Takeaways

The OISP imposes obligations on US Persons, including asset managers, relating to direct or indirect investments in China. Notably, unlike sanctions programs that restrict US Persons from dealing with persons and entities designated on a sanctions lists, Treasury is not establishing a list of Covered Foreign Persons subject to the requirements of the OISP. US Persons are expected to conduct their own due diligence on investment targets to ensure compliance with the OISP. Additionally, while the OISP has sometimes been referred to as a “reverse CFIUS,” it differs in many aspects, including that compliance is solely the responsibility of US Persons and not their foreign counterparties, and, unlike CFIUS, the OISP preemptively prohibits certain transactions.

In assessing the implications of the OISP, some key compliance measures for asset managers to consider include:

• Conducting a risk assessment on investment strategies and portfolios to determine existing or future exposure to potentially Covered Transactions.
• Educating/training investment teams and compliance personnel on the OISP, and in the case of non-US entities, instituting recusal policies for US Person personnel.
• Monitoring any new guidance from Treasury (such as FAQs) that may impact the OISP, as well as keeping apprised of executive branch and legislative efforts to modify or expand the OISP.
• Adopting a standalone OISP policy or amending existing regulatory policy documents, as well as adding trading restrictions in order management systems to monitor for OISP issues.
• Updating due diligence procedures to include assessments (such as through questionnaires) consistent with Treasury’s “reasonable and diligent inquiry” standard to determine whether investment targets are within the OISP’s scope, and ensuring that such diligence is documented, retained, and shared across investment teams.
• Seeking contractual commitments from unaffiliated general partners or managers/sub-advisors regarding OISP compliance.
• Determining whether any US-managed foreign funds have US investors and whether engaging in potential Covered Transactions may trigger reporting requirements for those investors.
• Anticipating requests for representations from counterparties regarding Covered Transactions and evaluating how those representations align with compliance obligations under the OISP (which may differ for US and non-US funds) and the fund’s investment strategies, particularly with respect to permissible notifiable transactions.
• If a target has connections to China, Hong Kong, or Macau (either directly or through controlled affiliates), further investigation is needed by Legal/Compliance. Be particularly aware of investment targets involved in the semiconductors, quantum computing, and AI sectors, even if such sectors are not the primary focus of the investment target.
• Considering reputational risks of engaging with Covered Foreign Persons, even if a transaction would only be notifiable.

Below we outline the key provisions of the OISP that asset managers and investors should consider in assessing the impact of the OISP on their investments and any compliance measures they may need to implement.

Key provisions and definitions of the OISP

Under the OISP, US Persons (discussed below) are required to determine if they are engaging in a transaction with a potential investment target that is a Covered Foreign Person. Depending on the nature of technology-based activities of a Covered Foreign Person, such transactions may either be prohibited (Prohibited Transactions), or may obligate a US Person to notify Treasury of the transactions (Notifiable Transactions). US Persons may also have obligations with respect to non-US entities under their direction or control – either to prevent such non-US entities from engaging in certain transactions or filing notification of a Covered Transaction (discussed below) on their behalf.

Covered Activities

The OISP defines Covered Activities to include any of the activities that, if engaged in by a person of a Country of Concern, would make an investment in that person a Prohibited and Notifiable Transaction.

Prohibited Transactions

• Semiconductor and microelectronics sector: Prohibited Transactions in the semiconductor and microelectronics sector will include Covered Transactions in which the Covered Foreign Person:
  • Develops or produces design automation software for integrated circuits design or advanced packaging;
  • Develops or produces equipment for semiconductor fabrication, volume fabrication of integrated circuits, volume advanced packaging or extreme ultraviolet lithography;
  • Designs or fabricates integrated circuits that meet or exceed specified performance characteristics; and
  • Packages integrated circuits using advanced packaging techniques.
• AI systems: Prohibited Transactions in the AI systems sector will include Covered Transactions in which the Covered Foreign Person:
  • Develops AI systems designed exclusively for or intended to be used for a military, government intelligence, or mass surveillance end use; and
  • Develops AI systems that are trained using a quantity of computing power greater than 10^25 computational operations, or 10^24 computational operations using primarily biological sequence data.
• Quantum information technologies sector: Prohibited Transactions in the quantum information technologies sector will include Covered Transactions in which the Covered Foreign Person:
  • Develops, installs, sells, or produces supercomputers that exceed specified performance and density criteria;
  • Develops or produces a quantum computer or critical components required to produce a quantum computer;
  • Develops or produces a quantum sensing platform intended for military, government intelligence, or mass surveillance end uses; and
  • Develops or produces quantum networks or quantum communications systems intended to be used for scaling quantum computing, secure communications or any other application that has a military, government intelligence, or mass surveillance end use.

Notifiable Transactions

• Semiconductor and microelectronics sector: Notifiable Transactions in the semiconductor and microelectronics sector will include Covered Transactions in which the Covered Foreign Person designs, fabricates, and packages certain integrated circuits.
• AI: Notifiable Transactions in the AI sector will include Covered Transactions in which the Covered Foreign Person develops an AI system that does not meet the criteria to make the transaction a Prohibited Transaction, but nevertheless is:
  • Designed to be used for a military end use, government intelligence, or mass surveillance end use;
  • Intended to be used for cybersecurity applications, digital forensic tools, penetration testing tools, or the control of robotic systems; or
  • Trained using computing power greater than 10^23 computational operations.
• Quantum information technologies sector: There are no categories of Notifiable Transactions with respect to the quantum information technology sector.

What we’re watching for: On February, 21, 2025, the Trump administration issued the America First Investment Policy Memorandum (Memorandum) signaling its intention to increase restrictions on US investments in China under “all necessary legal instruments,” including IEEPA, the Chinese Military-Industrial Complex Companies program administered under Executive Orders 13959 and 14032, as well as potentially expanding the scope of the OISP. The Memorandum signals the possibility of restricting investment in additional technology sectors of China’s economy, including biotechnology, hypersonics, aerospace, advanced manufacturing, directed energy, and other technologies critical to China’s national Military-Civil Fusion Strategy. Such investment restrictions on these additional technology sectors could be implemented through the OISP.

Covered Foreign Persons

A direct or indirect outbound investment by a US Person is not a Covered Transaction unless it involves (or may establish) a Covered Foreign Person. The OISP defines Covered Foreign Persons to mean:

• A person of a Country of Concern (defined below) that is engaged in a Covered Activity;
• A person that is not otherwise a Covered Foreign Person but:
  • Has, directly or indirectly, a voting or equity interest in, a board seat (voting or observer) on, or any contractual power to direct or cause the direction of management or policies of, a Covered Foreign Person; and
  • More than 50% of the person’s annual revenue, net income, capital expenditure, or operating expenses are attributable to Covered Foreign Persons, either individually or aggregated across all such Covered Foreign Persons from which the person derives or incurs (as applicable) at least $50,000 of the relevant metric.
• With respect to a joint venture transaction that constitutes a Covered Transaction, a person of a Country of Concern that participates in such joint venture.

A person of a Country of Concern includes nationals and permanent residents of a Country of Concern who are not also US citizens or permanent residents, entities with a principal place of business in, headquartered in, or incorporated in or otherwise organized under the laws of, a Country of Concern, governments of Countries of Concern and their political subdivisions, and entities in which any of the foregoing holds, individually or in the aggregate, directly or indirectly, at least 50% of the outstanding voting interest, voting power of the board, or equity interest.

Covered Transactions

The OISP applies to direct or indirect outbound investments by US Persons involving Covered Foreign Persons. Such Covered Transactions include certain direct or indirect 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 acquisitions of limited partner (LP) or LP-equivalent interests by US Persons in non-US Person investment funds. Covered Transactions may either be prohibited or require submitting notification to Treasury, depending on the nature of the specified technologies in which the investment target is involved (as outlined above). “Indirect” Covered Transactions include transactions where a US Person uses an intermediary, such as a special purpose vehicle, for the purpose of acquiring an equity interest in a Covered Foreign Person.

Acquisition of LP or LP-Equivalent Interests in Non-US Pooled Funds

Asset managers, both US and non-US, should take note that the acquisition of an LP interest by a US Person in a non-US venture capital fund, private equity fund, fund of fund, or other pooled investment fund (“Non-US Pooled Fund”) is a Covered Transaction only if (1) the US Person LP investor knows or has reason to know at the time of the acquisition that the Non-US Pooled Fund is likely to invest in a person of a Country of Concern who is engaged in the semiconductors and microelectronics, quantum information technologies, or AI sectors and (2) the Non-US Pooled Fund undertakes a transaction that would be a Covered Transaction if it were undertaken by a US Person.

Notification Procedures

Under the OISP, a US Person that engages in a Notifiable Transaction is required to submit an electronic notification to Treasury within 30 calendar days following the completion of the transaction. The notification must include certain specified information and be submitted through the Outbound Notification System (ONS) portal in accordance with the electronic filing instructions posted on Treasury’s Outbound Investment Security Program website.

• Recordkeeping: The OISP requires US Persons to maintain a copy of the notification filed and supporting documentation for a period of ten years from the date of the filing. If the US Person does not provide Treasury with the required information, the OISP requires that they (1) provide a “sufficient explanation” for why the information is unavailable or otherwise cannot be obtained and (2) explain their efforts to obtain such information. If such information subsequently becomes available, the US Person must provide this information to Treasury promptly and no later than 30 calendar days following the availability of such information.
• Confidentiality: The OISP generally prohibits Treasury from publicly disclosing information and documentary materials submitted by US Persons in connection with reporting Notifiable Transactions, with certain exceptions for disclosures pursuant to judicial or administrative proceedings and reports made to Congress or a government agency.
• Parties responsible for submission: Treasury clarified in an FAQ that joint submissions by US persons are not permitted. Each US person participating in a Notifiable Transaction much submit a separate notice and certify to the accuracy of the information submitted.

Knowledge Standard

In order for a Covered Transaction to be subject to the OISP, the participating US Person must have knowledge at the time of the transaction that a “fact or circumstance exists or is substantially certain to occur, … [a]n awareness of a high probability of a fact or circumstance’s existence or future occurrence; or … [r]eason to know of a fact or circumstance’s existence,” with respect to the involvement of a Covered Foreign Person in the transaction, or that the transaction will result or is planned to result in the establishment of a Covered Foreign Person.

Due Diligence

Under the OISP, a US Person is responsible for knowledge they had or could have had through a “reasonable and diligent inquiry” at the time of the transaction. Accordingly, US Persons should conduct, and document, appropriate due diligence on potential investment targets to ascertain whether the investment is a Covered Transaction. Factors that Treasury will consider in determining whether a reasonable and diligent inquiry was made at the time of the transaction, as outlined in the OISP, include:

• Questions that the US Person asked of the investment target or other relevant transaction counterparty (e.g., a joint venturer) as of the time of the transaction;
• Contractual representations or warranties that the US Person has obtained or attempted to obtain from the investment target or other relevant transaction counterparty with respect to the determination of the transaction’s status as a Covered Transaction and the status of the investment target or other relevant counterparty as a Covered Foreign Person;
• Efforts by the US 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 as a Covered Foreign Person;
• Available public information, the efforts undertaken by the US Person to obtain and consider such information, and the degree to which other information available to the US Person as of the time of the transaction is consistent or inconsistent with such publicly available information;
• Whether the US Person purposefully avoided learning or seeking relevant information;
• The presence or absence of warning signs, which may include evasive responses or non-responses from an investment target or other relevant transaction counterparty to questions or a refusal to provide information, contractual representations, or warranties; and
• The use of available public and commercial databases to identify and verify relevant information of an investment target or other relevant transaction counterparty.

Treasury notes that this is not an exhaustive list, and that its assessment of whether a US Person has undertaken a reasonable and diligent inquiry will ultimately depend on its consideration of the totality of the circumstances. In these cases, obtaining representations and warranties from the investment target relevant to the transaction’s status as a Covered Transaction may, in the absence of other warning signs, provide an indication that a US Person lacked the requisite knowledge to make the OISP applicable; however, doing so does not serve as a safe harbor. Accordingly, US Persons should be wary of any warning signs indicating that an investment target’s responses to diligence questions are potentially incomplete, inaccurate, or untruthful.

What we’re watching for: Treasury declined to create a “list” of Covered Foreign Persons or to prescribe specific due diligence obligations, creating difficulties for firms trying to determine what the appropriate level of diligence is for a given transaction. Further, as Treasury also acknowledges, limited publicly available information regarding some China-related companies may also make this inquiry challenging. To this end, service providers may begin to provide aggregated data on potential Covered Foreign Persons, especially in the absence of a published list of such persons by Treasury. If such services become available, asset managers may consider whether utilizing them will enhance their diligence procedures but should not necessarily disregard taking other appropriate measures.

Excepted Transactions

The OISP establishes conditions under which an otherwise Covered Transaction will not be considered a Notifiable or Prohibited Transaction (Excepted Transactions). Subject to certain qualifications, Excepted Transactions include:

• An investment by a US Person in publicly traded securities (as “security” is defined under Section 3(a)(10) of the Securities Exchange Act), denominated in any currency, that trades on a US or non-US securities exchange or “over-the-counter” in any jurisdiction;
• An investment by a US Person in a security issued by a registered investment company (e.g., index fund, mutual fund, exchange-traded fund) or issued by any company that has elected to be a business development company;
• Certain LP or equivalent investments by a US Person in a venture capital fund, private equity fund, fund of funds or other pooled investment fund, provided that either (1) the LP or equivalent’s committed capital is not more than $2,000,000, aggregated across any investment and co-investment vehicles of the fund or (2) the LP or equivalent has secured a binding contractual assurance that its capital in the pooled investment fund will not be used to engage in a transaction that would be a Prohibited or Notifiable Transaction if engaged in by a US Person;
• Certain investments by US Persons in derivatives, provided that such investment does not confer the right to acquire equity, any rights associated with equity, or any assets in or of a Covered Foreign Person;
• A US 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;
• An intracompany transaction between a US 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;
• Fulfillment of a US Person’s binding, uncalled capital commitment entered into prior to the effective date of the OISP (Jan. 2, 2025);
• 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 US Person participated passively in the syndicate;
• The receipt of employment compensation by an individual in the form of stock or stock options, or the exercise of such options; and
• Certain transactions with or involving a non-US Person or entity that have been designated by the Secretary of the Treasury in accordance with certain criteria (yet to be developed) that relate to the foreign country or territory’s own measures to address the national security risk related to a particular outbound investment.

Importantly, even if a transaction falls within the above categories, it is not an Excepted Transaction if the transaction would give a US Person rights with respect to a Covered Foreign Person that are “beyond standard minority shareholder protections.” For example, Treasury describes the ability to nominate and put forward for a vote a slate of directors as a positive right that “goes beyond just protecting the investment of [minority shareholders].” Accordingly, in Treasury’s view, acquiring a sufficient stake in a publicly traded company that would entitle a US investor to nominate directors is likely not an Excepted Transaction. Of note, in certain jurisdictions, ownership of voting securities above very low thresholds confers the investor with rights beyond “standard minority shareholder protections,” such as the right to propose a shareholder vote or nominate directors (e.g., above 1% of the issuer’s shares under the Chinese Companies Act, and above 1% under Taiwan Stock Exchange rules). Asset managers may look to rely on the publicly traded securities exception when considering investments in China, but it is important keep these low thresholds in mind when monitoring trading activity for OISP compliance.

Asset managers should also keep in mind that Treasury has stated that with respect to initial public offerings (IPOs), pre-IPO transactions involving the acquisition of equity in a Covered Foreign Person “such as a purchase with the intent to create a market for the security or to resell the security on a secondary market” are Covered Transactions, because the equity interest is not yet publicly traded. But the exception might still apply if the pre-IPO exposure is through a swap rather than cash (i.e., no actual ownership of shares).

What we’re seeing: Many LPs are seeking representations from asset managers that their capital will not be used to engage in prohibited transactions or notifiable transactions, to take advantage of the exception for LP investments. When faced with such requests, asset managers should carefully consider the implications of agreeing to limitations on a fund’s ability to engage in notifiable transactions and measures needed to isolate US LPs from Covered Transactions. Further, should Treasury expand the OISP to additional technology sectors, such representations may become more restrictive than anticipated. Asset managers may also consider less restrictive counterproposals, such as only representing that a fund will not engage in prohibited transactions and will provide notice to an LP if the fund engages in a notifiable transaction.

What we’re watching for: The America First Investment Policy Memorandum contemplates further review of, and potentially expanded restrictions on, “outbound private equity investments, venture capital investments, greenfield investments, corporate expansions, and investments in publicly traded securities from sources including pension funds, university endowments, and other limited-partner investors.” It is possible, therefore, that the Trump administration may narrow the OISP exceptions, including the publicly traded securities exception.

Obligations under the OISP

US Persons

The OISP applies to all “US Persons,” which 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. Non-US asset managers should be aware that the OISP can impact foreign entities that employ US Persons, as well as foreign entities with non-US Person employees who engage in Covered Activities while they are physically located in the US (e.g., during international business travel). Accordingly, non-US asset managers should consider implementing policies for any US Person personnel with investment decision-making authority to recuse themselves from Covered Transactions and monitor the geographic location of all personnel engaged in Covered Transactions.

Controlled Foreign Entities

The OISP also imposes obligations on US Persons with respect to foreign entities that they control (Controlled Foreign Entities). A 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 US Person is a parent.” The OISP further defines “parent” to mean a person that directly or indirectly holds more than 50% of the outstanding voting interest in an entity or of the board of the entity; a general partner, managing member or equivalent of an entity; or an investment adviser (as defined in the Investment Advisers Act of 1940) to any entity that is a pooled investment fund (Parent).

Under the OISP, US Persons must take “all reasonable steps to prohibit and prevent” a Controlled Foreign Entity from engaging in a Prohibited Transaction and file a notification to Treasury for any Notifiable Transaction undertaken by a Controlled Foreign Entity no later than 30 calendar days after the completion date of the Notifiable Transaction. The OISP outlines a non-exhaustive list of factors that Treasury will consider in determining whether a US Person took “all reasonable steps to prohibit and prevent” a Controlled Foreign Entity from engaging in a Prohibited Transaction, such as whether agreements to implement training and internal reporting between the US Person Parent and the Controlled Foreign Entity to ensure compliance with the OISP were executed, the implementation, auditing, and testing of appropriate controls, policies and procedures, as well whether such steps were “intended to be effective and … were adequately resourced,” among other factors.

Knowingly Directing an Otherwise Prohibited Transaction

The OISP also prohibits US Persons from “knowingly directing” a transaction by a foreign entity that the US Person knows at the time of the transaction would be prohibited if the transaction were engaged in by a US Person. The OISP clarifies that the “knowingly directing” provision only applies to a US Person that “has authority, individually or as part of a group, to make or substantially participate in decisions on behalf of a non-US Person, and exercises that authority to direct, order, decide upon or approve a transaction” (“Management Personnel”). Treasury also notes that the “knowingly directing” provision applies not just to individuals, but also to US entities with such authority.

In its FAQs, Treasury explains that a corporate officer who is a member of an investment committee that votes on whether to undertake potential investments has the requisite authority to knowingly direct an otherwise Prohibited Transaction and meets the definition of Management Personnel, while an accountant who conducts financial due diligence on a potential investment at the instruction of corporate management does not. Additionally, a bank that transfers funds on behalf of a third party to effectuate that third party’s Covered Transaction, without more, has not engaged in a Covered Transaction or “knowingly directed” such a transaction.

Recusal Carve-Out

US Persons employed as Management Personnel at foreign entities who fully recuse themselves from the following activities in connection with a Prohibited Transaction will not be determined to have “knowingly directed” that transaction:

• Participating in formal approval and decision-making processes related to the transaction, including making a recommendation;
• Reviewing, editing, commenting on, approving, and signing relevant transaction documents; and
• Engaging in negotiations with the investment target or, as applicable, the relevant transaction counterparty.

In order to successfully invoke the recusal carve-out, the US Person must “immediately cease” involvement in any of the above activities “prior to” the foreign entity approving and engaging in the Prohibited Transaction. Notably, the “knowingly directing” provision of the OISP captures US Person Management Personnel of foreign entities (e.g., non-US asset managers), wherever located. As such, to avoid violating the OISP, US Person Management Personnel must fully recuse themselves from any involvement in the foreign entity’s decisions relating to such a transaction.

National Interest Exemption

The Final Rule does not establish a licensing regime for US Persons to engage in Prohibited or Notifiable Transactions. However, the OISP provides an exemption for an otherwise Covered Transaction if the US Person seeking to engage in the transaction can demonstrate that the Covered Transaction is in the national interest. In determining whether a transaction qualifies under the national interest exemption, Treasury, in consultation with other agencies, will consider, among other factors:

• The transaction’s effect on critical US supply chain needs;
• Domestic production needs in the US for projected national defense requirements;
• US’s technological leadership globally in areas affecting US national security; and
• The impact on US national security if the US Person is prohibited from undertaking the transaction.

Enforcement

The OISP makes it a violation to take any action prohibited by the OISP; fail to take any action that the OISP requires within the time frame and manner specified in the OISP; make any materially false or misleading representation, statement or certification, including falsifying, concealing or omitting any material fact when submitting information required by the OISP; or to conspire to violate the OISP or taking any action that evades or avoids, has the purpose of evading or avoiding, causes a violation of, or attempts to violate, the OISP.

Violations of the OISP can give rise to civil and criminal penalties under the International Emergency Economic Powers Act (IEEPA), including a maximum civil penalty of up to (a) twice the amount of the transaction that is the basis for the violation or (b) approximately $368,000 (adjusted annually for inflation), whichever is greater; and, for willful violations, a criminal fine of up to $1 million, a prison sentence of up to 20 years, or both.

Further, the OISP provides that Treasury may take any action authorized by IEEPA to nullify, void, or compel the divestment of a Prohibited Transaction that was entered into after the OISP’s effective date (January 2, 2025).

What we’re watching for: Treasury has reportedly been contacting various US entities to inquire about transactions that may implicate the OISP. However, Treasury has not publicized any enforcement actions or settlements thus far, so it remains to be seen how Treasury will interpret some of the OISP’s ambiguities in an enforcement context.