Treasury releases NPRM expanding Outbound Investment Security Program

On October 22, 2026, the U.S. Department of the Treasury (Treasury) issued a Notice of Proposed Rulemaking (the 2026 NPRM)[1] that would implement Subtitle C of the Comprehensive Outbound Investment National Security (COINS) Act (summarized in our previous client update here) and significantly expand the scope of the Outbound Investment Security Program (OISP) that went into effect on January 2, 2025 (described in our previous client updates here and here) by replacing the existing OISP rules (Part 850) with a revised set of rules (Part 851). This update assumes general familiarity with the existing OISP rules and focuses on the changes introduced by the 2026 NPRM.

Part 851 maintains the basic structure of the existing Part 850, which obligates U.S. persons to notify Treasury of certain outbound investments and prohibits U.S. persons from engaging in other outbound investments. As described further below, though, Part 851 and the 2026 NPRM are materially broader than the existing rules and decline to implement simplifications suggested by the COINS Act.

The 2026 NPRM is not yet law, and the existing OISP will continue to govern transactions entered into before the effective date of the final rule, likely in the first quarter of 2027. However, market participants would be well advised to incorporate the proposed rule into their risk assessments immediately.

Treasury is accepting comments on the 2026 NPRM until December 7, 2026.

This update summarizes the most significant commercial changes between the Part 850 and Part 851, and then provides a broader perspective on how to understand the potential impact of the 2026 NPRM.

Key commercial takeaways

• The theme of the 2026 NPRM is expansion of the OISP, not clarification – except where the U.S. person does not direct the investment. Supporting services are still out of scope.
• The group of covered entities has expanded, including entities majority owned by citizens of the People’s Republic of China (including Hong Kong and Macau, the PRC), Russia, Iran, Cuba, or North Korea (wherever located), entities controlled (not only owned) by covered persons, and entities either headquartered or primarily operating in sanctioned countries.
• Covered sectors have expanded significantly, including broad and under-defined prohibitions on all investments in companies engaged in the development or production of biotechnology and artificial intelligence.
• The 2026 NPRM confirms an expansive view of OISP jurisdiction, specifically targeting a number of technical arguments previously seen in the market.
• At the same time, the 2026 NPRM confirms that there is no “facilitation” analogue under the OISP: transactions secondary or ancillary to an investment that would be prohibited for a U.S. person (including financing and underwriting) are out of scope.
• The restrictions on U.S. person employees with decision-making authority in a foreign investor are expanded to notifiable as well as prohibited transactions.
• The burden of notification increases.

New terminology

The 2026 NPRM clarifies the terminology of the original OISP, which conflated the foreign persons targeted by the rule with the activities targeted by the rule through the original “covered foreign person” definition. Under the 2026 NPRM:

• Covered foreign persons are persons potentially falling within the scope of the rule because of their ties to a “country of concern.”
• Notifiable technologies are sectors in which covered transactions meeting the specified criteria must be notified (semiconductors/microelectronics, high-performance computing, and hypersonic systems).
• Prohibited technologies are sectors in which covered transactions meeting the specified criteria are prohibited (semiconductors/microelectronics, artificial intelligence/super intelligence (AI/SI), supercomputing, hypersonic systems, biotechnology, and quantum computing)
• Covered national security transactions are covered transactions (principally, but not exclusively, equity investments) in covered foreign persons engaged in designing, developing, or producing notifiable technologies or prohibited technologies.

Summary of key changes

1. More entities qualify as “covered foreign persons” subject to the OISP’s restrictions, and Treasury did not eliminate categories omitted from the COINS Act.

The COINS Act, in reproducing the list of covered foreign persons in the existing OISP, omitted coverage of individual citizens of a country of concern (other than certain political leaders) and of entities with more than 50% of their gross income, net income, operating expenses, or capital expenses attributable to investments in covered companies in a country of concern. Although the COINS Act provided that its definition of “covered foreign person” was subject to regulations to be drafted by Treasury, this omission was presumably deliberate on the part of Congress. Nevertheless, Treasury declined to remove these categories from the implementing regulations, retaining coverage of companies outside countries of concern on the basis of the nationality of their shareholders and their revenues and expenses.

The list of “countries of concern” has been expanded to include Russia, Cuba, Iran, and North Korea.[2] Although these jurisdictions are already subject to extensive economic sanctions, unlike OFAC sanctions, the 2026 NPRM’s prohibitions extend to entities owned by citizens of those jurisdictions (who are not also U.S. citizens or permanent residents). The 2026 NPRM thus has important implications for entities owned by expatriate citizens of those countries located outside a country of concern. For example, a European company engaged in artificial intelligence research and majority-owned by a Russian exile would be a “covered foreign person” under the rule.

In addition to retaining the ownership test, the 2026 NPRM extends coverage to entities “subject to the direction or control” of a covered person, adding an undefined control test that can capture companies that are not majority owned by a covered foreign person. Because this is not a review regime, investors will be held responsible for making their own determination as to whether an entity is subject to the effective direction or control of a covered foreign person (e.g., a publicly traded company outside China with a founder and significant shareholder who is a Chinese citizen).

The 2026 NPRM also expands the definition of “principal place of business,” including not just where the principal management of the company is located (sometimes called the “nerve test” in corporate law) but also where its main business activities are located (the muscle test). Given that the 2026 NPRM retains the various 50% financial tests for investments in covered foreign persons engaged in notifiable or prohibited activities, the primary impact of this change is to potentially capture non-Chinese companies with extensive non-sensitive operations in China.

2. Coverage of investments in companies using AI/SI expands greatly and moves from notifiable to prohibited.

The 2026 NPRM redesignates “AI systems” as “SI systems” (“super intelligence,” tracking the administration’s preferred formulation) and expands substantially the coverage of such systems.

The OISP applied only to AI systems trained using more than a specified (and substantial) level of computing power or for particular end uses, with some investments notifiable and others prohibited. The 2026 NPRM eliminates those qualifications and defines the development of any “SI system” as a prohibited technology — excluding internal use, customization, configuration, or fine-tuning of an off-the-shelf, third-party SI system that is not sold or licensed by the user.

Although this change eliminates the need to evaluate the compute power used to train a model or the end uses to which it can be put—both of which presented practical diligence challenges under the original OISP—the blanket prohibition puts considerable stress on the sweeping definition of “SI system.”[3]  While the definition of SI system is unchanged in substance from the definition of AI system in the original OISP, many of the myriad companies that claim to incorporate “AI” in their products could be excluded under the original OISP because the relevant capabilities were not in covered end uses and were not created with anything approaching the requisite compute power.

Under the 2026 NPRM, however, the new blanket prohibition on equity investments in any covered foreign person that incorporates, in any way, any machine-based system to process observed data through automated or algorithmic statistical analysis and produce a decision or prediction will reach a huge range of products that are much less advanced than what is conventionally thought of as “AI”—from robotic vacuum cleaners that learn a floor plan, to pop-up internet advertising, to automobile collision warning systems, just to name a few. Although it seems unlikely that the 2026 NPRM is intended to sweep so broadly, the text provides little guidance for an investor to determine whether a potential investment is subject to the broad new AI/SI prohibition.

3. Biotechnology becomes a new prohibited sector (with no “notifiable” tier).

Biotechnology is not covered under the existing OISP and was not explicitly included in the COINS Act, but it was added to the 2026 NPRM. This expansion was widely expected and had been signaled several times by the administration and Treasury, but the scope of the prohibition is broad and unclear.

The entire biotechnology sector constitutes “prohibited technology,” and the definition is potentially sweeping: the rule prohibits any covered investment in a covered foreign person using any “biological system” (left undefined) to develop, among other things, any pharmaceutical product or biofuel; any covered investment in a covered foreign person developing or producing “computational or bioinformatics tools for research, design, optimization, modeling and simulation, discovery, or assessment of biological systems or processes”; and any covered investment in a covered foreign person developing or producing “hardware, robotics, or software for automated scientific discovery or experimentation, including laboratory automation or cloud lab infrastructure,” which would seem to capture a broad range of pharmaceutical, agricultural, and life science businesses. Other categories, such as biomanufacturing, the development of gene sequencing equipment, and the development of pathogens or toxins, are better defined and less surprising.

4. Other covered technology sectors are added or expanded, and the lists of entities subject to enhanced restrictions are also expanded.

The 2026 NPRM makes less significant revisions to a number of other notifiable and prohibited technology sectors.

• Hypersonic systems are added as a new covered technology with both prohibited and notifiable tiers. The primary ambiguity here is designating any company manufacturing sensors, systems, or materials “capable of” (in addition to “for”) being used in hypersonic systems. Presumably, this is intended to reach technologies meeting unique requirements of hypersonic systems, rather than off-the-shelf technologies usable in a wide range of applications, but the scope is again left undefined.
• The “prohibited” tier for semiconductors expands significantly to include all silicon carbide or gallium-based compound semiconductors, radiation-hardened integrated circuits (ICs), photonic ICs, high-bandwidth memory, and additional categories of advanced ICs.
• The “prohibited” tier for quantum computing expands to cover the development of software to design, simulate, test, or control a quantum computer, as well as software designed to identify, implement, cost, or optimize algorithms or applications for quantum computing.
• Notifiable transactions involving integrated circuits and high-performance computing are expanded and include the development or production of any equipment designed or intended for the design, fabrication, or packaging of any integrated circuit (regardless of performance) and the development or production of high-bandwidth, low-latency interconnects.
• In addition, the universe of restricted-party lists in the existing OISP is expanded to include the Section 1260H list of Chinese military companies operating in the United States and the BIOSECURE Act list (in addition to the BIS and OFAC lists covered in the original OISP). An otherwise notifiable transaction becomes a prohibited transaction if the target, or any affiliate of the target, is included on these lists.

5. The coverage of indirect transactions is expanded.

The 2026 NPRM includes a number of “clarifications” to the OISP’s coverage of: (1) investments in covered foreign persons whose subsidiaries engage in restricted or prohibited activities; (2) secondary investments in private equity funds and other collective investment vehicles that already hold prohibited or notifiable investments; and (3) contractual joint ventures. We are aware of some disagreement in the market over whether these categories potentially fell within the scope of the original OISP and, in each case, Treasury opted for the more expansive reading (in some cases without amending the underlying language).

With respect to subsidiaries, the 2026 NPRM amends the definition of “developing” a technology to include activities through or in collaboration with an affiliate, and also adds that turning blueprints, schematics, or other plans into actual products counts as development (i.e., development is not just engaging in original R&D). The 2026 NPRM also expands the definition of “developing” to include providing high-level oversight, direction, approval, conceptual input, or strategic planning before serial production.

These changes explicitly foreclose any argument that an investment in a company that is a covered foreign person (under the new definition) is permissible so long as the issuer itself (as opposed to the issuer’s subsidiaries) does not engage in restricted or prohibited activities. (The potential availability of this argument under the existing OISP could have created a loophole permitting investment in Chinese holding companies with subsidiaries engaged in covered activities, so long as the 50% financial tests were not tripped and the investor did not know the capital was destined for the subsidiaries engaged in covered activities.) Note that this only applies to investments in covered foreign persons, so it remains the case that investments in parent companies that are not covered foreign persons (for example, a European company with a Chinese subsidiary engaged in prohibited activities that does not trigger any of the 50% financial tests) still would not trigger the OISP.

The commentary in the 2026 NPRM also clarifies that “investments in venture capital funds, private equity funds, ‘funds of funds,’ or other pooled investment funds with pre-existing investments in a covered foreign person may constitute an indirect covered national security transaction,” whether or not the fund complies with the fund-related rules on committing to avoid future prohibited transactions. No corresponding change was made to the substantive prohibitions of the original OISP, implying that Treasury may be taking the position that secondary transactions in interests in funds holding investments that are now restricted or prohibited have been subject to the OISP as indirect investments all along.

The 2026 NPRM also states that indirect covered national security transactions include not only the use of intermediaries to enter into a transaction that would be a covered national security transaction if a U.S. person entered into it directly, but also any “use of a transaction structure that obfuscates or conceals the U.S. person’s role” in such a transaction. It is unclear precisely what this is intended to add, other than signaling a general hostility to attempting to structure investments around the OISP.

Finally, the 2026 NPRM states, in commentary on the definition of a “joint venture,” that no new entity need be formed (and thus, apparently, no equity need be acquired) for a JV transaction to be covered. (As a reminder, under the existing OISP, entry into a joint venture with a covered foreign person to engage in a notifiable or prohibited activity is a covered transaction.) Rather, the commentary states that a notifiable or prohibited joint venture “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.” 

It is not obvious, however, that there will always be a “plain English” answer for all commercial arrangements that may approximate a JV relationship—such as certain joint marketing arrangements common in the pharmaceutical industry—and therefore commercial arrangements in the relevant industries may risk triggering the OISP even if no equity investment is made in the covered counterparty. Again, no change was made to the relevant regulatory language in the original OISP, potentially leaving the door open for Treasury to apply the interpretation under the existing rule.

6. Recusal requirements for U.S. employees of non-U.S. companies expand to notifiable transactions.

Under the original OISP, U.S. persons are prohibited from “knowingly directing” a foreign person to enter into a transaction that would be prohibited for a U.S. person, requiring them to recuse themselves if in a position of decision-making or negotiating authority with respect to a prohibited transaction.

The 2026 NPRM expands this “knowingly directing” concept to notifiable transactions, creating a notification obligation for individual U.S. employees for the relevant transactions. In many cases, however, the burden of individual notification and confidentiality obligations to the employer may make notification impractical, meaning this change to the OISP is likely to effectively expand the recusal obligations of U.S. person employees.

7. The exclusion of underwriting and other banking activities from the OISP is more clearly stated.

The original OISP created significant confusion in the capital markets with respect to underwriting activities, given that underwriters and persons subscribing to offerings generally acquire securities or interests in securities as a technical matter shortly before public trading begins. Previous guidance from Treasury partly alleviated the confusion, but some institutions were still taking conservative views.

The 2026 NPRM, as required by the COINS Act, states clearly that underwriting services secondary to a covered national security transaction are exempt, as are a range of ancillary services provided by financial institutions.[4] In combination with previous Treasury guidance clarifying that the entry into an subscription agreement prior to the start of trading and settled after launch is permissible, underwriting activities would even more clearly be out of scope under the 2026 NPRM (as are other support activities by U.S. persons who neither make nor direct the investment).

8. Notifications will become more burdensome.

If an investor is required to submit a notification for a notifiable transaction, the 2026 NPRM expands the information required to be included in the notification filing. Although much of the information may be difficult for a small investor to obtain, Treasury states that the new requirements have typically been part of follow-on requests in any event.

9. There is now a formal consultation mechanism, but it may be of limited utility.

As mandated by the COINS Act, the 2026 NPRM would establish a new process through which investors could seek non-binding feedback from Treasury on the coverage of the revised OISP. However, the process is so heavily qualified that it may be of limited practical use.

For example, guidance can only be sought on whether a transaction is prohibited, and even then only after a binding written agreement exists (presumably one that is conditional on the transaction’s not being prohibited). In addition to the non-binding nature of the guidance, Treasury is under no obligation to respond at all to the questions posed, nor is there any timeline for a response.

Thus, although investors generally should welcome a feedback mechanism, it is not clear that the mechanism described in the 2026 NPRM will provide feedback on a commercially viable timeline, or that the mechanism adds meaningfully to the informal consultation already available under the existing OISP.

The bigger picture

The 2026 NPRM signals an apparent intention to pursue a vigorous and expansive approach to the OISP.

While activity was perhaps a bit slower than expected in the first 21 months or so of the OISP (with approximately 100 notifications filed during that period), and the measured approach of the COINS Act appeared to reflect a successful effort by industry to make the rules easier to administer, the 2026 NPRM’s expansive revisions and interpretations of the OISP (combined with the recently announced enforcement action for failure to notify a transaction as required, discussed here) indicate an intent to continue expanding and enforcing the program.

Treasury’s approach also continues to be to avoid precise or narrow definitions for fear of omitting technologies or activities of concern, particularly with respect to AI/SI and biotechnology, as well as “joint ventures” with covered foreign persons. As a result, there will be activities and transactions that exist in a “gray zone” (i.e., that are neither clearly in scope nor clearly out of scope) and therefore may be subject to irreducible legal uncertainty.

The main area in which market participants are gaining additional certainty is a clearer exemption of services and activities ancillary to prohibited and notifiable investments, at least where the relevant U.S. person providing those services does not participate in or exercise control over the potentially restricted investment. Underwriters, lenders, external counsel, and others providing services relating to a covered national security transaction (without control over the foreign investor) benefit from a consistent trend to clarify that, as Treasury has stated from the beginning, there is no “facilitation” concept under the OISP and ordinary service providers are not at high risk.

The regulation of outbound investment by U.S. persons will continue to evolve, and investors with exposure to the Chinese technology sector should continue to monitor it closely. Investors potentially affected by the more expansive provisions of the 2026 NPRM may also wish to submit comments to Treasury highlighting potentially overbroad or unintended consequences. The deadline for such comments is December 7, 2026.