Almost immediately after the Outbound Investment Security Program (OISP) went into effect on January 2, 2025, the America First Trade Policy and America First Investment Policy signaled that the White House wanted to expand the new restrictions on certain US investment in China. Subsequently, the US Congress passed legislation, discussed in more detail below, that established the OISP in federal statute, whereas previously its authority was rooted in an executive order issued by then-President Joseph Biden, and Congress mandated various expansions and other changes to the new regime.
Specifically, on October 22, 2026, the Department of the Treasury (Treasury) released a notice of proposed rulemaking (NPRM) implementing Subtitle C (50 USC Sections 4581-4589) of the Comprehensive Outbound Investment National Security Act (COINS Act), enacted on December 18, 2025. Treasury also published an accompanying fact sheet and FAQs explaining the proposed expansion and the features that would remain.
On October 26, 2026, Treasury published the NPRM in the Federal Register. The NPRM includes broader restrictions on artificial intelligence development, new biotechnology prohibitions, and coverage of additional countries. The proposed updates to the regulations would affect US investors, non-US funds with US capital, and US personnel directing foreign investments. Comments are due December 7, 2026, and until new regulations go into effect, the existing rules remain in force.
Our prior report discussed the investment restrictions and diligence obligations underlying the program. The new NPRM would retain the prohibition-and-notification framework but implement it in a new 31 CFR Part 851. Existing Part 850 would continue to govern activities occurring from January 2, 2025 until the new regulations take effect. The proposal does not establish that effective date or displace current compliance obligations in the interim. Comments are due December 7, 2026, under Docket No. TREAS-DO-2026-0595. Under the COINS Act, new regulations must be issued within 450 days after its enactment (i.e., by no later than March 13, 2027).
WHAT REMAINS, WHAT IS NEW, AND WHAT CHANGES
Broader Technology Coverage
The COINS Act required Treasury to add high-performance computing and supercomputing and hypersonic systems to the OISP. In addition to those two technologies, however, Treasury determined to also add biotechnology to the proposed new rules. The NPRM also includes several changes to the scope and process for the three technologies that were already covered—semiconductors, quantum information technologies, and AI.
SI Systems
Although AI is already covered by the OISP, the NPRM involves a consequential change through a proposed prohibition on covered transactions involving the development of any super intelligence (SI) system. Under the current regime, Part 850 distinguishes among prohibited, notifiable, and noncovered AI activities using training-compute thresholds and specified end uses. Proposed Section 851.226(h) would replace that approach with a broad prohibition on what it now terms SI and would eliminate the notification-only category. Treasury explains that training compute alone no longer reliably distinguishes model capability and that general-purpose models may present national security risks regardless of their intended use.
Notably, the definition of SI is not limited to systems with capabilities exceeding human intelligence. It broadly covers qualifying machine-based systems and applications that use them, expressly including generative systems, agent harnesses, industrial and humanoid robots, autonomous vehicles, and other unmanned systems. The proposal also addresses third-party systems. Enhancing or extending a third-party system, including through an agentic harness, would also constitute development. By contrast, using an off-the-shelf third-party system strictly for internal, noncommercial purposes, including specified customization or fine-tuning, would not constitute development solely on that basis. Investors should therefore examine application developers and not just model developers.
Biotechnology
Treasury also proposes to include biotechnology as prohibited technology, even though the COINS Act did not require that addition. Proposed Section 851.226(r) would cover the development, engineering, or use of biological systems to modify, enhance, produce, or control specified agents and toxins, energetic materials, novel or high-performance functional materials, pharmaceutical compounds and their delivery mechanisms, and biofuels.
Pharmaceutical compounds expressly include small molecules, vaccines, cell and gene therapies, and monoclonal antibodies. The pharmaceutical-compound prong requires development, engineering, or use of a biological system or component to modify, enhance, produce, or control the compound or its delivery mechanism, but contains no advanced-technology threshold. Separate provisions would also cover brain-computer interfaces, specified biomanufacturing equipment, sequencing technology, certain analytical instruments, computational and bioinformatics tools, and laboratory automation or cloud-lab infrastructure.
Biotechnology would have no notification-only category. Treasury expressly requests comments on narrowing several categories, including pharmaceutical compounds, biofuels, and equipment, and acknowledges potential public health and commercial consequences. The proposal could therefore prohibit equity in a covered biologics developer or a qualifying research and development (R&D) joint venture even where no drug IP changes hands. A stand-alone drug in-license is not covered solely because it transfers a program; adding equity or a qualifying joint-venture component can change that result. Diligence should address the counterparty’s activities and the transaction’s investment features, rather than treating all China drug deals alike.
Semiconductors
Proposed Section 851.226(b)(3) would cover commodities, materials, software, and technology designed or intended for use in or with either deep ultraviolet (DUV) or extreme ultraviolet (EUV) lithography fabrication equipment. Currently, the restriction is limited to items designed exclusively for EUV equipment. Removing exclusivity and adding DUV would substantially broaden the provision’s reach, including for photomask and other lithography-related businesses whose products meet the proposed test.
The proposal would also replace the existing dynamic random-access memory (DRAM) technology-node criterion with alternative tests of memory-cell area below 0.0026 square micrometers, memory density above 0.20 gigabits per square millimeter, or more than 3,000 through-silicon vias per die; expand coverage to development or production of specified compound-semiconductor, radiation-hardened, and photonic integrated circuits; and add high-bandwidth memory exceeding 2 gigabytes per second per square millimeter of memory bandwidth density.
Notifiable transactions would also expand to cover additional integrated-circuit development or production and equipment designed or intended for chip design, fabrication, or packaging that is not otherwise prohibited.
Quantum, High-Performance Computing, and Hypersonic Systems
Prohibited quantum-related transactions would expand to software for designing, simulating, testing, or controlling quantum computers and to algorithms and applications for quantum information science. Unlike the preamble, proposed Section 851.226(j) contains no end-use limitation for quantum algorithms and applications, an ambiguity that likely warrants clarification. High-performance computing and supercomputing would become a separate covered sector, and the NPRM would retain the existing supercomputer thresholds of at least 100 double-precision (64-bit) or 200 single-precision (32-bit) petaflops within 41,600 cubic feet, add components designed to enable those capabilities, and introduce notification coverage for specified high-bandwidth, low-latency interconnects.
Additionally, the hypersonic provisions would prohibit covered investments involving systems capable of sustained atmospheric or very-low-Earth-orbit flight at Mach 5 or greater and specified propulsion, materials, testing, and digital-modeling technologies. Certain supporting sensors, software, and materials would instead be notifiable. The definition extends to civilian as well as military systems.
Expanded Geographic and Entity Coverage
The NPRM would add Cuba, Iran, North Korea, and Russia as “countries of concern.” Treasury’s FAQs expressly state that Venezuela does not currently meet the proposed definition because the definition is limited to the former Maduro-led government, while cautioning that investments in Venezuelan entities may still be covered through other country of concern connections.
The definition of covered foreign person would be reorganized around a nexus to a country of concern. Of particular importance, covered status could arise through direction or control by specified country of concern persons without satisfying a 50% ownership threshold. The definition of principal place of business would also encompass headquarters, main business activities, and management locations, expressly allowing more than one principal place of business. US or third-country incorporation would not, by itself, eliminate coverage.
Separately, proposed Section 851.226(v) would convert otherwise notifiable activity into prohibited technology where the target, relevant joint venture, or an affiliate or subsidiary meets specified restricted party criteria, including inclusion on the Bureau of Industry and Security’s Entity List or Military End User List, Treasury’s Specially Designated Nationals and Blocked Persons (SDN) List, or the Non-SDN Chinese Military-Industrial Complex Companies List. The provision would also cover entities on the Section 1260H list of Chinese military companies and the BIOSECURE Act list of biotechnology companies of concern, as well as certain military intelligence end users, entities majority-owned by SDNs, and designated foreign terrorist organizations. The proposal adds the Section 1260H Chinese military companies list and the pending BIOSECURE Act biotechnology companies of concern list. Because affiliates include entities under common control, screening only the investment target would not necessarily identify all relevant restricted-party connections.
Transaction Coverage and Compliance Obligations
The NPRM would extend the OISP provision regarding US persons that knowingly direct transactions by non-US persons. Currently, US persons may not knowingly direct prohibited transactions but do not trigger the regulations if they knowingly direct a notifiable transaction, but under the proposed rules the provision would be applied to notifiable transactions as well. Therefore, US persons exercising decision-making authority for foreign businesses or funds would need to assess notification obligations as well as prohibitions. The existing recusal concept would be retained, and the proposed rules would not bar US persons from working for an investing entity or an investment recipient; instead, their participation in covered transactions is the relevant concern.
In the NPRM, Treasury also clarified that a joint venture need not involve a newly formed entity and that fund investments involving pre-existing portfolio holdings may constitute indirect covered transactions independently of the specific limited partner (LP) provision. In addition, the definition of “develop” would expressly include activities through affiliates and high-level oversight, direction, approval, conceptual input, and strategic planning. Together, these provisions warrant closer review of collaboration structures and fund interests rather than reliance on how the transactions and documents are labeled.
Significantly, the definition of a covered transaction would not be expanded to cover licensing arrangements, so long as they do not involve equity investments or other components that would trigger the regulations for other reasons. That is especially important in light of the expansion to biotechnology, because a stand-alone license in that sector (and others) would not be covered solely because it transfers technology. An equity-linked license or collaboration structured as a joint venture may nevertheless require separate analysis, and export-control and sanctions requirements would remain independently applicable.
The 30-calendar-day deadlines for post-closing and post-transaction-knowledge notifications would remain, but notifications under the new § 851.405 would require more information, including information about foreign beneficial owners holding more than 5% of voting or economic interests in the US person, transaction rationale and chronology, transaction and side agreements, and commercial relationships with the target. Proposed Sections 851.402 and 851.403 expressly address a controlled foreign entity’s knowledge, as well as the US person’s knowledge, including facts learned after closing. Filers would retain the notification and supporting documentation, including diligence materials, for 10 years from filing.
The knowledge standard would continue to encompass actual knowledge, awareness of a high probability, and reason to know. Treasury would expressly consider whether investors addressed information it made available before closing. US parents would also remain responsible for taking all reasonable steps to prevent prohibited transactions by controlled foreign entities, supported by documented controls, training, and testing or auditing.
NEW EXCEPTIONS, BUT NO GENERAL SAFE HARBOR
The NPRM would introduce a $50,000 de minimis exception for otherwise notifiable (but not prohibited) transactions. The calculation would aggregate relevant transactions and funding to the relevant covered foreign person or joint venture over the preceding 12 months and include the fair market value of non-cash consideration. As the fact sheet emphasizes, it would not exempt prohibited transactions. The separate $2 million LP exception would be retained, with committed capital aggregated across the fund’s investment and co-investment vehicles. Alternatively, an LP could obtain a binding contractual assurance that its capital will not fund prohibited or notifiable transactions, as applicable; an assurance addressing only prohibited transactions would not also excuse notification obligations.
The NPRM would also introduce exceptions to address secondary transactions (a transaction secondary to a covered national security transaction), ordinary or administrative business transactions, and ancillary financial services. The proposal includes examples such as bank lending and underwriting services, including temporary equity acquisitions solely to facilitate underwriting. However, the secondary transaction exception excludes contractual arrangements for technology transfer or technical knowledge transfer. Treasury’s FAQs confirm that activities outside the covered transaction definition remain outside the program, subject to the anti-evasion provisions. The term “secondary transaction” here is not a blanket exception for secondary-market purchases of fund interests; such purchases still require analysis under the transaction-coverage provisions.
Other changes would remove the express exception for business development companies and revise derivatives relief by limiting it to specified securities and LP interests while dropping the existing exclusion for equity-conferring derivatives. Relevant investment exceptions would remain unavailable when they confer governance rights beyond standard minority protections. For intracompany transfers, Treasury seeks comment on whether maintaining existing operations should permit only upkeep, upgrades without increased production, or broader expansion. The exception for fulfilling binding, uncalled capital commitments entered into before the final rule’s effective date would also remain, without eliminating obligations applicable under Part 850.
FEEDBACK AND ENFORCEMENT
A new nonbinding feedback process would permit persons with a direct financial interest in an actual prospective transaction to seek Treasury’s view on whether it would be prohibited. Material terms would need to appear in binding written documentation, although an executed transaction agreement would not be required. Treasury could decline to respond, provide only partial feedback, or issue anonymized guidance. Feedback would not constitute authorization or prevent later enforcement. Treasury could, however, consider reasonable reliance on feedback when assessing a potential violation, provided the requester fully and accurately disclosed material facts.
As the FAQs state, the program would remain a self-assessment regime, not a transaction-screening process. A national interest exemption would remain available for an otherwise prohibited transaction. National-interest considerations would include critical US supply chains, defense production, public health, and US technological leadership; any exemption would require written approval and could carry binding conditions.[1]
The NPRM would also establish confidential submissions about potentially covered foreign persons. Although its preamble requests comment on a possible public database, Treasury’s FAQs state that it does not intend to establish one at this time. Investors must therefore continue to determine covered person status through reasonable and diligent inquiry rather than rely on a government list.[2] On enforcement, the proposal would expressly place the burden of proof on Treasury, retain civil penalties and divestment authority, and omit Part 850’s stand-alone criminal penalty provision. Criminal exposure under other laws, including for false statements, would remain. The civil-penalty ceiling would be the greater of the inflation-adjusted $250,000 statutory amount or twice the value of the transaction underlying the violation. Voluntary self-disclosures would need to include a proposal to mitigate harm, potentially through divestment or disgorgement. A mandatory notification, including a post-transaction-knowledge filing, would not itself qualify as a voluntary self-disclosure.
RELATED CHINESE TECHNOLOGY EXPORT DEVELOPMENTS
China is separately proposing additions to its Catalogue of Technologies Prohibited or Restricted from Export covering AI, biopharmaceutical, and photovoltaic technologies. Announcement No. 48, issued on October 16, 2026, also imposed temporary pre-export registration for in-scope technology exports, including exports already begun but not completed. Our October 20, 2026 LawFlash, China Proposes Biotech Export Restrictions: Implications for Licensees and Acquirers, discusses the biotechnology provisions and their implications for licensees and acquirers.
The two regimes have different triggers. The OISP addresses specified US investment transactions, whereas the Chinese measures address exports of China-based technology, including ownership transfers, authorization for overseas use, and changes that place ownership or actual control in an overseas party. A stand-alone license outside the OISP can therefore still require Chinese registration if it involves an in-scope technology export. Conversely, a Chinese exclusion or licensing convenience does not resolve whether an equity investment or joint venture is covered under the US proposal.
The Chinese interim registration requirement is already operative; the proposed new export prohibitions and restrictions and the US NPRM have not taken effect. Parties assessing investments, licenses, or R&D collaborations involving China-based technology should consider both transaction rights and technology-transfer obligations, including whether registration or licensing dependencies affect closing or subsequent deliveries.
CONSIDERATIONS
Many of the proposed changes implement expansions Congress required under the COINS Act and therefore were expected. Treasury’s discretionary addition of biotechnology, however, has taken many investors and other stakeholders by surprise and warrants particular attention because the proposed scope reaches pharmaceutical development and enabling tools beyond technologies already subject to export controls.
Based on past experience, we assess that Treasury may be open to comments from industry that propose surgical changes—for example, for technical precision or to avoid unintended negative collateral effects. The final scope remains subject to Treasury’s consideration of comments, including its express requests for input on the biotechnology categories. Although the government may be unlikely to completely eliminate biotechnology from the proposed new scope of the regulations, stakeholders should provide feedback to Treasury through formal comments in an effort to help the government draw lines in a way that appropriately balances national security considerations with market needs.
One positive aspect of the proposed rules is the new process, although that was mandated by the COINS Act, so it is not surprising. In our experience advising clients in this area, the current OISP created a degree of uncertainty with respect to whether certain transactions were covered and led investors to either apply the regulations in a way that could have been overly conservative, or conversely to take a less conservative approach but thereby take on some compliance and enforcement risk. Treasury’s FAQs helped to some extent but are not extensive enough to provide guidance in all scenarios. Although it may not actually be advisable in certain cases, creating that option is still a welcome improvement.
Investors should continue to comply with Part 850 while planning for the proposed changes. Preparatory work need not, and should not, await the final rule, but changes in operations and processes do not need to be implemented until the updated rules go into effect. Transactions involving China-based technology also require a separate assessment of current Chinese obligations, including interim registration for in-scope exports.
Just as one basic example of how investors will need to update their processes, screening for Chinese-domiciled or Chinese-owned portfolio investments will no longer be sufficient once the OISP is extended to additional countries. For investors making direct investments, as opposed to investing through pooled funds, the additional covered technologies will require significant new diligence to determine whether a target business is within the scope of the updated regulations. We anticipate that Treasury will expect full compliance as soon as the updated regulations go into effect, which is why it is important to begin planning for the likely changes even before they are finalized. Preparatory work should include updating technology questionnaires, mapping ownership and control relationships, and identifying US personnel who participate in foreign investment decisions.
HOW WE CAN HELP
Morgan Lewis lawyers have been counseling clients on these issues since before the OISP became effective in 2025, and our work has included representing both US and non-US investors, as well as Chinese investment targets. Based on our experience, the market is still in the process of adapting to the program, and the proposed updates will once again require industry to rapidly adjust.
Moreover, because of some of the extraterritorial elements of the program, these issues will be important not just for US and Chinese companies—for example, investment funds with US limited partners will continue to be affected. Despite the changes discussed above, in many respects the regulations will not change, so there also remains significant continuity.
For questions about this development, please contact one of the authors of this LawFlash.
UPCOMING WEBINAR
Join Morgan Lewis lawyers on November 3, 2026 at 10:00 pm ET (November 4, 2026 at 10:00 am China Standard Time) for a discussion of the proposed expansion of US outbound investment restrictions under the COINS Act and its implications for businesses and investors. Additional details and registration information will follow.
