On December 11, the House of Representatives passed the FY26 National Defense Authorization Act (“NDAA”), including legislation to codify and modestly expand the existing Outbound Investment Rule (“OIR”) that came into effect in January 2025. Specifically, the NDAA adopts a revised version of the previously proposed Comprehensive Outbound Investment National Security (“COINS”) Act. The codification comes after several years of congressional deliberation over the scope of outbound investment controls and reflects a bipartisan consensus to anchor outbound investment restrictions in statute, rather than in executive action alone.
As a reminder, the OIR prohibits or requires notification for certain transactions undertaken directly or indirectly by “U.S. persons” with Chinese or Chinese-owned entities, as well as certain other entities with a significant nexus to China (so-called “covered foreign persons”) engaged in specific activities in the semiconductor, quantum information technology, and artificial intelligence sectors (so-called “covered activities”). The OIR adopts the term “covered transaction” to refer to specific categories of transactions—including equity investments, certain types of debt financing, greenfield and brownfield investments, joint ventures, and certain limited partner investments—undertaken by U.S. persons involving covered foreign persons. For details on the specific covered transactions and covered activities subject to the OIR, which went into effect on January 2, 2025, please see our client alert linked here.
Similar to the OIR, the revised COINS Act defines covered transactions (called “covered national security transactions”) to include direct or indirect acquisitions of equity, certain types of debt financing, greenfield and brownfield investments, joint ventures, and certain limited partner investments that involve covered foreign persons that engage in specified activities in the identified covered sectors. Importantly:
- The COINS Act seeks to harmonize certain definitional inconsistencies with the OIR that existed in prior iterations of the bill, while authorizing Treasury to undertake a rulemaking process within 450 days to implement the COINS Act, either through issuing new regulations or updating the existing OIR. However, the bill does not address ambiguities that already exist under the OIR, such as ambiguities regarding the scope of “indirect” covered transactions (i.e., under what circumstances an investment in a counterparty that is not a covered foreign person could be considered a covered transaction with respect to the counterparty’s affiliate that is a covered foreign person) and the scope of covered brownfield transactions (i.e., under what circumstances a company’s investment in its own operations in China could constitute a covered transaction), as discussed in our client alert referenced above.
- While the COINS Act proposes to expand the scope of covered sectors (to include “hypersonic systems” and “high performance computing and supercomputing”) and countries of concern (to include Russia, North Korea, Cuba, Iran, and Venezuela), it provides that inconsistencies between the statute and the OIR will be resolved through Treasury’s rulemaking process and leaves the technical contours of any expansion to Treasury.
- The COINS Act codifies certain clarifications and exceptions (e.g., for certain secondary/ancillary transactions, transactions under a de minimis threshold, and “ordinary or administrative business transactions”) and process improvements (an advisory opinion process and a non-exhaustive public database of covered foreign persons) that Treasury considered and rejected during the rulemaking process for the current OIR.
- The COINS Act also adopts certain sanctions provisions that would authorize—but not require—the President to impose sanctions on foreign persons that appear on certain U.S. government restricted-party lists or that engage in significant operations in specified Chinese defense or surveillance sectors.
The COINS Act would appropriate $150,000,000 and provide the Departments of the Treasury and Commerce with direct hiring authority to implement and enforce the requirements of the rule.
The COINS Act’s outbound investment provisions are best understood as locking in the core of the existing OIR and positioning Congress to influence how the regime evolves over time, while preserving flexibility for the executive branch in implementing the rule. The most meaningful practical changes are likely to be the expansion of the “covered foreign person” definition to include entities that are “subject to the direction or control” of covered foreign persons, and the implementation of an advisory opinion process—allowing for both published, anonymized advisory opinions and confidential advisory opinions—and a non-exhaustive public database of covered foreign persons identified by Treasury. The COINS Act also creates an exception for “underwriting services, including but not limited to the temporary acquisition of an equity interest for the sole purpose of facilitating underwriting services,” which Treasury considered and rejected during its rulemaking process for the OIR. The following discussion highlights where the COINS Act could meaningfully clarify, expand, or reshape the existing OIR, depending on how Treasury implements it through rulemaking.
1. Harmonization with OIR Definitions
Early iterations of the COINS Act (including the Foreign Investment Guardrails to Help Thwart (“FIGHT”) China Act), were drafted before Treasury finalized the OIR (in October 2024) and therefore relied on definitions from earlier rulemakings, including formulations that Treasury ultimately revised. Nearly all of the definitional updates reflected in the COINS Act appear intended to conform the text of the bill to the final OIR definitions, though there are still areas where the OIR and the COINS Act diverge in terminology. For example, the OIR refers to “covered transactions” while the COINS Act refers to “covered national security transactions,” though the definitions are essentially identical.
Importantly, the bill provides that any inconsistencies between the statute and the OIR will be resolved through Treasury rulemaking, and authorizes Treasury to:
“issue or update existing regulations to carry out this section subject to public notice and comment [. . .]. The regulations issued pursuant to this paragraph shall, as necessary, amend, terminate, supersede, revoke, or streamline existing requirements in part 850 of title 31, Code of Federal Regulations (the Outbound Investment Rule) and shall provide a reasonable timeframe for compliance.”
We interpret this clause as granting Treasury flexibility to address overlaps and inconsistencies between the COINS Act and existing OIR requirements. Treasury has 450 days from enactment of the COINS Act to issue implementing regulations (or presumably, update its existing regulations). Until Treasury issues a new rulemaking as contemplated in the COINS Act, we expect the current version of the OIR to remain in effect. We do not know at this point whether Treasury will move quickly to begin that rulemaking process or whether they will take their time. It likely will depend on the priorities of the incoming Assistant Secretary of the Treasury for Investment Security and whether any political forces in the Administration or Congress push for swifter implementation of the COINS Act.
2. Expansion of Covered Sectors and Countries of Concern
Consistent with the OIR framework, the COINS Act applies to “covered national security transactions” undertaken by “U.S. persons” with “covered foreign persons” engaged in certain activities involving “notifiable” or “prohibited” technologies in the semiconductor, quantum information, and artificial intelligence sectors. Relative to the OIR, the COINS Act proposes to expand the list of covered sectors to include “hypersonic systems” and “high-performance computing and supercomputing.” However, the COINS Act removes all of the technical parameters for notifiable and prohibited technologies that were in the FIGHT China bill and the prior version of the COINS Act and defers such technical parameters to Treasury’s rulemaking. We also note that the OIR already includes in its list of covered activities “[d]evelops, installs, sells, or produces any supercomputer enabled by advanced integrated circuits that can provide a theoretical compute capacity of 100 or more double-precision (64-bit) petaflops or 200 or more single-precision (32-bit) petaflops of processing power within a 41,600 cubic foot or smaller envelope.” Treasury could determine that the inclusion of this covered activity under the OIR is sufficient to implement that aspect of the COINS Act.
In addition to covered technologies, the COINS Act expands the definition of “countries of concern” to include Russia, North Korea, Cuba, Iran, and Venezuela (in addition to China). We expect this expansion to have relatively little practical impact for investors, given the minimal level of U.S. investment in these countries due to economic sanctions imposed by the U.S. government.
The COINS Act also expands the “covered foreign person” definition to include “members of the political leadership of a country of concern,” and any foreign person “subject to the direction or control” of:
- a country of concern or the state or the government of a country of concern (including any political subdivision, agency, or instrumentality thereof);
- an entity that is incorporated in, has a principal place of business in, or is organized under the laws of a country of concern; or
- a member of the Central Committee of the Chinese Communist Party or a member of the political leadership of a country of concern.
This formulation is broader than the scope of the definition under the existing OIR, and may increase the due diligence burden for investors, who will need to determine whether a counterparty is “subject to the direction or control” of a covered foreign person. For example, under the existing OIR, a semiconductor manufacturer that is 15%-owned by a Chinese entity and has a representative of that entity on its board of directors would not be considered a covered foreign person (absent additional facts). However, once the OIR is amended to reflect the COINS Act, a U.S. person considering whether to invest in the semiconductor manufacturer would need to evaluate whether the company is “subject to the direction or control” of its Chinese investor. The COINS Act does not define “subject to the direction or control” or otherwise provide parameters for how that language should be implemented by Treasury. If Treasury adopts a broad and flexible standard—such as the definition of “control” under the regulations for the Committee on Foreign Investment in the United States—rather than a brightline test, it could significantly increase the due diligence burden for investors.
3. Clarifications/Exceptions and Process Improvements
The COINS Act codifies certain exceptions and process improvements that Treasury considered—but ultimately declined to adopt—in the rulemaking process for the OIR. For the most part, however, these “exceptions” apply to activities that generally would not constitute covered national security transactions because they relate to the provision of services, rather than the acquisition of equity, provision of debt, etc. Notably, though, the COINS Act also includes an exception for underwriting services, including but not limited to the temporary acquisition of an equity interest for the sole purpose of facilitating underwriting services, which Treasury rejected during the rulemaking process for the OIR. Under the existing OIR, such temporary equity acquisitions constitute covered transactions (and will continue to do so until Treasury amends the OIR to implement the COINS Act).
The list of new exceptions includes:
- Exceptions for investments as a limited partner in an investment fund where the committed capital falls below a de minimis threshold, to be determined via regulation;
- Exceptions for certain “secondary transactions” including:
- contractual arrangements (not including contractual arrangements for technology transfer or technical knowledge transfer) or the procurement of material inputs;
- bank lending, processing, clearing, or sending of payments by a bank;
- underwriting services, including but not limited to the temporary acquisition of an equity interest for the sole purpose of facilitating underwriting services;
- debt rating services;
- prime brokerage;
- global custody;
- equity research or analysis; or
- other similar services;
- Exceptions for “ancillary transactions” undertaken by financial institutions, defined to include processing, settling, clearing, or sending of payments and cash transactions; underwriting services, including the temporary acquisition of an equity interest for the sole purpose of facilitating underwriting services; credit rating services, and other services ordinarily incident to and part of the provision of financial services, such as opening deposit accounts, etc.; and
- Exceptions for any “ordinary or administrative business transactions,” as may be defined by regulation.
We note that, while investors may be heartened by the inclusion of a de minimis threshold for limited partner investments in investment funds, as opposed to the $2 million threshold that Treasury included in the OIR, Treasury could simply decide to set the de minimis threshold at $2 million.
As noted, the COINS Act that could have the greatest practical impacts are the provisions for:
- A formal advisory opinion process under which parties could request “non‑binding feedback on a confidential basis or as anonymized guidance to the public”; and
- A publicly accessible, non-exhaustive database identifying “covered foreign persons” engaged in either a prohibited or notifiable technology.
In our experience, the greatest compliance challenge that investors have faced during the first 11 months of living with the OIR has been the inability to resolve interpretive questions by obtaining guidance from Treasury. Because Treasury did not include an advisory opinion process in the OIR, investors facing interpretative questions under the rule—e.g., whether a given transaction is a covered transaction or a given counterparty is a covered foreign person—have been forced to wait for Treasury to issue FAQ guidance, which Treasury has not done since May of this year—and, indeed, certain of that guidance itself has been the source of confusion. While Treasury will have wide latitude in how it implements the advisory opinion process, it should provide investors with another avenue to seek clarity from Treasury on compliance with the rule.
The public database for covered foreign persons too should provide at least a modicum of additional clarity for investors, to the extent that Treasury chooses to make active use of the database by updating it with identified covered foreign persons. Of course, Treasury could decide not to populate the database or to populate it only infrequently.
4. Sanctions Harmonization Provisions
Lastly, the COINS Act includes sanctions harmonization provisions modeled on Titles I and III of the previous version of the COINS Act and the FIGHT China Act. These provisions would authorize—but not require—the president to impose sanctions on foreign persons that appear on certain U.S. government lists or that engage in significant operations in specified Chinese defense or surveillance sectors.
As revised, these provisions remain entirely discretionary, and are best understood as applying additional political pressure on the Executive Branch to justify the scope of sanctions imposed (or not imposed) on Chinese entities. Notably, the COINS Act narrows the sanctions authority compared to the previous COINS Act and the FIGHT China Act by authorizing only prohibitions on investing in or purchasing “significant amounts of equity or debt instruments,” rather than full property-blocking sanctions.
The COINS Act also expands the universe of U.S. restricted-party lists that may prompt harmonization reviews to include the FCC Covered List and the Uyghur Forced Labor Prevention Act (“UFLPA”) Entity List.
While these provisions could encourage additional designations to the NS-CMIC List or enhanced scrutiny of certain Chinese entities, they largely reiterate authorities already available to the president.
Taken together, the COINS Act largely validates Treasury’s existing approach while modestly expanding the scope, codifying certain process improvements, and ensuring the durability of the regime across administrations. For most U.S. investors, near-term compliance obligations are unlikely to change. Over the longer term, Treasury’s forthcoming rulemaking will determine whether the COINS Act meaningfully reshapes the outbound investment regime or instead serves primarily as a statutory backstop for the existing OIR.
If you have any questions concerning the material discussed in this client alert, please contact the following members of our CFIUS practice.
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