Effective January 2, 2025, the U.S. Department of Treasury will implement new outbound investment regulations targeting specific sectors in countries of concern, including China, Hong Kong, and Macau. The rules focus on restricting or requiring notification for transactions in semiconductors, quantum computing technology, and artificial intelligence (AI) systems, aiming to mitigate national security risks. Below, we summarize the key provisions of these regulations, including AI coverage, exceptions, exemptions, and penalties.

1. AI COVERAGE

The rules target investments in entities developing AI systems with applications that could pose national security risks. Importantly, Treasury emphasizes the distinction between systems intended for civilian use and those with potential military or security implications.

Key Definitions and Thresholds:

• End-Use Thresholds: Transactions involving entities developing AI systems for military or security purposes are covered.
• Technical Thresholds:
  • Notifiable Transactions: Use of computing power exceeding 10²³ computational operations.
  • Prohibited Transactions: Use of computing power exceeding 10²⁵ operations or AI systems trained on biological sequence data exceeding 10²⁴ operations.

Treasury clarified that customizing or fine-tuning third-party AI systems for internal, non-commercial use is not covered by the rule.

2. EXCEPTED TRANSACTIONS

The regulations provide important limitations and exceptions, including the following:

• Retroactivity: Transactions completed before January 2, 2025, are exempt.
• Binding Commitments: Transactions based on pre-existing, uncalled capital commitments established before January 2, 2025, are also exempt.

Allowable Transactions Without Notification:

Transaction TypeDescriptionInvestmentsInvestments in publicly traded securities, SEC-registered funds, business development companies, or pooled funds with safeguards.AcquisitionsAcquisitions of entities where U.S. persons acquire all equity and the entity ceases to be a "covered foreign person."Employment CompensationEquity or option grants received as compensation for employment in covered entities.Country DesignationsTransactions with persons in countries where U.S. national security concerns are deemed addressed.

Note: If an investment grants rights beyond minority shareholder protections, the exception does not apply.

3. EXEMPT TRANSACTIONS

Treasury retains a national interest exemption allowing U.S. persons to request exceptions for covered transactions if they serve the United States' national interest. These requests can be filed on the Outbound Investment Security Program website.

4. VIOLATIONS AND PENALTIES

Failure to comply with the rule’s requirements, including misrepresentation, concealment of facts, or attempts to evade restrictions, constitutes a violation.

Penalties:

• Violations are subject to civil and criminal penalties under the International Emergency Economic Powers Act (IEEPA).
• U.S. persons must ensure compliance for themselves and avoid causing others to violate these regulations.

CONCLUSION

The outbound investment regulations represent a significant development in U.S. national security policy. By focusing on investments in semiconductors, quantum computing, and AI, these rules aim to prevent foreign adversaries from gaining technological advantages. Investors must understand the rules' thresholds, exceptions, and penalties to ensure compliance. For transactions that may fall into exempt categories or require further clarity, proactive engagement with Treasury through designated processes is essential.

Stay informed and consult legal counsel at The Law Offices Of Destiny Aigbe PLLC to ensure your investments align with these critical regulations.