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Rule2024-25422

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

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Published

November 15, 2024

Effective

January 2, 2025

Issuing agencies

Treasury DepartmentInvestment Security Office

Abstract

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.

Full Text

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[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 [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-25422]

[[Page 90397]]

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:
<a href="/cdn-cgi/l/email-protection#6926203a47261c1d0b061c070d473b0c0e1c05081d0006071a291d1b0c081a1c1b10470e061f"><span class="__cf_email__" data-cfemail="e7a8aeb4c9a892938588928983c9b58280928b86938e888994a7939582869492959ec9808891">[email&#160;protected]</span></a>.

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 <a href="https://www.regulations.gov">https://www.regulations.gov</a> (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.
<bullet> 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.
<bullet> 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.
<bullet> 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 <a href="https://www.regulations.gov">https://www.regulations.gov</a> (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:
<bullet> A person of a country of concern that engages in a covered
activity (Sec. 850.209(a)(1));
<bullet> 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
<bullet> 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

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