Treasury Department revise the 
exception to apply to syndicates led by either a bank or a nonbank. The 
Treasury Department declines to expand the exception in the Final Rule 
to include nonbank lenders. The Treasury Department seeks to keep this 
exception limited, given that it involves a U.S. person lender taking 
possession of a voting interest in an entity to which it has provided 
capital, and notes that there are other exclusions under the Final Rule 
that may be applicable to U.S. persons who have foreclosed on an equity 
interest as a result of a loan default, for example, where the U.S. 
person did not know at the time of making the loan that the pledged 
collateral was in a covered foreign person. (See the discussion of a 
covered transaction above.) U.S. person bank lenders are generally not 
in the business of managing and operating going concerns. To the extent 
that they take possession of a voting interest, it is primarily for the 
purpose of selling the interest to recoup the value of their loans, and 
hence the Treasury Department assesses there is a relatively lower 
likelihood of such banks conveying intangible benefits to the covered 
foreign person.
    The Final Rule, therefore, remains largely unchanged from the 
Proposed Rule, except for the change in Sec.  850.501(e)(2) discussed 
above. The exception, therefore, applies to 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 loan was made by a syndicate of banks where the U.S. person 
lender in the syndicate cannot act on its own with respect to the 
debtor and is not the syndication agent.
Exception Regarding Designated Territories or Countries Outside of the 
United States
    Recognizing shared objectives and in furtherance of the U.S. 
Government's efforts to encourage partners and allies to address risks 
related to outbound investment, Sec.  850.501(f) of the Proposed Rule 
excepted 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 related to 
that country or territory's own measures to address the national 
security risk related to certain outbound investment. The Treasury 
Department expected that any such country or territory would be 
designated after accounting for factors such as whether the country or 
territory was regulating outbound investment transactions involving 
technologies critical to a country of concern's military, intelligence, 
surveillance, or cyber-enabled capabilities, which technologies were 
covered by such regulation, and whether such regulation addressed 
national security concerns related to outbound investment similar to 
those addressed by the Outbound Order. The Proposed Rule noted that the 
Treasury Department was considering taking into account other factors 
for purposes of designating a country or territory, including the 
extent to which a country or territory cooperated with the United 
States on issues of national security and whether it had in place and 
is using related authorities and tools, such as export controls, to 
protect sensitive technologies and products.
    The Proposed Rule would have provided 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 stated 
that the Secretary would determine the types of transactions for which 
the related national security concerns were 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 
Treasury Department stated that it would make the 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 the Treasury Department's Outbound Investment Security 
Program website.
    Several commenters addressed--and were generally supportive of--the 
proposed exception under Sec.  850.501(f).
    A few commenters offered a framework for how the Treasury 
Department should consider scoping which transactions should be subject 
to the exception, or general principles for applying the exception in 
the future. Others noted that the proposed exception could convey an 
unfair advantage to a foreign competitor unless the foreign program is 
equally stringent. Another commenter noted that the proposed exception 
would not provide an incentive for a country or territory to develop an 
equivalent program because it would affect only a small number of 
businesses in any given country, and that if the Treasury Department 
were to consider other national security measures (such as export 
controls) in evaluating a country or territory for designation, then 
the country may gain the benefit of the incentive without needing to 
establish its own outbound security program. One commenter asked that 
the Treasury Department revise the Proposed Rule to clarify that the 
Secretary will make public the bases for the decision to designate a 
country or territory. Another commenter requested that the criteria for 
the exception be ``fully developed and specific'' prior to the issuance 
of the Final Rule.
    The Treasury Department appreciates commenters' efforts to help 
develop a framework and to conceptualize the proposed exception and 
identify principles to guide its operation, as well as their interest 
in having the relevant consideration criteria be developed prior to the 
issuance of the Final Rule. Accordingly, the Treasury Department 
anticipates making available on its

[[Page 90447]]

Outbound Investment Security Program website more information on the 
factors the Secretary will consider when making a designation or 
determination. With respect to factors related to a designation, the 
Treasury Department intends to consider, for example:
     A country or territory's legal authority to regulate 
outbound investment;
     The extent to which the country or territory has in place 
and effectively utilizes a mechanism to regulate outbound investment 
involving sensitive technologies and products in the semiconductors and 
microelectronics, quantum information technologies, and AI sectors;
     The extent to which the country or territory possesses the 
legal authority to prohibit or require notification for outbound 
investment transactions involving sensitive technologies and products 
in the semiconductors and microelectronics, quantum information 
technologies, and AI sectors; and
     The extent to which the country or territory possesses 
legal authority to control the export of sensitive technologies and 
products in the semiconductors and microelectronics, quantum 
information technologies, and AI sectors to any foreign persons 
anywhere they may be located.
    With respect to determinations, the Treasury Department is 
currently considering adopting an approach similar to that described by 
commenters, where the ``types of transactions'' for which this 
exception is available may differ based on whether the country or 
territory is the ``source of investment'' or the ``destination of 
investment.''
    In response to comments, the Treasury Department notes that any 
exceptions created under this section would ultimately apply to U.S. 
persons. These exceptions would lift the notification requirement or 
prohibition, as applicable, on a U.S. person with respect to certain 
transactions that would otherwise be notifiable transactions or 
prohibited transactions.
    The Treasury Department does not expect a foreign country or 
territory's regime related to outbound investment to necessarily be 
identical to the Final Rule. The relevant focus remains on the national 
security risks related to and, as stated in the Outbound Order, 
potentially exacerbated by, outbound investment. As such, the 
Secretary, following relevant consultations, may determine that certain 
types of transactions involving those countries or territories should 
be excepted.
    Accordingly, the Final Rule adopts at Sec.  850.501(g) the 
exception found at Sec.  850.501(f) of the Proposed Rule with minor 
modifications. The Final Rule clarifies that the national security 
risks related to outbound investment to be addressed by a country or 
territory outside of the United States must be similar to those 
described by the Outbound Order. Additionally, consistent with the 
national emergency declared in the Outbound Order, the risks must be 
related to, rather than be posed by outbound investment. The Treasury 
Department assesses that these changes will provide the Secretary with 
greater flexibility to consider the full range of a country's or 
territory's legal authorities and programs when making designations or 
determinations under the rule. In addition, to afford flexibility to 
respond to changes in the international threat environment, the 
Treasury Department has added Sec.  850.501(g)(4) to provide the 
Secretary with the authority to rescind a designation or determination 
if determined to be appropriate. The Secretary's recission of a 
designation or determination would apply prospectively and would be 
announced publicly.
Excepted Transaction--Final Rule Summary
    The Final Rule implements ten categories of excepted transaction, 
including (subject to conditions, in some instances):
    [ssquf] An investment by a U.S. person in a publicly traded 
security;
    [ssquf] An investment by a U.S. person in a security issued by a 
registered investment company, such as an index fund, mutual fund, or 
exchange traded fund, or issued by any company that has elected to be a 
business development company;
    [ssquf] An investment of a certain size by a U.S. person LP in a 
pooled investment fund;
    [ssquf] An investment by a U.S. person in a derivative;
    [ssquf] 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 is not a 
covered foreign person following the transaction;
    [ssquf] An intracompany transaction between a U.S. person parent 
and its controlled foreign entity that supports new operations that are 
not covered activities or that maintains ongoing operations, including 
ongoing covered activities;
    [ssquf] Fulfillment of a U.S. person's binding, uncalled capital 
commitment entered into prior to the effective date of the Final Rule;
    [ssquf] 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 participated 
passively in the syndicate;
    [ssquf] The receipt of employment compensation by an individual in 
the form of stock or stock options, or the exercise of such options; 
and
    [ssquf] Certain transactions with or involving a person of 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(g) of the Final Rule.
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.'' As described in the Proposed Rule, the 
Secretary, in consultation with the Secretary of Commerce, the 
Secretary of State, and the heads of relevant agencies, as appropriate, 
may have determined that a covered transaction is in the national 
interest of the United States and therefore, exempted it from certain 
provisions of the Proposed Rule. The Treasury Department anticipated 
that this exemption of a covered transaction would have been granted by 
the Secretary only in exceptional circumstances.
    Section 850.502 of the Proposed Rule described the process and 
considerations for the Secretary's authority to exempt a covered 
transaction determined to be, in consultation with the heads of 
relevant agencies, as appropriate, in the national interest of the 
United States. Any determination that a covered transaction was in the 
national interest of the United States and therefore exempt from 
certain provisions of the Proposed Rule would have been based on a 
consideration of the totality of the facts and circumstances. The 
Proposed Rule stated that the Treasury Department anticipated such 
determination may have been 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 Proposed Rule stated that the 
Treasury Department would not consider granting retroactive waivers or

[[Page 90448]]

exemptions (i.e., waivers or exemptions after a prohibited transaction 
has been completed).
    To request a national interest exemption under the Proposed Rule, a 
U.S. person would have needed to submit certain information to the 
Treasury Department, including a description of 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 Proposed Rule noted that the Treasury Department may have 
requested that a U.S. person submit information, including some or all 
of the information required under Sec.  850.405, as well as additional 
details based on the facts and circumstances.
    The Treasury Department received comments on Sec.  850.502 of the 
Proposed Rule. Commenters generally expressed support for this section. 
Several commenters requested that the Treasury Department develop 
clearer and more specific considerations that will be evaluated in 
determining whether a covered transaction is in the national interest 
of the United States, and therefore exempt from applicable provisions 
of the rule. Commenters requested that the Treasury Department expand 
the considerations that will be evaluated in a national interest 
determination, to include concerns related to the impact on human life, 
the environment, and finances of U.S. persons.
    While understanding the interest of commenters in expanding the 
enumerated considerations that may inform a national interest 
determination, the Treasury Department declines to include additional 
enumerated considerations or clarifications in the Final Rule. As 
discussed in the Proposed Rule, any determination will take into 
account 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 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. For the avoidance of doubt, the considerations in the 
Final Rule are not exclusive, and additional considerations may inform 
any determination by the Secretary. The Treasury Department anticipates 
providing information on the process and requirements for any national 
interest exemption request on its Outbound Investment Security Program 
website.
    One commenter requested clarity as to whether individuals with 
delegated authority can seek an exemption on behalf of a U.S. person. 
Similar to the submission of a notification which requires a 
certification signed by the chief executive officer or other duly 
authorized designee of the person filing pursuant to Sec.  850.203, the 
Treasury Department has added in the Final Rule a provision at 
850.502(d) to require a certification that can be signed by a duly 
authorized designee according to Sec.  850.203 in order to help ensure 
the provision of accurate and complete information to the Treasury 
Department. The Treasury Department notes that a certification based on 
misrepresentation, concealment, or omission of material fact may impact 
the validity of a national interest determination.
    One commenter suggested that the rule include clear timelines for 
both the requesting person and the Treasury Department in reaching a 
determination and seeking additional information about the U.S. 
person's interactions with the covered foreign person and any 
mitigation of potential threats from the covered foreign person. 
Additionally, the commenter requested that the Treasury Department 
publicize the granting of a national interest exemption so that others 
can benefit from understanding the criteria that meet the requirements. 
Another commenter requested that the Treasury Department issue 
additional guidance on the process for submitting information related 
to the transaction for which this exemption is sought, and that any 
such process be developed with business practicalities in mind. As 
noted above, the Treasury Department intends to provide information, in 
accordance with Sec.  850.502(c), to be submitted in connection with 
any national interest exemption request on its Outbound Investment 
Security Program website by the effective date of the Final Rule. As 
stated in the Proposed Rule, a U.S. person requesting a national 
interest exemption will need to submit certain information to the 
Treasury Department, including a description of 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 Treasury Department 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. In addition to the required information, as a general 
matter, the Treasury Department welcomes additional information that 
the U.S. person deems relevant, including with respect to the U.S. 
person's interaction with the covered foreign person and views on 
mitigation of any national security risk, among others.
    At this time, the Treasury Department is not instituting a timeline 
for its internal review and determination. After the Outbound Order and 
Final Rule are implemented, the Treasury Department may consider 
instituting such a timeline or providing additional information.
    One commenter requested that the Treasury Department establish an 
appeals process and timeline in the event a request for an exemption is 
denied. The Treasury Department declines to establish such a process at 
this time and will be informed by experience.
    One commenter suggested that the Treasury Department establish, 
prior to the issuance of the rule, the binding conditions to which an 
exempt covered transaction may be subject. The Treasury Department 
declines to establish in the Final Rule the binding conditions that a 
covered transaction may be subject to in connection with a granted 
national interest exemption. Because any determination will be based on 
a consideration of the totality of relevant facts and circumstances, 
the Treasury Department is unable to speculate as to what binding 
conditions may be necessary in a determination by the Secretary that a 
covered transaction is exempt under Sec.  850.502.
    The Final Rule adopts Sec.  850.502 as set forth in the Proposed 
Rule with a modification to require that any information and documents 
submitted in relation to a national interest determination request be 
subject to the certification described in Sec.  850.203. As noted 
above, a certification based on misrepresentation, concealment, or 
omission of material fact may impact the validity of a national 
interest determination.
    Under Sec.  850.502 of the Final Rule, 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. Any such 
determination will be based on consideration of the totality of the

[[Page 90449]]

relevant facts and circumstances and may be informed by the criteria 
discussed, although the Treasury Department reiterates this is not an 
exclusive list of criteria. A U.S. person seeking a national interest 
exemption shall submit relevant information to the Treasury Department 
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 
Treasury Department may request additional information that may include 
some or all of the information required under Sec.  850.405. A 
certification must be submitted pursuant to Sec.  850.203. Electronic 
filing instructions will be available via the Treasury Department's 
Outbound Investment Security Program website. A determination that a 
covered transaction is exempt under this section may be subject to 
binding conditions, and to be valid must be 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.
    The Treasury Department reiterates that it will not grant 
retroactive waivers or exemptions (i.e., waivers or exemptions after a 
prohibited transaction has been completed).
Subpart F--Violations
    Subpart F of the Proposed Rule (Sec. Sec.  850.601 through 850.604) 
described conduct that would be treated as a violation of the Proposed 
Rule. Such conduct would have included 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 Treasury 
Department when submitting any information under the Proposed Rule. The 
Proposed Rule would also have prohibited any action that evades or 
avoids or has the purpose of evading or avoiding any of the 
prohibitions of the Proposed Rule. The Treasury Department did not 
receive any comments on Subpart F of the Proposed Rule.
    The Final Rule implements Subpart F as proposed, with the exception 
of a clarification to Sec.  850.603 to include ``omission.'' The 
Treasury Department is making this change to clarify that in addition 
to any materially false or misleading information submitted pursuant to 
the Final Rule, the omission of any such material information would 
also constitute a violation of the Final Rule.
Subpart G--Penalties and Disclosures
    Subpart G of the Proposed Rule (Sec. Sec.  850.701 through 850.704) 
described the civil and criminal penalties that may be imposed for 
violations of its requirements up to the maximum amount set forth in 
section 206 of IEEPA. Furthermore, the Proposed Rule would have 
permitted the Secretary, in consultation with the heads of relevant 
agencies, to take action to nullify, void, or otherwise compel 
divestment of any prohibited transaction entered into after the 
effective date of the Final Rule. The Proposed Rule also described the 
process for a person that may have violated applicable provisions to 
submit a voluntary self-disclosure.
    The Treasury Department received comments to this subpart. One 
commenter suggested the rule include a process for appealing a penalty 
that is imposed or provide some other administrative or legal remedy. 
Other commenters requested that the Treasury Department clarify whether 
a non-U.S. person would face penalties for violations of the rule, and 
if so, under what circumstances, and requested specific guidance for 
non-U.S. persons.
    The Treasury Department declines to establish an appeals process at 
this time. Any penalty will be imposed based on a totality of the facts 
and circumstances. The Treasury Department anticipates providing 
additional information regarding compliance with the program at a later 
date. The Treasury Department also notes that the Final Rule places 
certain obligations solely upon U.S. persons.
    The Final Rule makes technical edits to the text of the provisions 
of Subpart G. Under the Final Rule, the Treasury Department may impose 
a civil penalty on any person that violates the Final Rule. In Sec.  
850.701(a)(1), the Final Rule clarifies that the maximum civil penalty 
that 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 the Final 
Rule, is the greater of twice the value of the transaction that is the 
basis of the violation with respect to which the penalty is imposed or 
$250,000, which amount is subject to adjustment pursuant to the Federal 
Civil Penalties Inflation Adjustment Act of 1990, as amended by the 
Federal Civil Penalties Inflation Adjustment Act Improvements Act of 
2015. The Final Rule at Sec.  850.701(c) notes that, pursuant to the 
Federal Civil Penalties Inflation Adjustment Act of 1990, as amended, 
notice of the maximum penalty which may be assessed under this section 
will be published in the Federal Register and on Treasury's Outbound 
Investment Security Program website on an annual basis on or before 
January 15 of each calendar year. As of the date of issuance of this 
Final Rule, the current maximum civil penalty under IEEPA is an amount 
not to exceed the greater of an amount that is twice the amount of the 
transaction that is the basis of the violation with respect to which 
the penalty is imposed or $368,136. 89 FR 2139 (published January 12, 
2024). The Secretary may also refer potential criminal violations under 
the Final Rule to the Attorney General. Regarding a voluntary self-
disclosure made for actual or apparent violations of the Final Rule, 
the Treasury Department will take such disclosure into account as a 
mitigating factor in determining the appropriate response, including 
the potential imposition of penalties, if the Treasury Department 
determines that there was, in fact, a violation.
Subpart H--Provision and Handling of Information
Sec.  850.801--Confidentiality
    Section 850.801 of the Proposed Rule described the Treasury 
Department's proposal to treat as confidential, subject to limited 
exceptions, information and documentary materials that would have been 
submitted pursuant to its provisions and were not otherwise publicly 
available.
    The Proposed Rule would have permitted the Treasury Department to 
disclose information or documentary materials, subject to appropriate 
confidentiality and classification requirements, where such materials 
were relevant to any judicial or administrative action or proceeding; 
provided to Congress; or provided to any domestic governmental entity 
or to a foreign governmental entity of a U.S. partner or ally, where 
the information or materials was important to the national security 
analysis or actions of such governmental entity or the Treasury 
Department. Additionally, the Proposed Rule would have permitted the 
Treasury Department to disclose information to third parties with the 
submitter's consent, and it also permitted the Treasury Department to 
use the information gathered to fulfill its obligations under the 
Outbound Order, potentially including publication of anonymized data.
    As explained in the Proposed Rule, the Treasury Department was 
considering whether there were additional circumstances where 
disclosure of otherwise confidential information should be permitted. 
One

[[Page 90450]]

proposal considered would have allowed the Treasury Department to 
disclose such information to the public as and when the Secretary 
determined that such disclosure was in the national interest. The 
Treasury Department expected that such an exception would be rarely 
invoked and limited to circumstances in which the Secretary identified 
a pressing national interest that disclosure could help to address. 
This exception would not have superseded 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 Treasury Department invited 
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.
    Multiple commenters provided perspectives on Sec.  850.801 of the 
Proposed Rule. One commenter requested that the Treasury Department 
limit the sharing of information among U.S. Government agencies to only 
what is necessary to develop the analysis and recommendations required 
by the Outbound Order. The commenter also suggested retaining the other 
information sharing exceptions, particularly the exception for 
supporting judicial or administrative procedures. Another commenter 
expressed concerns about the Treasury Department's ability to share 
confidential business information submitted by parties with foreign 
government entities, potentially placing U.S. companies at a 
competitive disadvantage, and urged clarification that such information 
may be shared only to the extent ``necessary'' for the purpose of 
national security. One commenter requested the Treasury Department 
compile a monthly report on the distribution of notified investments 
across geography and industry, among other categories, to be ``shared 
with the relevant security or intelligence agency.''
    While the Treasury Department recognizes the importance of 
safeguarding sensitive information, limiting the ability of the 
Treasury Department to share information among U.S. Government agencies 
to only what is necessary to develop the required information and 
recommendations to the President would undermine certain directives in 
the Outbound Order. For example, the Outbound Order directs the 
Treasury Department to consult with relevant departments and agencies 
in assessing the effectiveness of the Final Rule. Additionally, the 
Treasury Department, as stated in the Proposed Rule, intends to analyze 
notifiable transactions, in consultation with the Department of 
Commerce and, as appropriate, other relevant agencies. The Treasury 
Department emphasizes the importance of consulting with relevant 
agencies in furtherance of effective administration of the Final Rule.
    With respect to the sharing of information with foreign governments 
of a United States partner or ally, the Treasury Department declines to 
change the standard under the exception to the confidentiality 
provision in Sec.  850.801(b)(3) from ``important'' to ``necessary'' 
and instead retains the language ``important to the national security 
analysis or actions of such governmental entity or the Department of 
the Treasury.'' The Treasury Department views this as a high bar and 
intends that any sharing of information would be subject to appropriate 
safeguards, including appropriate confidentiality and classification 
requirements, which the Treasury Department takes seriously.
    In response to the commenter suggestion regarding monthly data 
being shared with the relevant security or intelligence agencies, the 
Outbound Order directs the Treasury Department to provide to the 
President, through the Assistant to the President for National Security 
Affairs, an assessment of the effectiveness of the Outbound Investment 
Security Program in addressing national security threats identified in 
the Outbound Order as well as appropriate recommendations. Such 
assessment and/or recommendations may include anonymized data 
pertaining to notifiable transactions. The Treasury Department is 
finalizing Sec.  850.801 as set forth in the Proposed Rule with the 
addition of the proposal discussed in the Proposed Rule (but not added 
to proposed regulatory text at that time) to permit the disclosure of 
information where the Secretary determines such disclosure to be in the 
national interest, as discussed further below. Section 850.801(a) of 
the Final Rule provides that information or documentary materials not 
otherwise publicly available that are submitted to the Treasury 
Department in accordance with its provisions will not be disclosed to 
the public, except as required by law or as set forth in the 
exceptions. As with the Proposed Rule, the Final Rule sets out limited 
circumstances under which the Treasury Department is permitted to 
disclose information or documentary materials, subject to appropriate 
confidentiality and classification requirements. Such circumstances 
include where information and documentary materials are (1) relevant to 
any judicial or administrative action or proceeding, (2) provided to 
Congress, or (3) provided to any domestic governmental entity or to a 
foreign governmental entity of a U.S. partner or ally, where the 
information or materials are important to the national security 
analysis or actions of such governmental entity or the Treasury 
Department. The Final Rule, like the Proposed Rule, also permits the 
Treasury Department to disclose to third parties information or 
documentary materials when the person who submitted or filed the 
information or documentary materials has consented to its disclosure to 
such third parties. The Final Rule also specifies that the Treasury 
Department may use the information gathered pursuant to the rule to 
fulfill obligations under the Outbound Order, which may include 
publication of anonymized data. An additional circumstance in which 
information may be disclosed is included in the Final Rule at Sec.  
850.801(d).
    The Treasury Department is implementing in the Final Rule the 
proposal discussed in the preamble to the Proposed Rule that will allow 
the disclosure of information when the Secretary determines such 
disclosure is in the national interest. Factors that the Secretary may 
consider when determining if disclosure is in the national interest may 
include whether such disclosure will further national security 
interests, address law enforcement needs, or promote compliance with 
the rule. Circumstances in which the Secretary may determine the 
disclosure of information to be in the national interest can include, 
for example, identifying persons of a country of concern that are 
engaged in covered activities so that U.S. persons are on notice that 
the Treasury Department has determined such persons to be covered 
foreign entities. The Treasury Department anticipates this exception to 
be invoked rarely and limited to circumstances in which the Secretary 
identifies a national interest that disclosure could help to address. 
The Treasury Department recognizes that a determination as to when the 
disclosure of information is in the national interest is a significant 
decision that requires taking into account a range of considerations 
and accordingly should be made only by a

[[Page 90451]]

senior official. Consistent with this, the Final Rule provides that any 
such determination may not be delegated below the level of the 
Assistant Secretary of the Treasury.
Subpart I--Other Provisions
Sec.  850.903--Severability
    Section 850.903 of the Proposed Rule provided that if any provision 
of the Final Rule, or the application thereof to any person or 
circumstance, is held to be 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. The Treasury Department did not receive any comments on 
Sec.  850.903 and adopts it without change in the Final Rule.
    If any provisions of this Final Rule, 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 without the 
invalid provision or application. Each provision of the Final Rule and 
application thereof serves an important, related, but distinct purpose; 
provides a distinct benefit separate from, and in addition to, the 
benefit provided by other provisions and applications; is supported by 
evidence and findings that stand independent of each other; and is 
capable of operating independently such that the invalidity of any 
particular provision or application would not undermine the operability 
or usefulness of other aspects of the Final Rule. Based on its 
analysis, the Treasury Department believes that although more limited 
application would change the magnitude of the overall benefit of the 
Final Rule, it would not undermine the important benefit of, and 
justification for, the Final Rule's application to other persons or 
circumstances. The qualitative and quantitative benefits of the Final 
Rule outweigh the costs for all persons and circumstances covered by 
the Final Rule.
    For example, but without limitation, if application of the Final 
Rule to a U.S. person with respect to the actions of its controlled 
foreign entity, is held to be invalid, it is the Treasury Department's 
intent that the Final Rule remain in effect as to all other persons 
covered by the Final Rule. Similarly, if the prohibition on a U.S. 
person knowingly directing a transaction by a non-U.S. person is held 
to be invalid, it is the Treasury Department's intent that the Final 
Rule remain in effect as to the prohibition on U.S. persons from 
engaging in prohibited transactions. The purpose of the Final Rule is 
to restrict those investments by U.S. persons 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 countries of concern in ways that negatively impact the 
national security of the United States. It is consistent with this 
purpose to cover activity of U.S. persons as defined in the Final Rule 
if the application of the rule to a subcategory of persons or to a 
subcategory of activity is held to be invalid.
    The key requirements of the Final Rule--the prohibition or 
notification of certain covered transactions--are likewise severable. 
The covered transactions that are subject to notification are distinct 
from those that are prohibited, and the two provisions operate 
independently of each other. The Treasury Department therefore intends 
for each of these requirements in the Final Rule to be severable from 
each other and to be applied to the extent possible, even if its 
application is limited.
Sec.  850.904--Reports To Be Furnished on Demand
    The Proposed Rule set forth at Sec.  850.904 that any person may be 
required to furnish information under oath regarding any act or 
transaction subject to part 850. Pursuant to Sec.  850.904, the 
Treasury Department could have requested this information at any time 
and conduct investigations, hold hearings, take depositions, and compel 
witnesses to testify through subpoenas, among other things.
    A commenter requested clarification in the rule that any inquiry 
made of legal counsel under this section should be conducted subject to 
the attorney-client privilege applicable in the relevant jurisdiction. 
The Treasury Department declines to specifically mention any particular 
defense, such as the attorney-client privilege, to a demand for 
information under this provision. Individuals required to provide such 
information may raise such defenses as applicable and appropriate, 
although the availability of such defenses does not excuse a party from 
the requirements of this rule.
    Another commenter suggested the requirement to furnish information 
was overly broad, and recommended narrowing its scope to only functions 
necessary, in the commenter's view, for enforcement of the rule. 
Additionally, the commenter requested the Treasury Department make 
revisions including by removing the language requiring the information 
to be submitted under oath, in the form of reports or otherwise, as 
well as the language permitting the inquiry to be at any time. The 
commenter also requested narrowing the Treasury Department's authority 
to request information from ``any person'' about any ``act or 
transaction'' subject to the Proposed Rule to instead requesting 
information only from a person involved in a transaction subject to the 
Proposed Rule and about such transaction. Lastly, the commenter 
requested limiting the Treasury Department's investigative authority 
under Sec.  850.904 to conducting investigations and requesting 
information aided by civil administrative subpoenas.
    Limiting the Treasury Department's ability to seek information in 
connection with transactions subject to part 850 as suggested by the 
commenter would undermine the Treasury Department's ability to 
investigate and enforce violations of the Final Rule. Given the focus 
of the Final Rule on obligations on U.S. persons and the range of 
transactions within the definitions of covered transaction and excepted 
transaction, greater rather than less flexibility in the Treasury 
Department's avenues for obtaining information is important. Under 
IEEPA, the President has broad authority to investigate transactions in 
which any foreign person has an interest. Section 10(ii) of the 
Outbound Order grants the full scope of these investigative powers to 
the Secretary to carry out the purposes of the Outbound Order, 
including to investigate and make requests for information relative to 
notifiable or prohibited transaction not only from parties to such 
transactions but also from other relevant persons. Section 850.904 
implements this authority and is consistent with longstanding OFAC 
practice under IEEPA (e.g., 31 CFR 501.602). Notably, the text of the 
provision limits the Treasury Department's information gathering power 
to acts or transactions subject to part 850.
    The Final Rule makes no change to the text of proposed Sec.  
850.904. Under the Final Rule, any person may be required to furnish 
information under oath regarding any act or transaction subject to its 
provisions. The Treasury Department can request this information at any 
time and the Treasury Department has the authority to conduct 
investigations, hold hearings, take depositions, and compel witnesses 
to

[[Page 90452]]

testify through subpoenas, among other things.

D. Other Comments

Compliance Burden
    Several commenters noted that the Proposed Rule would impose what 
the commenters believed were significant compliance costs on U.S. 
companies, particularly small businesses, U.S. investors, and also 
foreign persons. One such commenter stated that the compliance costs 
for U.S. investors would be passed along to businesses, limiting 
resources to advance innovation. Another commenter noted that for 
venture capital investments in particular, it would be difficult and 
costly to determine who is a person of a country of concern, and that 
regulatory changes in the PRC were making it more challenging to obtain 
information on PRC entities, which will make it difficult for U.S. 
persons to comply with this requirement.
    As described below in Section IV, the Treasury Department assessed 
the costs and benefits of the Final Rule. As noted in that analysis, 
while the Final Rule will impose some compliance costs on U.S. 
companies, investors, and foreign persons, the Treasury Department 
estimates that the Final Rule will apply to a relatively modest volume 
of potential covered transactions, and that these costs, in turn, will 
be relatively modest compared to the size of potential investment 
opportunities. The Treasury Department also notes that for at least 
some transactions and investors, the level of information collection, 
retention, and diligence necessary to comply with the Final Rule, to 
include determining whether a transaction party is a person of a 
country of concern, may not give rise to any costs beyond what would be 
incurred during the course of routine due diligence in the absence of 
the Final Rule.
Compliance Assistance
    Several commenters requested the Treasury Department develop tools 
to assist compliance with the rule, such as public guidance or 
advisories, frequently asked questions (FAQs), sample due diligence 
questionnaires, red flags and case examples, or recommended contractual 
language, as well as enforcement guidelines.
    Some commenters requested that the Treasury Department include 
specific fact patterns in the regulatory text, not just in the preamble 
to the rule, to illustrate transactions that might be covered, 
prohibited, or excepted, or that the Treasury Department publish these 
examples as FAQs.
    Commenters also requested that the Treasury Department develop a 
formal or informal process, such as a hotline, for providing 
interpretive guidance or advisory opinions on specific transactions. 
Some commenters requested this process be established before the rule 
is effective. One commenter pointed to similar practices by other 
components of the Treasury Department as well as other departments and 
agencies that administer national security-related regulatory programs, 
such as the Departments of Commerce, Justice, and State, as well as the 
SEC.
    Two commenters requested the Treasury Department periodically 
publish non-confidential or anonymized information in its possession 
about specific transactions to minimize program compliance costs, as 
well as unintentional violations.
    One commenter requested that the Treasury Department publish 
guidance on prohibited transactions and notifiable transactions that 
were undertaken between August 9, 2023 (i.e., the date of the Outbound 
Order), and the effective date of the rule. The commenter recommended 
that, in the alternate, the Treasury Department could clarify that 
prohibited transactions undertaken during this time period will not be 
subject to enforcement/penalties if parties submit a notification after 
the issuance of the rule, while notifiable transactions undertaken 
during an interim period could be notified within a certain period 
(e.g., 100 days) after the effective date of the rule. In response, the 
Treasury Department notes that the obligations under the Final Rule 
take effect upon the effective date; only transactions with a 
completion date on or after the effective date are subject to the 
notification requirements or prohibition, as applicable.
    The Treasury Department recognizes that the Final Rule imposes new 
requirements about which further information may be helpful. To assist 
U.S. persons in compliance with the Final Rule, the Treasury Department 
anticipates providing additional information following publication of 
the Final Rule, including through its Outbound Investment Security 
Program website. The Treasury Department also anticipates engaging in 
stakeholder outreach and education on the requirements in the Final 
Rule. In providing any additional information or materials, the 
Treasury Department will consider commenter requests to publish more 
specific and detailed materials to assist in due diligence. Regarding 
the request to include specific examples of fact patterns in the 
regulatory text, the Treasury Department assesses it is more efficient 
to publish examples through its Outbound Investment Security Program 
website rather than through a rulemaking. Doing so will allow the 
Treasury Department to provide and update such examples in a timely 
manner to support industry compliance.
    At this time, the Treasury Department does not expect to establish 
an advisory opinion process to allow parties to request determinations 
of whether a particular transaction is covered, notifiable, or 
prohibited. Such a process does not exist for CFIUS reviews, for 
example, and, given the complexity and volume of potential 
transactions, would not be an efficient allocation of resources for the 
Office of Investment Security. Instead, as noted above, the Treasury 
Department anticipates making additional information available that can 
assist U.S. persons in understanding and complying with the Final Rule.
Competitiveness Considerations and Other Consequences
    A number of commenters suggested that certain requirements in the 
Proposed Rule would affect the international competitiveness of U.S. 
investors, asset managers, and businesses in certain industries. Some 
commenters focused on the additional due diligence obligations with 
which U.S. investors must comply. Others emphasized the need for a 
multilateral approach so that foreign competitors are subject to 
similar requirements. Other commenters suggested that the proposed 
exception for transactions under Sec.  850.501(f)(1) involving persons 
of a country or territory outside the United States designated by the 
Secretary after taking into account whether the country or territory is 
addressing national security concerns posed by outbound investment, 
would convey an unfair advantage on a foreign competitor unless the 
foreign program is equally stringent. Two commenters argued that 
limitations on U.S. investment in the semiconductor industry in a 
country of concern, to include the notification and prohibition 
requirements related to AI systems, would put U.S. businesses in the 
semiconductor and automotive industries at a disadvantage when compared 
to foreign competitors. One commenter suggested that the requirements 
would disadvantage U.S. LPs who would be required to seek additional 
information and governance rights compared to non-U.S. LPs investing in 
non-U.S. funds.
    The Treasury Department recognizes that the obligations created by 
the Final Rule will impose certain costs and

[[Page 90453]]

restrictions on U.S. persons. To minimize those costs and restrictions, 
the rule focuses on only those 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. Additionally, the Treasury 
Department is committed to working with its allies and partners to 
stand up their own similar mechanisms to help ensure that foreign 
capital and intangible benefits do not merely fill investment gaps 
resulting from the Final Rule.
    Regarding the concern over potential designations under Sec.  
850.501(g)(1), the Treasury Department notes that any exceptions 
created under that section would ultimately benefit U.S. persons. These 
exceptions would permit or not require a notification by a U.S. person 
with respect to certain transactions that would otherwise be a 
notifiable transaction or a prohibited transaction.
    Several commenters shared their views on possible unintended 
consequences of the Proposed Rule, including general concerns around 
the breadth of the rule impacting U.S. and other companies' ability to 
conduct global business, as well as concerns about impacts to U.S. 
competitiveness, innovation, and national security.
    One commenter expressed concern about expansion of the scope of 
countries listed as ``countries of concern'' given past implementation 
of certain national security-related laws and regulations, citing the 
2018 imposition of tariffs on steel imports under Section 232 of the 
Trade Expansion Act of 1962 (19 U.S.C. 1862) as an example.
    Another commenter suggested that U.S. venture capital firms could 
become uncompetitive for deals involving a country of concern or in 
which determining the potential involvement of a country of concern 
takes time. The commenter also predicted a chilling effect from the 
compliance related to distinguishing between transactions that would be 
notifiable versus those that would be prohibited. A few commenters 
argued that the Proposed Rule could permit non-U.S. investors to more 
easily engage in transactions, pushing particular companies in these 
leading-edge sectors away from the United States and thus harming our 
national security and competitive edge.
    Some commenters suggested that the Proposed Rule could impact 
investment activities of third-country entities and thereby increase 
the instability of global supply chains or impact U.S. investors' 
ability to do business in the broader Asia region. One commenter 
requested that the Treasury Department ensure the rule does not disrupt 
the day-to-day management of global diversified portfolios invested in 
publicly traded securities.
    The Treasury Department notes that the Final Rule seeks to address 
the national security threat described in the Outbound Order while 
minimizing unintended consequences. Accordingly, the Final Rule 
includes tailored definitions and descriptions of terms and elements to 
appropriately scope coverage and facilitate compliance by U.S persons. 
Where appropriate and consistent with the goals of the Outbound Order, 
the Treasury Department has included exceptions to the coverage of the 
rule, to seek to minimize unintended consequences for U.S. persons.
    The Treasury Department notes concerns around the practical effects 
of due diligence requirements associated with the Final Rule, 
especially as they relate to the timelines of private investments. As 
noted above, the Treasury Department intends to publish compliance 
resources and information on its Outbound Investment Security Program 
website to assist with implementing the Final Rule. In addition, as 
required by the Outbound Order, the Secretary of the Treasury, in 
consultation with the Secretary of Commerce and, as appropriate, the 
heads of other relevant agencies, will assess, within one year of the 
effective date of the Final Rule and periodically thereafter, whether 
to amend the rule.
International Engagement
    The Treasury Department received several comments related to U.S. 
Government engagement with foreign countries and territories on the 
Outbound Order and requirements described in the Proposed Rule. Several 
commenters expressed support for substantive engagement between the 
U.S. Government and foreign countries on the Outbound Order and similar 
programs being considered by foreign jurisdictions. One commenter 
recommended that the U.S. Government work with foreign partners to 
identify regulatory options for outbound investment screening reviews 
that are easier to implement and administer and are tailored to the 
particular investment relationship that these countries have with a 
country of concern and the national security risks arising therefrom.
    Some commenters called out specific foreign jurisdictions with whom 
to prioritize coordination, including the European Union and South 
Korea. One commenter recommended that the Treasury Department engage 
with PRC commercial regulators to increase awareness of the Proposed 
Rule's objectives and compliance requirements for PRC businesses, in 
order to assist U.S. firms that are conducting due diligence and 
facilitate implementation of the Proposed Rule.
    Other commenters noted potential outcomes they believe could arise 
if the U.S. Government does not engage substantively with foreign 
partners and align the approach in the Final Rule with those taken by 
foreign partners. These include the risk of backfilling capital and 
associated benefits from other economies, as well as disadvantaging 
U.S. firms and harming U.S. competitiveness.
    As noted in the Proposed Rule, the Treasury Department recognizes 
the importance of working with our partners and allies as they explore 
options to address national security concerns related to outbound 
investment. The Treasury Department concurs with commenters that the 
goals of the Outbound Order and Final Rule will be enhanced if foreign 
allies and partners develop similar mechanisms. The Treasury 
Department, along with other relevant U.S. Government departments and 
agencies, such as the Departments of Commerce and State, will continue 
to collaborate with foreign partners to advance coordination on risks 
and policy responses related to outbound investment. In addition, to 
further U.S. Government efforts to encourage partners and allies to 
address risks related to outbound investment, the Final Rule includes 
as an excepted transaction 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 that 
relate to that country or territory's own measures to address the 
national security risk related to outbound investment.
Implementation Delay
    A few commenters requested delaying the effective date of the rule 
to ensure U.S. persons and non-U.S. persons have enough time to analyze 
and comply with its requirements. One commenter suggested the 
implementation of the rule be delayed at least 120 days. Another 
commenter requested the Treasury Department not set an effective date 
for the rule until after a decision has been made by the 118th Congress 
on

[[Page 90454]]

a package of PRC-focused legislation given that the pending legislation 
could supersede portions of the rule.
    The Treasury Department has determined to make the effective date 
of the Final Rule January 2, 2025. This provides time for U.S. persons 
to analyze and respond to the changes made between the Proposed Rule 
and the Final Rule, while still allowing the Treasury Department to 
expeditiously address the national security concerns identified in the 
Outbound Order. The Treasury Department notes that the issuing of the 
Outbound Order and ANPRM in August 2023 and the Proposed Rule in June 
2024 provided notice about the creation and scope of the Final Rule. 
Moreover, much of the due diligence the Final Rule expects of firms 
overlaps with existing diligence provisions in other laws and 
regulations, as well as the routine due diligence performed in these 
types of transactions. While the Treasury Department welcomes continued 
engagement with Congress on addressing the national security concerns 
identified in the Outbound Order, given the lack of certainty 
surrounding the status of proposed legislation or its likelihood of 
passage over alternative proposals, the Treasury Department elects not 
to postpone the effective date of the Final Rule in response to a 
legislative proposal.
Alignment With Other Authorities
    Some commenters discussed how the rule should interact with 
existing regulatory regimes. One commenter suggested that the rule 
should anticipate transactions that are subject to both the Outbound 
Order and CFIUS jurisdiction. They requested the Treasury Department 
exclude transactions that have been or will be notified to CFIUS from 
the jurisdiction of the Final Rule.
    This commenter misinterprets the role of CFIUS in the context of 
overlapping authorities. CFIUS was designed to be a tool of last 
resort, only to be used when other authorities do not apply to a 
particular transaction. Applying CFIUS jurisdiction to a transaction 
prior to determining whether a separate authority may cover the 
transaction would reverse this process. The Treasury Department makes 
no change to the Final Rule in response to this comment.
    A few commenters suggested areas where provisions of the Final Rule 
could be tied more closely to existing authorities. One commenter 
suggested tying covered activities and similar terms to export 
classifications or other methods already in use by the U.S. Government. 
Another commenter requested the rule be more consistent with existing 
national security regimes described in the EAR and ITAR, particularly 
the definitions and compliance standards.
    While many of the due diligence expectations set forth in the Final 
Rule were designed to overlap with existing diligence provisions in 
other laws and regulations, the Treasury Department recognizes that 
areas of differentiation may impose some additional burden on market 
participants. The Treasury Department intends the Final Rule to 
increase the U.S. Government's visibility into U.S. person transactions 
involving sensitive technologies and products, which necessitates some 
deviation from existing national security regimes. The proposed 
provisions are tailored to 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. The Treasury 
Department makes no change to the Final Rule in response to these 
comments.

IV. 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 Final Rule is being issued to assist in 
addressing the national emergency declared by the President with 
respect to the threat posed to U.S. national security 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 and foreign policy of the United States has its 
source in whole or substantial part outside the United States. The 
Final Rule will have a direct impact on a foreign affairs function of 
the United States, which includes the protection of national security 
against external threats (for example, limiting investment in specific 
sectors in designated countries of concern).
    Although the Final Rule is not subject to the notice and comment 
requirements of the APA, the Treasury Department is engaged in notice 
and comment rulemaking for the Final Rule, consistent with section 1(a) 
of the Outbound Order. In addition, the Final 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 Treasury Department has 
undertaken an analysis of the anticipated costs and benefits of the 
Final Rule. Several commenters to the Proposed Rule discussed the 
potential burden associated with the Proposed Rule. The Treasury 
Department, after taking into account these comments, conducted an 
analysis of the relative costs and benefits of the Final Rule. For 
purposes of this analysis, the Treasury Department assessed the costs 
and benefits of the Final 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.), Unfunded Mandates Reform Act of 1995 (UMRA), and 
Executive Order 13102, 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 Treasury Department has conducted an assessment of the costs and 
benefits of the Final Rule, as well as the costs and benefits of 
available regulatory alternatives. That cost-benefit analysis, along 
with a summary of comments to the cost-benefit analysis included in the 
Proposed Rule, is below.
    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 will serve 
distinct but interrelated objectives with respect to the relevant 
technologies and products. The first component requires the Secretary 
to prohibit certain types of investment by a U.S. person in a covered 
foreign person engaged in

[[Page 90455]]

certain categories of activities related to technologies and products 
that pose a particularly acute national security threat. The second 
component requires 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 is on investments that can 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 PRC, including Hong Kong and Macau, as a 
country of concern.
    As described above in section II, this Final 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 
organized under the laws of a country of concern, certain other 
entities owned or controlled by persons of a country of concern or 
acting for or on behalf of the government 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 organized under 
the laws of a country of concern, certain other entities owned or 
controlled by persons of a country of concern or acting for or on 
behalf of the government 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 Final Rule will advance the President's objective of 
regulating certain investments from the United States into a country of 
concern.
    The Final Rule will 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 
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 Treasury Department will except from the Final Rule 
certain transactions with a lower likelihood of having that effect. The 
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.
1. Comments on Initial Executive Order 12866, 13563, and 14094 Analysis
    Several commenters provided comments on the initial cost analysis, 
while another commenter provided additional data related to outbound 
and inbound investments involving the PRC.
    Multiple commenters argued that the initial cost analysis 
underestimated the costs associated with the rule. In making this 
argument, a few commenters noted that the initial cost analysis 
underestimated the scope of affected transactions. One commenter noted 
that the Treasury Department's cost estimate relied on analysis of 
equity investments made by U.S.-based investors in the semiconductor, 
AI, and quantum science sectors of the PRC, but that the rule could 
apply to a range of investment and corporate activities beyond equity 
investments. It also noted that the rule could affect investment in 
countries other than the PRC because of the scope of the definition of 
covered foreign person and could affect non-U.S. based investors 
because of the scope of the definition of controlled foreign entity. 
Another commenter noted that the Treasury Department's estimate of 
direct costs for the rule is too low, and that the potential impact 
would be at least 10 times greater than the Treasury Department's 
estimate.
    Regarding the number of transactions used for the initial cost 
analysis, as the Treasury Department noted in the Proposed Rule, 
precise data that matches the scope of potential covered transactions 
is not available. However, the Treasury Department disagrees that the 
scope of potential covered transactions is as broad as suggested by the 
commenters. The terms covered transaction and covered foreign person, 
along with other defined terms they incorporate, are scoped to apply to 
a relatively narrow subset of firms and activities involving either 
U.S. persons or persons in a country of concern. In the initial cost 
analysis, the Treasury Department doubled the average number of 
transactions derived from the existing data, in recognition of the lack 
of precision in the data used to estimate the number of potential 
covered transactions, and to account for the likely underrepresentation 
of potentially relevant transactions. While the Treasury Department 
declines to adopt an estimate 10 times greater than that set out in the 
Proposed Rule, as was suggested by one commenter, the Treasury 
Department has increased the estimated number of annual transactions 
for the cost analysis in the Final Rule from 120 entities and 212 
transactions to 180 entities and 318 transactions. While commenters did 
not provide any more specific alternative data, the Treasury Department 
is making this adjustment in response to comments about 
underrepresentation and uncertainty for the number of potential covered 
transactions. The Treasury Department notes that this increase in the 
number of transactions increases estimated costs for the private sector 
but does not increase estimated costs for the U.S. Government. The U.S. 
Government costs associated with the Final Rule are not calculated on a 
per transaction basis.
    One commenter argued that the estimated costs were too low because 
they did not take into account the costs of due diligence in the 
business sector more broadly. The commenter stated that in each case 
the party undertaking the transaction will be required to determine 
whether a U.S. person is involved, whether the transaction is a covered 
transaction, and whether the transaction counterparty is a covered 
foreign person. The commenter also noted that even for transactions 
that are not covered, parties will feel compelled to maintain records 
of the diligence they perform on such transactions, so they can 
demonstrate that they did not have knowledge--including ``reason to 
know''--that the transaction was a covered transaction in the event the 
Treasury Department decides to investigate the transaction after the 
fact. The commenter suggested that Treasury Department account for 
these costs as well.
    With regard to the need to engage in due diligence and maintain 
records for transactions that are not covered to demonstrate the lack 
of knowledge about a potentially covered transaction, the Treasury 
Department declines to add additional costs. As noted in the Proposed 
Rule, most investment transactions, regardless of whether the 
investment would be potentially subject to the Final Rule, involve some 
level of review, diligence, assessment, and recordkeeping by the 
investor. For some transactions and investors, the level of information 
collection, retention, and diligence necessary to comply with the Final 
Rule may not give rise to any costs beyond what would be incurred in 
the absence of the Final Rule. The Treasury Department has added 
additional

[[Page 90456]]

discussion to the final cost analysis to note this. With regards to 
significantly higher costs noted by one commenter, the Treasury 
Department notes that the total annual direct costs associated with 
complying with the Proposed Rule were expected to have a range of 
between $2,811,120 and $6,148,000, and the total annual time burden was 
estimated at approximately 21,200 person hours. The commenter did not 
provide further evidence or data supporting its alternative estimate. 
As noted above, the Final Rule cost analysis increases the number of 
estimated transactions, but without more specific alternative data 
provided, it does not adjust the time or labor costs identified in the 
Proposed Rule cost.
    Another commenter argued that the initial analysis understated the 
relevant costs because it omitted certain indirect costs. In 
particular, the commenter stated that while the initial analysis 
examined indirect costs such as foregone returns on investment incurred 
for prohibited transactions, it should also consider two other indirect 
costs related to covered transactions. The first indirect cost is for 
both ``uncovered'' and notifiable transactions that the commenter 
alleges some firms will abandon due to the ``actual or perceived 
costs'' associated with the rule. The second indirect cost is the loss 
associated with forgone returns of all investments that did not occur--
prohibited transactions and transactions that were abandoned because of 
the perceived or actual cost of the rule, including forgone revenues, 
market access, market participation, and research and development 
expenditures. The commenter also noted that as the actual or perceived 
costs of compliance increase, it is more likely that the costs of the 
rule would exceed its benefits.
    In response to this comment, the Treasury Department declines to 
add additional indirect costs associated with other covered 
transactions as well as transactions that are not covered. As noted in 
the Proposed Rule, other indirect costs are particularly difficult to 
assess due to individual decision-making, opportunities available, and 
market conditions, making any estimate highly speculative. The Treasury 
Department has updated the cost analysis to note that in a very small 
number of cases, companies might decide to forego a non-prohibited 
transaction in favor of a different investment that would be further 
away from the parameters of the Final Rule. The Treasury Department 
assesses that the impact of these costs is nominal, because if the 
difference in investment return between the forgone investment and 
alternate investment the company chose was more significant, then the 
company would have determined the diligence cost was acceptable, given 
the higher economic return. In addition, the Treasury Department notes 
it is very challenging to determine the particular sector, country, or 
investment structure that the U.S. investor would choose as the 
alternate and then quantify the impact of that determination.
    Finally, a commenter noted that the Treasury Department should 
review how the rule will affect U.S. investments in sectors implicated 
by the definitions of notifiable transaction and prohibited transaction 
and whether they will be supplanted by investments from other 
countries. As noted above and discussed in the rule, several impacts of 
the Final Rule are particularly difficult to quantify, including the 
extent to which the Treasury Department can determine the percentage of 
investors from specific countries that will replace U.S. investors for 
prohibited transactions. The Treasury Department has added a brief 
discussion of this issue to the final cost analysis.
2. Final Executive Order 12866, 13563, and 14094 Analysis
(a) Costs
    The primary direct costs to the public associated with the Final 
Rule relate to (1) understanding the Final 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 Final 
Rule; and (3) if applicable, preparing and submitting a mandatory 
notification of certain transactions or other information to the 
Treasury Department pursuant to the Final Rule. The Final Rule may also 
involve certain additional indirect costs associated with prohibited 
transactions. Investors who would have otherwise engaged in a 
prohibited transaction absent the Final Rule may pursue alternative 
investment opportunities since they are precluded from undertaking a 
prohibited transaction.
    The Final Rule will apply to all U.S. persons who undertake, 
directly or indirectly, a covered transaction. Because of the tailored 
scoping of the Final Rule, the Treasury Department estimates that it 
will 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 
Final Rule is not available--and is one of the reasons for the 
notification requirement, which will increase the U.S. Government's 
visibility into the relevant transactions--available data appears to 
support this estimate of a modest volume. For example, to estimate the 
number of entities that will be potentially affected by the Final Rule 
and would incur associated direct compliance costs, the Treasury 
Department 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 Treasury Department 
has determined this figure to be a lower bound.
---------------------------------------------------------------------------

    \1\ PitchBook, https://pitchbook.com (last visited May 24, 
2024).
---------------------------------------------------------------------------

    The Treasury Department also acknowledges that some U.S. person 
investors may incur costs even where the Final 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 Final 
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 Final Rule and then proceed to spend 
resources on diligence, only to confirm that the relevant transaction 
is not a covered transaction. However, as noted in the Proposed Rule, 
most investment transactions, regardless of whether the investment 
would be potentially subject to the Final Rule, involve some level of 
review, diligence, assessment, and recordkeeping by the investor. For 
some transactions and investors, the level of information collection, 
retention, and diligence necessary to comply with the Final Rule may 
not give rise to any costs beyond what would be incurred in the absence 
of the Final Rule.
    For purposes of the Final Rule cost analysis, the Treasury 
Department tripled the averages from the available data to account for 
the likely underrepresentation of potentially relevant transactions. 
Thus, the Treasury Department's analysis is based

[[Page 90457]]

on the estimate of approximately 180 entities and 318 transactions 
annually (based on an assumption of an annual average of 1.77 
transactions per entity) that may be affected by the Final Rule. For 
the remainder of this analysis, however, the Treasury Department relied 
on the estimates as described above.
    To derive an estimate for the costs related to the Final Rule, the 
Treasury Department first estimated the associated labor costs related 
to interpreting and applying the Final Rule. The Treasury Department 
expects that individuals and entities reviewing the Final Rule and 
engaging in potentially relevant transactions will 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 Treasury Department 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 Treasury Department 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 Final Rule will often be higher than the hourly mean wage in 
these occupation categories across the United States. Accordingly, the 
Treasury Department estimates that the impacted entities will each 
incur costs of $187 per hour for managers and $255 for lawyers. As the 
Treasury Department is unable to determine which particular tasks will 
be performed by managers or lawyers, the Final Rule cost analysis uses 
the average wage of the two positions for both the low-end and high-end 
estimate, which the Treasury Department assesses is a reasonable method 
for estimating the hourly cost. The average of these figures is $221 
per hour and, again, this is a low-end estimate.
---------------------------------------------------------------------------

    \2\ Figures based on May 2023 data.
---------------------------------------------------------------------------

    For a high-end estimate, the Treasury Department 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.
---------------------------------------------------------------------------

    \3\ Statista (Feb. 26, 2024), https://www.statista.com/statistics/941146/legal-services-hourly-rates-metropolitan-region-united-states/.
---------------------------------------------------------------------------

Costs Associated With Understanding the Proposed Rule
    Based on the above assumptions and estimates of affected entities, 
number of transactions, and labor costs, the Treasury Department has 
estimated the annual time and cost that would be spent by affected 
entities in understanding the Final Rule. While recognizing that the 
extent of this diligence will necessarily vary from transaction to 
transaction, the Treasury Department arrived at the below estimates for 
purposes of this regulatory analysis.
    The range of estimated aggregate annual costs for understanding the 
Final Rule begins at $702,780 on the low end and goes up to $922,200 on 
the high end. This is based on the estimate of an average time burden 
to be 10 total person hours per transaction for understanding the Final 
Rule. As such, 10 total person hours per transaction multiplied by 318 
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 Final 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 Treasury Department has 
estimated the annual time and cost that would be spent by affected 
entities on conducting additional transactional diligence with respect 
to this Final 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 Treasury Department arrived at the 
below estimates for purposes of this regulatory analysis.
    The Treasury Department recognizes that most investment 
transactions, regardless of whether the investment is potentially 
subject to this Final 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 Final Rule may 
not give rise to any costs beyond what would be incurred in the absence 
of the Final 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 Treasury Department 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 only incremental costs would be incurred for the review of the 
information from the perspective of ensuring compliance with the Final 
Rule. While the notification requirement also includes (1) information 
regarding covered activities undertaken by the covered foreign person 
that make 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 nodes at 
which any applicable product is produced, the due diligence underlying 
many covered transactions will include gathering and reviewing this 
information even if not specifically to comply with the Final Rule. The 
Final Rule further states that a U.S. person that has failed to conduct 
a ``reasonable and diligent inquiry'' as of 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 Final Rule may in some 
cases require enhanced diligence. Recognizing that in some instances, 
compliance with the Final 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 Final Rule as 
described below.
    The range of estimated annual incremental cost for conducting due

[[Page 90458]]

diligence and recordkeeping associated with the Final Rule runs from $0 
on the low end to $3,688,800 on the high end. These are two ends of the 
range, and it is anticipated that the costs for most transactions will 
fall between these figures. The Treasury Department estimates that the 
average time burden will likely not exceed 40 total person hours per 
transaction for conducting additional due diligence and recordkeeping 
with respect to the Final Rule.
    For the low end of this range, it is reasonable to anticipate that 
some investors, having spent resources learning about the Final 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 318 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 Final Rule. The Treasury Department 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.
Costs Associated With Providing Information
    The Final Rule requires the submission of information to the 
Treasury Department for notifiable transactions and provides for 
certain other circumstances that require information submission. The 
Treasury Department requires U.S. persons to provide notification of 
certain transactions under the Final Rule. The Final Rule requires that 
a person seeking a national interest exemption from the Final Rule's 
notification requirement or prohibition must submit certain information 
to the Treasury Department. The Final Rule also requires 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 transaction. Also, the 
Final Rule requires a U.S. person to inform the Treasury Department of 
any material omission or inaccuracy in any previous representation, 
statement, or certification. Lastly, the Treasury Department 
anticipates time and cost associated with responding to inquiries by 
the Treasury Department.
    The Treasury Department 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 Treasury 
Department has assumed that U.S. persons will perform due diligence 
with respect to the estimated 318 potentially covered transactions each 
year, and that all 318 will turn out to be notifiable transactions. The 
Treasury Department 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 $3,513,900 to $4,611,000. 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 (318) 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 Treasury Department estimated 
only the total annual costs of preparing and submitting a notification 
under Sec.  850.404 of the Final Rule. The Treasury Department 
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 Treasury Department anticipates that the associated costs will be 
comparable to or will 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 Final Rule can be expected to 
have a range of between $4,216,680 and $9,222,000 and the total annual 
time burden will be approximately 31,800 person hours.
Additional Indirect Costs Associated With Prohibited Transactions and 
Non-Covered Transactions
    With respect to prohibited transactions, the Treasury Department 
has no basis to conclude that the Final 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 Final Rule may pursue alternative 
investment opportunities since they will 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 will result from an alternative transaction. The Treasury 
Department notes that in a very small number of cases, companies might 
decide to forego a non-prohibited transaction in favor of a different 
investment that is not subject to the Final Rule or a similar 
regulatory regime. The Treasury Department assesses that the impact of 
these costs are nominal, because if the difference in investment return 
between the forgone investment and alternate investment the company 
chose was more significant, then the company would have determined the 
diligence cost was acceptable given the higher economic return. In 
addition, Treasury notes it is very challenging to determine the 
particular sector, country, or investment structure that the U.S. 
investor will choose as the alternate and then quantify the impact of 
that determination. The Treasury Department also notes that investors 
from specific countries, including those that are not U.S. allies, may 
replace U.S.

[[Page 90459]]

investors for prohibited transactions. Similarly, Treasury notes that 
it is particularly difficult to quantify these and other impacts of the 
Final Rule.
    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 Final Rule may have an economic impact on investment targets 
that are covered foreign persons because certain transactions will be 
prohibited, the Final 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 
Final Rule.
Costs to the U.S. Government
    Administering the Final Rule will also entail costs to the U.S. 
Government. Such costs will include information technology (IT) 
development and ongoing annual maintenance, as well as processing 
electronic notifications. The Treasury Department estimates that 
initial IT development costs will 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 Treasury Department and other relevant agencies, 
including the Department of Commerce, may incur additional costs 
besides those estimated above. These include other responsibilities 
related to the implementation of the Final 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, potentially including education on the 
requirements, provision of information and FAQs, and conducting 
stakeholder outreach. The Treasury Department does not currently have 
specific estimates for these costs but estimates that there will be 
personnel costs of less than $2 million associated with the Final Rule 
in Fiscal Year 2024 with additional costs for ongoing outreach and 
enforcement thereafter.
    The Treasury Department and other U.S. Government agencies may also 
incur costs in enforcing compliance with the Final Rule. The Treasury 
Department does not currently have estimates for these costs, and they 
are not included in the estimates above.
    The Treasury Department plans to monitor compliance with the Final 
Rule by leveraging a variety of data sources, both internal and 
external. If the external data sources include third-party commercial 
data, the Treasury Department assesses that the cost associated with 
accessing these databases will be modest and incremental, given that 
the Treasury Department 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 Treasury Department may initiate outreach to the 
involved entity, work with law enforcement to investigate the apparent 
non-compliance, or initiate an enforcement action. The Treasury 
Department's enforcement of the Final Rule will also involve 
coordination with law enforcement agencies. These law enforcement 
agencies may also incur costs (time and resources) while conducting 
investigations into potential non-compliance.
(b) 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 U.S. 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 U.S. outbound investments, including certain intangible 
benefits that often accompany U.S. 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 Final Rule is designed to complement 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 Final Rule is intended to provide key 
information that the Treasury Department can use to better inform the 
development and implementation of the Final Rule. These notifications 
will 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 will be helpful in 
highlighting trends with respect to related capital flows and will 
inform future policy development. The Treasury Department expects that 
the national security benefits, while qualitative, will outweigh the 
compliance costs of the Final Rule.
(c) Alternatives
    The Outbound Order requires the Secretary to issue implementing 
regulations subject to public notice and comment. As a result, the 
Treasury Department did not have the discretion to refrain from 
promulgating the Final Rule or to promulgate it without notice and 
comment. However, the Treasury Department considered different 
approaches to the Final Rule that would be available under the Outbound 
Order. Specifically, the Treasury Department considered the following 
potential alternatives to the Final Rule:
     Scope of covered transaction and excepted transaction. The 
Treasury Department could have proposed a broader definition of covered 
transaction or fewer exceptions, and the Treasury Department considered 
certain alternatives to the scope of covered transaction and excepted 
transaction in developing the Final Rule. This discussion does not 
cover each alternative considered for the scope of covered transaction 
but provides a summary of a few alternatives the Treasury Department 
considered. The

[[Page 90460]]

Treasury Department 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 Treasury Department 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. Another example is 
with respect to the exception for LP investments. As discussed above, 
in the Proposed Rule the Treasury Department offered and sought comment 
on two alternatives for this exception. Under proposed Alternate 1, a 
U.S. person's investment made as an LP in a pooled investment fund 
would have constituted an excepted transaction if (1) the LP's rights 
were consistent with a passive investment and (2) the LP's committed 
capital was not more than 50 percent of the total AUM of the pooled 
investment fund. If the U.S. person LP's committed capital were to 
constitute more than 50 percent of the total AUM of the pooled 
investment fund, its investment would have qualified as an excepted 
transaction only if the U.S. person secured a binding agreement that 
the pooled investment fund would not use its capital for a prohibited 
transaction. This approach would have addressed 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 investment 
fund or the ultimate covered foreign person investment target. Compared 
to Alternate 2, Alternate 1 would have scoped in fewer LP investments 
as covered transactions but could potentially have been more 
challenging for a U.S. person to comply with, as it required 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 
committed capital in a pooled investment fund that then invests in a 
covered foreign person would have been an excepted transaction only if 
the committed capital was not more than $1,000,000. Although this 
alternative would have likely scoped 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 have been easier for U.S. persons to comply with than 
Alternate 1. As discussed above at the preamble to Subpart E, the 
Treasury Department has adopted a hybrid approach in the Final Rule--
defining excepted transaction as any LP investment of $2,000,000 or 
less, or any LP investment accompanied by a binding contractual 
assurance that the LP's capital invested in the pooled investment fund 
would not be made to effect an indirect prohibited transaction or 
notifiable transaction, as applicable.
     Covered national security technologies using broad 
definition of sectors rather than specific activities and technologies. 
In the Proposed Rule, the Treasury Department proposed to define 
notifiable transaction and prohibited transaction in Sec. Sec.  850.217 
and 850.224, respectively, by reference to certain technologies and 
activities, and in some instances, end uses. Alternatively, the 
Treasury Department 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 
Treasury Department had proposed that approach, the Treasury Department 
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 Final Rule. Instead, the Treasury Department, 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 Final 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 Treasury Department intends the Final Rule to provide a U.S. 
person with clarity and information 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 Treasury Department expects that the national security 
benefits, while qualitative, will outweigh the compliance costs of the 
Final Rule.

B. Paperwork Reduction Act

    The collections of information contained in this Final Rule have 
been submitted to OMB for review in accordance with the PRA under 
control number 1505-0282.
    The Final Rule will 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 must 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 Final Rule will require any U.S. 
person that has filed a notification to respond to any questions or 
document requests from the Treasury Department related to the 
transaction or compliance with the Final Rule; any information or 
documents provided to the Treasury Department in response to such 
request will be deemed part of the notification under the Final Rule.
    The Final Rule will 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 10 years from the date of the 
filing. Further, the Final Rule will require any person who has made 
any representation, statement, or certification subject to the Final 
Rule to notify the Treasury Department in writing of any material 
omission or inaccuracy in such representation, statement, or 
certification. Finally, the Final Rule will also require any U.S. 
person seeking a national interest exemption to submit information to 
the Treasury Department regarding the scope of the transaction 
including, as applicable, the information required for a notification 
of a notifiable transaction.
    The collections of information described will be used by the 
Treasury

[[Page 90461]]

Department 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 will 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 may also inform future policy development and 
decisions, including any modifications to the scope of notifiable 
transactions and prohibited transactions. Additionally, the information 
will 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 
Final Rule will prohibit the Treasury Department from making public any 
information or documentary materials submitted to or filed with the 
Treasury Department under the Final Rule unless required by law or 
otherwise provided in the Final Rule.
    The Treasury Department used the methodology described in the 
previous section to estimate the total annual reporting and 
recordkeeping burden of the information collections in this Final Rule. 
The Treasury Department estimates that the annual hourly burden will be 
up to 28,620 hours. This annual total is based on the Treasury 
Department's assumption that: (1) 180 entities per year will respond to 
the information collections in this Final Rule and each entity will 
submit an average of 1.77 notifications annually, meaning these 
respondents will file a total 318 responses to the information 
collections annually; and (2) each respondent will spend an estimated 
50 to 90 person hours per response. The Treasury Department estimates 
that the annual cost burden associated with the information collections 
and recordkeeping in the Final Rule will range between $3,513,900 and 
$8,299,800.
    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.

C. Regulatory Flexibility Act

    The RFA requires an agency either to provide a final regulatory 
flexibility analysis with a final rule or certify that the final rule 
would not have a significant economic impact on a substantial number of 
small entities. The Treasury Department 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 
RFA. The Treasury Department did not receive any comments from the 
public or the Chief Counsel for the Office of Advocacy of the Small 
Business Administration (SBA) on this certification.
    The Treasury Department is hereby certifying that the Final Rule 
will not have a significant economic impact on a substantial number of 
small entities within the meaning of section 601(6) of the RFA.
    The Final Rule may impact any U.S. person, including a small 
business that engages in a covered transaction with a covered foreign 
person. The Treasury Department does not anticipate that the Final Rule 
will affect ``small organizations'' or ``small governmental 
jurisdiction[s],'' as defined in the RFA.
    The Treasury Department expects the Final Rule to have a negligible 
baseline impact on small businesses because the Final 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 Final Rule. These larger 
institutions are more likely to enter into transactions that will 
trigger the definition of covered transaction. The Final Rule will 
except specific types of transactions that may be more attractive or 
accessible to small business investors. And, as discussed below, the 
Treasury Department has assessed that small businesses will be likely 
to enter into transactions that constitute excepted transactions.
    As an example, the SBA's Table of Size Standards with respect to 
North American Industry Classification System (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 Treasury Department 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.
    Extrapolating from this data, the average 2023 revenue per firm in 
this category would have been $231.5 million. 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 Treasury Department 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 Treasury Department 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 Final Rule will 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 Final Rule, 
the Treasury Department expects that few small businesses, as that term 
is defined by the SBA, will be impacted by the Final Rule.
    In the unlikely event that a small entity is subject to the 
requirements of the Final Rule, such entity will be expected to incur 
the costs described in the cost benefit analysis above. For submission 
of notifications, the Treasury Department 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

[[Page 90462]]

who will be able to submit directly to the Treasury Department.

D. Unfunded Mandates Reform Act

    Section 202 of UMRA requires that agencies assess anticipated costs 
and benefits and take certain other actions before issuing a final rule 
that includes any Federal mandate that may result in expenditures in 
any one year by a State, local, or Tribal government, in the aggregate, 
or by the private sector, of $100 million in 1995 dollars, updated 
annually for inflation. The Final Rule does not include any Federal 
mandate that may result in expenditures by State, local, or Tribal 
governments, or by the private sector in excess of that threshold.

E. Executive Order 13132: Federalism

    Executive Order 13132 prohibits an agency from publishing any rule 
that has federalism implications if the rule either imposes 
substantial, direct compliance costs on State and local governments, 
and is not required by statute, or preempts State law, unless the 
agency meets the consultation and funding requirements of section 6 of 
the order. The Final Rule does not have federalism implications and 
does not impose substantial direct compliance costs on State and local 
governments or preempt State law within the meaning of Executive Order 
13132.

F. Congressional Review Act

    Pursuant to the Congressional Review Act (5 U.S.C. 801 et seq.), 
OIRA designated this rule as not a major rule, as defined by 5 U.S.C. 
804(2).

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 Treasury Department adds 
part 850 of title 31 of the Code of Federal Regulations to read 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.
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, concealment, and omission 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, 31 
U.S.C. 321.

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

[[Page 90463]]

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 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, or the engagement of a person of 
a country of concern in a 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 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 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, or engagement of a 
person of a country of concern in a 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 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 has made regarding an investment 
target or other relevant transaction counterparty (such as a joint 
venture partner), including questions asked of the investment target or 
relevant

[[Page 90464]]

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 other 
relevant transaction counterparty (such as a joint venture partner) 
with respect to the determination of a transaction's status as a 
covered transaction and status of an investment target or other 
relevant transaction counterparty (such as a joint venture partner) as 
a covered foreign person;
    (3) The efforts by the U.S. person as of the time of the 
transaction to obtain and consider available non-public information 
relevant to the determination of a transaction's status as a covered 
transaction and the status of an investment target or other relevant 
transaction counterparty (such as a joint venture partner) as a covered 
foreign person;
    (4) Available public information, the efforts undertaken by the 
U.S. person to obtain and consider such information, and the degree to 
which other information available to the U.S. person as of the time of 
the transaction is consistent or inconsistent with such publicly 
available information;
    (5) Whether the U.S. person purposefully avoided learning or 
seeking relevant information;
    (6) The presence or absence of warning signs, which may include 
evasive responses or non-responses from an investment target or other 
relevant transaction counterparty (such as a joint venture partner) to 
questions or a refusal to provide information, contractual 
representations, or warranties; and
    (7) The use of available public and commercial databases to 
identify and verify relevant information of an investment target or 
other relevant transaction counterparty (such as a joint venture 
partner).
    (d) An assessment of whether a U.S. person has undertaken a 
reasonable and diligent inquiry shall be based on a consideration of 
the totality of relevant facts and circumstances.

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:
    (1) Uses data inputs to perceive real and virtual environments;
    (2) Abstracts such perceptions into models through automated or 
algorithmic statistical analysis; and
    (3) Uses 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 
paragraph (a) of this section.


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:
    (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 interest 
(including debt) 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 or at 
the discretion of the U.S. person that holds the financial interest.


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.

[[Page 90465]]

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 a board seat on, a 
voting or equity interest (other than through securities or interests 
that would satisfy the conditions in Sec.  850.501(a) if held by a U.S. 
person) in, or any contractual power to direct or cause the direction 
of the management or policies of any person or persons described in 
paragraph (a)(1) of this section from or through which it:
    (i) Derives more than 50 percent of its revenue individually, or as 
aggregated across such persons from each of which it derives at least 
$50,000 (or equivalent) of its revenue, on an annual basis;
    (ii) Derives more than 50 percent of its net income individually, 
or as aggregated across such persons from each of which it derives at 
least $50,000 (or equivalent) of its net income, on an annual basis;
    (iii) Incurs more than 50 percent of its capital expenditure 
individually, or as aggregated across such persons from each of which 
it incurs at least $50,000 (or equivalent) of its capital expenditure, 
on an annual basis; or
    (iv) Incurs more than 50 percent of its operating expenses 
individually, or as aggregated across such persons from each of which 
it incurs at least $50,000 (or equivalent) of its operating expenses, 
on an annual basis.
    (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) For purposes of paragraph (a)(2) of this section:
    (1) Calculations shall be based on an audited financial statement 
from the most recent year. If an audited financial statement is not 
available, the most recent unaudited financial statement shall be used 
instead. If no financial statement is available, an independent 
appraisal shall be used instead. If no independent appraisal is 
available, a good-faith estimate shall be used instead.
    (2) Where an amount is not denominated in U.S. dollars, the U.S. 
dollar equivalent shall be determined based on the most recent 
published rate of exchange available on the Department of the 
Treasury's website.

    Note 1 to Sec.  850.209: References in this section to revenue, 
net income, capital expenditure, or operating expenses refer to 
overall revenue, net income, capital expenditure, or operating 
expenses, as applicable, without subtracting amounts attributable to 
persons described in paragraph (a)(1) of this section of less than 
$50,000 (or equivalent).

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 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 affords or will 
afford the U.S. person an interest in profits of the covered foreign 
person, the right to appoint members of the board of directors (or 
equivalent) of the covered foreign person, or other comparable 
financial or governance rights characteristic of an equity investment 
but not typical of a loan;
    (3) Conversion of a contingent equity interest into an equity 
interest in a person that the U.S. person knows at the time of the 
conversion is a covered foreign person, where the contingent equity 
interest was acquired by the U.S. person on or after January 2, 2025;
    (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 plans 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;
    (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 that the joint 
venture will engage, or plans 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 contingent interest described in paragraph 
(a)(1) 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:  An indirect covered transaction 
includes a U.S. person's use of an intermediary to engage in a 
transaction that would be a covered transaction if engaged in 
directly by a U.S. person. However, for purposes of paragraph (a)(1) 
of this section, a U.S. person is not considered to have acquired an 
indirect equity interest or contingent equity interest in a covered 
foreign person when the U.S. person acquires a limited partner or 
equivalent interest in a venture capital fund, private equity fund, 
fund of funds, or other pooled investment fund and that fund then 
acquires an equity interest or contingent equity interest in a 
covered foreign person. (A U.S. person's acquisition of a limited 
partner or equivalent interest in a non-U.S. person venture capital 
fund, private equity fund, fund of funds, or other pooled investment 
fund may, however, be a covered transaction under paragraph (a)(6) 
of this section.)


    Note 2 to Sec.  850.210: Neither the issuance of a secured loan 
or similar debt financing for which equity is pledged as collateral, 
nor the acquisition of such secured debt on the secondary market, is 
an acquisition of an equity interest. However, foreclosure on 
collateral where the debtholder takes possession of the pledged 
equity is an acquisition of an equity interest; provided that such 
an acquisition is not a covered transaction where the equity was 
pledged prior to January 2, 2025, or where the U.S. person did not 
know at the time of issuing or acquiring the debt that the pledged 
equity was in a covered foreign person.


[[Page 90466]]




Sec.  850.211  Develop.

    Except as used in Sec.  850.210(a)(4), the term develop means to 
engage in any stages prior to serial production, such as design or 
substantive 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);
    (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 military end use (e.g., for weapons 
targeting, target identification, combat simulation, military vehicle 
or weapons control, military decision-making, weapons design (including 
chemical, biological, radiological, or nuclear weapons), or combat 
system logistics and maintenance); or government intelligence or mass-
surveillance end use (e.g., through incorporation of features such as 
mining text, audio, or video; image recognition; location tracking; or 
surreptitious listening devices);
    (2) Intended by the covered foreign person or joint venture to be 
used for any of the following:
    (i) Cybersecurity applications;
    (ii) Digital forensics tools;
    (iii) Penetration testing tools; or
    (iv) The control of robotic systems; or
    (3) Trained using a quantity of computing power greater than 
10[supcaret]23 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 criterion described in paragraph 
(d)(3) of this section is serving to effectively address threats to 
the national security of the United States described in the Order 
and make updates, as appropriate, through public notice.


    Note 2 to Sec.  850.217: Consistent with the definition for 
develop at Sec.  850.211, to develop an AI system defined at Sec.  
850.202(b) in a manner subject to these notification requirements, 
the relevant covered foreign person or joint venture must engage in 
the activities enumerated in Sec.  850.211, such as design or 
substantive modification, with respect to the third-party AI model 
or machine-based system that is being used by a data system, 
software, hardware, application, tool, or utility to operate in 
whole or in part.


    Note 3 to Sec.  850.217: For purposes of paragraph (d) of this 
section, a person customizing, configuring, or fine-tuning a third-
party AI model or machine-based system strictly for its own 
internal, non-commercial use (e.g., not for sale or licensing) would 
not implicate the notification requirements for related transactions 
solely on that basis unless the person's internal, non-commercial 
use is for government intelligence, mass-surveillance, or military 
end use, or for digital forensics tools, penetration testing tools, 
or the control of robotic systems.

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)).

    Note 1 to Sec.  850.219: Any entity that meets the conditions of 
paragraph (a), (b), or (c) of this section with respect to another 
entity is the parent, even if the parent entity is an intermediate 
entity and not the ultimate parent.

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 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 a country of 
concern; or any entity with respect to which the government of a 
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,

[[Page 90467]]

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 of the following:
    (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 (including chemical, 
biological, radiological, or nuclear weapons), or combat system 
logistics and maintenance); or
    (2) Government intelligence or mass-surveillance end use (e.g., 
through incorporation of features such as 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:
    (1) 10[supcaret]25 computational operations (e.g., integer or 
floating-point operations); or
    (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 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 criterion described in paragraph (k) 
of this section is serving to effectively address threats to the 
national security of the United States described in the Order and 
make updates, as appropriate, through public notice.


    Note 2 to Sec.  850.224: Consistent with the definition for 
develop at Sec.  850.211, to develop an AI system defined at Sec.  
850.202(b) in a manner subject to these prohibition requirements, 
the relevant covered foreign person or joint venture must engage in 
the activities enumerated in Sec.  850.211, such as design or 
substantive modification, with respect to the third-party AI model 
or machine-based system that is being used by a data system, 
software, hardware, application, tool, or utility to operate in 
whole or in part.



[[Page 90468]]


    Note 3 to Sec.  850.224:  For purposes of paragraphs (j) and (k) 
of this section, a person customizing, configuring, or fine-tuning a 
third-party AI model or machine-based system strictly for its own 
internal, non-commercial use (e.g., not for sale or licensing) would 
not implicate a prohibition for related transactions solely on that 
basis unless the person's internal, non-commercial use is for 
government intelligence, mass-surveillance, or military end use, or 
for digital forensics tools, penetration testing tools, or the 
control of robotic systems.

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 in light of the relevant facts and circumstances.

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 
otherwise possesses executive responsibilities 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 each of the following 
activities will not be considered to have exercised their authority to 
direct, order, decide upon, or approve a transaction:
    (1) Participating in formal approval and decision-making processes 
related to the transaction, including making a recommendation;
    (2) Reviewing, editing, commenting on, approving, and signing 
relevant transaction documents; and
    (3) Engaging in negotiations with the investment target (or, as 
applicable, the relevant transaction counterparty, such as a joint 
venture partner).

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 knowledge, submit a notification 
pursuant to Sec.  850.404. This requirement applies regardless of 
whether the

[[Page 90469]]

transaction would have been a notifiable transaction or a prohibited 
transaction.

    Note 1 to Sec.  850.403:  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.  850.401, Sec.  
850.402, or Sec.  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, subject 
to paragraph (d) of this section.
    (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 the name and principal place of business and place of 
incorporation or legal organization of the intermediate and ultimate 
parent entities of the U.S. person, identifies the U.S. person's 
relationship with any controlled foreign entity or entities of the U.S. 
person, and 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.  850.401, Sec.  
850.402, or Sec.  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 that includes the name and principal place of business and place 
of incorporation or legal organization of the intermediate and ultimate 
parent entities 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

[[Page 90470]]

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 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 no 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, as 
applicable, if the conditions set forth in this section are met. In 
that case, the transaction is an excepted transaction. The following 
transactions are excepted transactions:
    (a)(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:
    (A) 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
    (B) Any company that has elected to be regulated or is regulated as 
a business development company pursuant to section 54 of the Investment 
Company Act of 1940, as amended, at 15 U.S.C. 80a-53;
    (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 or equivalent's committed capital is not 
more than $2,000,000, aggregated across any investment and co-
investment vehicles of the fund; or
    (B) The limited partner or equivalent has secured a binding 
contractual assurance that its capital in the fund will not be used to 
engage in a transaction that would be a prohibited transaction or 
notifiable transaction, as applicable, if engaged in by a U.S. person; 
or
    (iv) In a derivative, so long as such derivative does not confer 
the right to acquire equity, any rights associated with equity, or any 
assets in or of a covered foreign person.
    (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 standard minority shareholder 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 operations that are not covered activities or that 
maintains covered activities that the controlled foreign entity was 
engaged in prior to January 2, 2025;
    (d) A transaction made after January 2, 2025, pursuant to a 
binding, uncalled capital commitment entered into before January 2, 
2025;
    (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) Is not the syndication agent;
    (f) The receipt of employment compensation by an individual in the 
form of an award of equity or the grant of an option to purchase equity 
in a covered foreign person, or the exercise of such option; or
    (g)(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 addressing national 
security risks substantially similar to those described in the Order 
and related to 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 (g), 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 
(g)(1) of this section shall be made available through public notice.
    (4) The Secretary may rescind a designation or determination under

[[Page 90471]]

paragraph (g)(1) of this section if the Secretary, in consultation with 
the Secretary of State, Secretary of Commerce, and, as appropriate, the 
heads of other relevant agencies, determines that such a rescission is 
appropriate. Any rescission shall be made available through public 
notice.


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 and the 
certification referred to in Sec.  850.203. Information and other 
documents submitted by the U.S. person to the Department of the 
Treasury under this section shall be deemed part of the national 
interest exemption request. The U.S. person shall follow the 
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 a request 
for a national interest exemption. 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, concealment, and omission 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, concealing or omitting 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 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 in an amount not to exceed the greater of:
    (i) $250,000, as such amount is adjusted pursuant to the Federal 
Civil Penalties Inflation Adjustment Act of 1990, as amended (Pub. L. 
101-410, 28 U.S.C. 2461 note); or
    (ii) An amount that is twice the amount of the transaction that is 
the basis of the violation with respect to which the penalty is 
imposed.
    (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). Notice 
of the maximum penalty which may be assessed under this section will be 
published in the Federal Register and on Treasury's Outbound Investment 
Security Program website on an annual basis on or before January 15 of 
each calendar year.
    (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.

[[Page 90472]]

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 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) through (d) 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) Notwithstanding paragraph (a) of this section, the Department 
of the Treasury may disclose information that is not already publicly 
available, when such disclosure of information is determined by the 
Secretary to be in the national interest. Any determination under this 
paragraph (d) may not be delegated below the level of the Assistant 
Secretary of the Treasury.
    (e) 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

[[Page 90473]]

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 
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. 2024-25422 Filed 11-7-24; 11:15 am]
BILLING CODE 4810-AK-P