Comments on Provisions Pertaining to U.S. Investments in Certain National Security Technologies and Products in Countries of Concern

Submitted by: Sarah Bauerle Danzman (Associate Professor, Indiana University Bloomington; Non-Resident Senior Fellow, Atlantic Council), Tim Fist (Senior Technology Fellow, Institute for Progress; Senior Adjunct Fellow, Technology and National Security Program, Center for a New American Security); Geoffrey Gertz (Senior Fellow, Energy, Economics, and Security Program, Center for a New American Security); Emily Kilcrease (Senior Fellow and Director of the Energy, Economics, and Security Program, Center for a New American Security); and Ngor Luong (Senior Research Analyst, CSET; Non-Resident Fellow, Atlantic Council).¹

Summary

Comments are provided on the following areas:

• The scope of AI prohibitions and notifications: We welcome the progress from the ANPRM in strengthening and clarifying these definitions, and offer several additional comments on how to further refine the approach adopted in the NPRM.
• Entity-based restrictions: We welcome the NPRM’s inclusion of an entity-based approach, as a complement to the focus on technology-based restrictions, though note as drafted it will likely have limited practical impact. We recommend ways to expand the entity-based approach, recognizing some changes may require alterations to the underlying Outbound EO or use of other related authorities.
• LP coverage and binding contractual assurances: We recommend adjusting the proposed exception so that U.S. person LPs must obtain a contractual requirement that none of the fund’s capital will be invested in covered transactions, rather than only the U.S. person’s capital.
• Partner and ally exception: We welcome the inclusion of a partner and ally exception as part of Treasury’s broader effort to encourage multilateral cooperation on outbound, and offer several principles to guide the development of this program.
• Buy out exception: We recommend expanding the buy out exception to also include transactions in third countries that result in the acquired entity no longer qualifying as a person of a country of concern (because it is not majority owned by other persons of a country of a concern).
• Pivots: We recommend introducing a reporting requirement if a U.S. person invests in a company that subsequently pivots into a covered activity after the time of the investment (where such pivots were not foreseeable at the time of the investment under the knowledge standard).
• Government use of collected data: We recommend further clarifying the limits on how the US government will use data collected through notifications.
• Public reporting: We recommend Treasury commit to publicly reporting on the implementation of the outbound program, and provide suggestions for specific information to include in such reporting.

Introductory Comments

We commend Treasury and the interagency for the release of this notice of proposed rulemaking (NPRM), as well as the President’s issuance of Executive Order 14105: Addressing United States Investments in Certain National Security Technologies and Products in Countries of Concern (the EO). The NPRM marks an important milestone in the development of new authorities to address national security concerns associated with certain investments made in the China market, particularly those that may advance China’s capabilities in key technology ecosystems that support its military modernization, intelligence, and surveillance capabilities. We welcome the opportunity for the public to provide comments on this new and complex set of authorities.

The enclosed comments build on comments submitted by CNAS, CSET, and the Atlantic Council for the Outbound ANPRM, and are informed by guiding principles laid out in prior research by Bauerle Danzman and Kilcrease, Sand in the Silicon: Designing an Outbound Investment Controls Mechanism, jointly published by the Atlantic Council and the Center for a New American Security In this report, the authors note that new outbound investment control authorities should be:

• targeted at transactions that present the highest national security risk;
• clearly defined and understandable to private-sector participants, who will be responsible for the first line of compliance;
• non-duplicative of existing tools that address national security risks associated with global economic activities, including inward investment screening conducted by the Committee on Foreign Investment in the United States (CFIUS), export controls, list-based sanctions programs, and the CHIPS and Science Act of 2022;
• scoped proportionately to the institutional capacity available to effectively administer a new mechanism; and
• designed to enable meaningful conversations with allies about adopting similar regimes.

As a general matter, the proposals in the NPRM align closely with these principles, though our comments note certain points where the proposed rules would benefit from further clarity, examples, and explanation to strengthen alignment with these core concepts. Additionally, we urge the executive branch to continue its engagement with other economies that are large exporters of capital and developers of advanced technologies. As with export controls, a coordinated approach of like-minded countries will be most effective in addressing the main policy objectives of the EO, and there remains a high risk of backfilling of capital and associated benefits from other economies should the United States act in a unilateral manner.

In our personal engagements with international counterparts, we continue to hear a high degree of skepticism about the need for outbound investment programs outside of the United States. In particular, international counterparts have noted that their economies’ lack of a large venture capital base reduces the need for outbound investment restrictions in their jurisdictions. We encourage the U.S. government to avoid over-emphasizing venture capital investments as the only rationale for implementing outbound investment restrictions, as national security risks can emanate from a broad scope of outbound investments. Indeed, monitoring and potentially restricting corporate overseas investment in technologies of concern may be easier to implement precisely because disclosure practices make it easier to track corporate overseas investment than venture capital flows. Partners and allies may be more willing to develop their own outbound regulatory regime if they believe the task before them is simpler and less administratively complex than what the U.S.G. is undertaking. Additionally, we encourage the government to work with like-minded countries on the establishment of outbound investment mechanisms that are bespoke to the particular investment relationship that these countries have with China or other countries of concern and the national security risks arising thereof. A successful diplomatic effort on outbound investment need not result in a carbon copy of the U.S. approach in other countries. Instead, like-minded countries should focus on the investment types and sectors that are most likely to occur, and raise national security concerns, in their relationship with China and other countries of concern.

While Congressional actions are beyond the scope of these comments, we nonetheless note that Congress has an important role to play in working with the executive branch to address national security concerns arising from certain outbound investments. The Congress should codify the authorities laid out in the EO and use the legislative process to fill any gaps that may exist due to constraints of relying on the International Emergency Economic Powers Act (IEEPA) as the underlying authority for the EO. The Congress should also ensure that the agencies implementing the outbound authorities receive sufficient budgets and staffing resources to effectively administer this novel program, to ensure robust intelligence community support, and to engage in outreach to partners and allies, as has proven to be effective through similar appropriations in the Foreign Investment Risk Review Modernization Act of 2018.