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Expect Outbound Investment Regs, New CFIUS Rules This Year, Lawyer Says

The Treasury Department is likely to release its draft outbound investment regulations in the next several months, setting them up to potentially take effect before year's end, said foreign investment lawyer Jonathan Gafni of Linklaters.

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Gafni, speaking during a virtual event this week hosted by the American Bar Association, said he’s expecting proposed rules or some other form of draft regulations governing outbound investment prohibitions and notification requirements “in the first or second quarter of 2024.” He said those rules will likely feature a 30-day comment period, and after Treasury reviews that feedback and tweaks the regulations, the agency could issue the final version within another 30 days.

“So all told, the outbound foreign investment regime should be in effect by the third or fourth quarter of this year,” Gafni said.

Treasury in August requested feedback about how it should craft the new restrictions and notification requirements, which will apply to certain investments in China’s semiconductor, artificial intelligence and quantum sectors (see 2310050035). Law firms and industry groups raised a host of concerns about the rule’s scope, and they urged the agency to clarify what types of due diligence would be required of dealmakers (see 2310050035).

Gafni said a range of other questions remain unanswered, including which specific technologies and investors will be subject to the rules and whether they will capture indirect U.S. investments -- including through non-Chinese companies in the U.S. and elsewhere -- if those companies “happen to have relevant activities in China.”

“So this may not just [capture] direct U.S. investment in China -- it could affect a lot more than that,” Gafni said during the ABA event, which was the first program held by the association’s new Foreign Investment and National Security Committee launched in August. “The devil of all this is going to be in the details,” Gafni said.

He also said he's been “told to expect” new Committee on Foreign Investment in the U.S. rules this year. Paul Rosen, the head of Treasury's Office of Investment and Security, said in September the agency was preparing for its first major updates since the Foreign Investment Risk Review Modernization Act of 2018, which will include several notices of proposed rulemakings over the next year (see 2309150038).

Although the committee “hasn't really detailed what they'll cover,” Gafni said CFIUS has spoken broadly about wanting to make filings more efficient. “In the interest of efficiency, we would not be surprised to see more detailed disclosures in CFIUS filings that cover frequently asked follow-up questions, particularly with respect to ultimate beneficial ownership of the non-U.S. parties,” Gafni said.

Lawyers may also see CFIUS expand its definition of critical technologies -- the set of technologies that falls under its jurisdiction for national security reviews -- beyond the “scope of the export controls that CFIUS is currently using to define that term,” Gafni said, although he called that “speculative.” This could help bring CFIUS rules “more in sync with the outbound foreign investment regime,” he said, “which similarly may need to rely on a bespoke definition of critical technologies.”

Gafni said he wasn’t sure when those changes will be released, but said Treasury is likely prioritizing work on its outbound investment regulations over everything else. “Since the same people are writing the outbound foreign investment rules and the CFIUS rules,” he said, “my guess is that we won't see the CFIUS rules until the outbound foreign investment rules have at least been published in draft form.”

Aside from new CFIUS and outbound investment rules, Gafni said U.S. foreign direct investment lawyers also are grappling with challenges caused by a rise of foreign investment regimes in other countries. “A few years ago, U.S. lawyers mostly had to worry about Australian and Canadian national security reviews of inbound investments,” he said. “But now nearly all the [Organisation for Economic Co-operation and Development] countries have some form of foreign investment review.”

He specifically pointed to the EU, which last month issued a new proposal designed to make sure all member states have an FDI screening regime in place (see 2401240078). The bloc is also studying possible outbound investment rules, which Gafni said will likely be influenced by the “approach ultimately chosen by the U.S.”

Asia is also seeing a flurry of FDI activity, said Ninette Dodoo of Freshfields, adding that the region is "really experiencing a significant evolution" in how it treats foreign investments without "any real consistency in approach."

She specifically mentioned Singapore, which has traditionally imposed "minimal restrictions" on investment. But the country's parliament in January passed a bill to better screen investments in entities that are viewed as critical for national security, Dodoo said, and the regime is expected to take effect later this year.

Fraser Malcolm of Blake Cassels said investors should also expect new Canadian FDI rules this year. He said the country will introduce a "mandatory pre-closing filing regime" in the next few months that will be similar to CFIUS. The new prefiling rules will capture foreign investments -- including minority investments -- that are made in certain critical sectors in Canada.

"There's going to be a lot more multijurisdictional analysis," Malcolm said, "and Canada is going to trip that pre-closing filing requirement a lot."