On October 22, 2026, the U.S. Department of the Treasury (Treasury) unveiled a significant proposed rule aimed at bolstering national security by restricting U.S. investment in certain technology sectors in countries of concern. This proposed rulemaking, stemming from the Comprehensive Outbound Investment National Security Act of 2025 (COINS Act), represents a substantial expansion of the existing Outbound Investment Security Program (OISP). The Treasury also released a detailed Fact Sheet and Frequently Asked Questions (FAQs) to accompany the proposed rule, providing clarity on its scope and intent. Secretary of the Treasury Scott Bessent emphasized the program’s objective: "to strengthen the existing Outbound Investment Security Program to prevent our adversaries from using U.S. investment to develop critical technologies that threaten U.S. national security." The public comment period for the proposed rule closes on December 7, 2026, with the current regulations remaining in effect until a final rule is promulgated.
This comprehensive update, analyzed by Sam Kleiner, Keith Shomig, and Quinn Dang, Partners and Of Counsel at Paul Hastings LLP respectively, builds upon the foundation laid by Executive Order 14105 issued in August 2023 and the subsequent Treasury regulations that took effect on January 2, 2025. The existing framework has primarily targeted U.S. capital and expertise flowing to Chinese companies within a select group of strategic technologies, including semiconductors, quantum information technologies, and artificial intelligence (AI). The proposed rule significantly broadens both the technological scope and the geographic reach of these restrictions.
Expansion of Scope and Technological Focus
A central tenet of the proposed rulemaking is the significant expansion of restrictions related to artificial intelligence (AI) and the introduction of biotechnology as a prohibited sector. Under the current OISP, investments in AI are categorized as either prohibited or subject to notification requirements. The proposed rule aims to eliminate this distinction for AI, effectively prohibiting all covered investments involving covered foreign persons in companies that develop AI systems. This move signals a heightened concern over the strategic implications of AI development and its potential dual-use applications.
Furthermore, the proposed rule introduces biotechnology as a prohibited sector, a significant addition not explicitly mandated by the COINS Act itself. This suggests that Treasury has identified biotechnology as a critical area where U.S. investment could inadvertently fuel advancements that pose national security risks. This expansion underscores a proactive approach by the U.S. government to safeguard its technological and economic interests on a global scale.
Background and Evolution of the Outbound Investment Security Program
The genesis of the Outbound Investment Security Program can be traced to Executive Order 14105, signed in August 2023. This executive order laid the groundwork for restricting U.S. persons’ outbound investments in specific technology sectors within countries deemed to be of concern, primarily China. The Treasury Department’s implementing regulations, which became effective on January 2, 2025, established a framework for either prohibiting certain investments outright or requiring notification to the Treasury.
The existing rule applies to a broad definition of U.S. persons, encompassing U.S. citizens, permanent residents, entities organized in the United States, and any person physically present within the U.S. It also extends to foreign entities controlled by these U.S. persons. The targeted sectors under the current regime are semiconductors and microelectronics, quantum information technologies, and AI. For investments in these sectors involving Chinese companies (including those in Hong Kong and Macau), transactions are either prohibited or require notification to Treasury within 30 days of closing. It is important to note that this program operates differently from the Committee on Foreign Investment in the United States (CFIUS), which reviews inbound investments; the OISP does not involve an application or approval process.
The enforcement of the OISP has already seen tangible consequences. On October 7, 2026, Treasury announced its first penalty under the program, sanctioning a U.S. investor for failing to file a required notification related to an investment made through a subsidiary’s Chinese fund. This marked a clear signal of the program’s operational status and the Treasury’s commitment to enforcement.
The COINS Act, enacted on December 18, 2025, as part of the FY2026 National Defense Authorization Act, provided a statutory basis for the OISP. The Act mandated the issuance of new implementing regulations within 450 days of enactment, setting a deadline of March 13, 2027, for Treasury to finalize these rules. The proposed rule released in October 2026 is a crucial step towards meeting this statutory requirement.
Key Provisions of the Proposed Rule
The proposed rule largely mirrors the structure of the existing regulations, establishing a framework where a U.S. person or a controlled foreign entity engages in a "covered transaction" with a "covered foreign person" from a "country of concern" in a "covered technology." Transactions involving prohibited technologies will be barred unless a national interest exemption is granted, while those involving notifiable technologies must be reported to Treasury.
Crucially, Treasury does not maintain a transaction screening process or publish a list of covered foreign persons, although this is under consideration. As the FAQs clarify, the onus is on the U.S. person undertaking the transaction to determine its compliance status: "the relevant U.S. person undertaking a transaction would have the obligation to determine whether the given transaction is prohibited, permissible but subject to notification, or not covered by the rule because it is either an excepted transaction or not within the jurisdiction of the OISP."
Covered Transactions and Persons
A "covered transaction" is defined as any action by a U.S. person or its controlled foreign entity that involves specific types of investments with or for a "covered foreign person." The proposed rule broadens the definition of "country of concern" beyond China (including Hong Kong and Macau) to include Cuba, Iran, North Korea, and Russia, as mandated by the COINS Act. While existing sanctions already significantly restrict U.S. investment in these countries, the inclusion formally integrates them into the OISP framework. Notably, Venezuela, initially listed under the Maduro regime, has been excluded as Treasury determined the regime "no longer exists."
The proposed rule further categorizes covered foreign persons into two groups. The definition of a covered foreign person also broadens by expanding the list of U.S. government lists that trigger a prohibition. In addition to the Entity List and the Specially Designated Nationals and Blocked Persons (SDN) List, the rule now includes the Department of War’s list of Chinese military companies (the 1260H list) and the BIOSECURE Act list of biotechnology companies of concern. Moreover, the restriction extends to investments where an affiliate or subsidiary of the target is listed, not just the target entity itself.
Expanding Covered Sectors: AI and Biotechnology Take Center Stage
The proposed rule delineates six technology sectors subject to its purview. These include the three established under the existing rule—semiconductors, quantum information technologies, and AI—along with two sectors explicitly added by the COINS Act: high-performance computing and hypersonic systems. The most significant addition, however, is biotechnology, which Treasury has designated under its authority to identify additional technologies of national security concern.
Artificial Intelligence ("Super Intelligence") Systems: The proposed rule revises the AI provisions, aligning with Executive Order 14434’s directive to use the term "super intelligence" or "SI" in place of "artificial intelligence." The existing rule differentiated between prohibited and notifiable AI investments based on factors such as military, intelligence, or mass surveillance uses, or the amount of computing power used for training. The proposed rule eliminates these nuances, opting for a blanket prohibition on investments in any covered foreign person that develops any AI system, irrespective of its specific capabilities or intended applications. Treasury’s rationale is the difficulty in reliably distinguishing advanced AI models and isolating their end uses, thus favoring a clear prohibition to simplify compliance and enforcement. This broad definition of an AI system includes those that "generate content" and any "application, tool, or utility that operates in whole or in part using an SI system," potentially encompassing AI agents and robotic systems. Furthermore, companies that "enhance or extend the capability" of third-party models, for instance, by building agentic products, are also considered developers, with the only explicit exclusion being use "strictly for internal, non commercial purposes." The definition of "develop" also extends to work done through affiliates and includes "high level oversight, direction, approval, conceptual input, or strategic planning," meaning parent or holding companies directing an affiliate’s AI work could be deemed developers.
Biotechnology: The inclusion of biotechnology as a prohibited-only sector represents the most substantial expansion of the proposed rule. The proposed regulations target entities that use biological systems to produce controlled or novel agents and toxins, energetic materials, novel functional materials, pharmaceutical compounds (including cell and gene therapies, vaccines, and monoclonal antibodies), or biofuels. Additionally, it covers entities developing brain-computer interfaces, export-controlled biomanufacturing equipment, sequencing technology, certain laboratory instruments, bioinformatics tools, or laboratory automation. This broad scope could significantly impact a substantial portion of China’s pharmaceutical and life sciences tools industries. Treasury has acknowledged the potential implications for public health and U.S. businesses, soliciting feedback on whether this category should be limited to "advanced or frontier technologies."
Other Sectors: For existing covered sectors, the proposed rule introduces further restrictions. In semiconductors and microelectronics, the prohibition is expanded to include investments in entities that design, develop, or produce advanced chipmaking equipment or semiconductor manufacturing equipment used to fabricate advanced logic or memory chips. Quantum information technologies will see prohibitions extended to include entities involved in quantum sensing and metrology.
The rule also introduces hypersonic systems as a covered sector, prohibiting investments in hypersonic systems or their propulsion systems, as well as related materials and test facilities. Investments in sensors, control equipment, and software for hypersonic systems, along with certain dual-use materials, will require notification.
Excepted Transactions and Compliance Mechanisms
The proposed rule carries forward most of the exceptions found in the existing rule, while also incorporating new exceptions mandated by the COINS Act. Exceptions for publicly traded securities, registered funds, limited partner interests, and derivatives remain available, but are forfeited if the investment grants governance rights beyond standard minority shareholder protections.
New exceptions include investments made by venture capital funds, private equity funds, or similar investment vehicles where the U.S. person’s involvement is limited to passive oversight and governance rights consistent with those of other limited partners. Another new exception is for investments in entities that solely engage in research and development activities, provided these activities are conducted in the United States and the entity does not develop or produce covered technologies.
The proposed rule also formalizes a process for requesting nonbinding feedback from Treasury on whether a transaction would be prohibited. This mechanism is available to individuals with a direct financial interest in a transaction, who can seek either anonymized public guidance or confidential, nonbinding feedback.
Furthermore, the rule retains the national interest exemption, allowing U.S. persons to request an exemption from prohibitions if a transaction is deemed to be in the U.S. national interest.
Penalties and Enforcement
Violations of the proposed rule are subject to significant civil penalties, mirroring those under the International Emergency Economic Powers Act (IEEPA). This includes penalties up to the greater of $250,000 (adjusted for inflation) or twice the amount of the transaction. The Secretary of the Treasury also retains the authority to compel divestment of a prohibited transaction.
The proposed rule also establishes a confidential channel for individuals to report information to Treasury about foreign persons engaged in notifiable or prohibited technologies. Voluntary self-disclosure will continue to be considered a mitigating factor in enforcement actions, provided it includes a proposal for mitigating any harms, such as divestment or voluntary disgorgement of profits.
Key Takeaways for Multinational Companies and Investors
The proposed expansion of the Outbound Investment Security Program by the U.S. Treasury signifies a heightened focus on safeguarding national security through the regulation of outbound capital flows. Multinational companies and investors with operations or investment portfolios involving China, and potentially other designated countries of concern, must conduct thorough due diligence to understand the implications of these proposed changes.
Key considerations include:
- Broadened Scope: The expanded definition of covered technologies, particularly AI and the newly added biotechnology sector, requires a re-evaluation of existing and planned investments.
- Increased Prohibitions: The move to eliminate notification requirements for AI investments means a more stringent prohibition on such activities.
- Geographic Expansion: The inclusion of Cuba, Iran, North Korea, and Russia as countries of concern, while potentially having limited immediate impact due to existing sanctions, formally integrates them into the OISP framework.
- Compliance Burden: The responsibility for determining compliance rests with the U.S. person, necessitating robust internal compliance programs and expert legal counsel.
- Enforcement Vigilance: The Treasury’s proactive enforcement, evidenced by the first penalty announcement, underscores the importance of strict adherence to the regulations.
- Comment Period: The upcoming comment period presents a crucial opportunity for industry stakeholders to provide feedback and potentially influence the final rule.
Paul Hastings will continue to monitor developments regarding the Outbound Investment Security Program and provide timely updates to its clients and the broader business community.
