Treasury proposes significant expansion of US outbound investment restrictions under the COINS Act

On October 22, 2026, the US Department of the Treasury released a notice of proposed rulemaking (Proposed Rule), to implement the Comprehensive Outbound Investment National Security Act of 2025 (COINS Act), which Congress enacted on December 18, 2025. The Proposed Rule would significantly expand the existing Outbound Investment Security Program (OISP) rules, which have been in effect since January 2, 2025, and appear at 31 C.F.R. Part 850 (Part 850). The Proposed Rule would create a new Part 851, and Part 850 would continue to govern activity until the final Part 851 regulations take effect. Comments are due December 7, 2026, and the COINS Act directs Treasury to issue final regulations by March 13, 2027.

Part 850’s core restrictions on US investment in certain persons of a country of concern that are involved in development/production of sensitive technologies (Covered Foreign Persons) would stay the same: US persons would still have to (1) notify Treasury of certain transactions with Covered Foreign Persons that engage in “notifiable technologies” and (2) avoid certain transactions with Covered Foreign Persons engaged in “prohibited technologies.” Much of the Part 850 framework would also carry forward, including the knowledge standard and “reasonable and diligent inquiry” expectation, obligations with respect to controlled foreign entities, the 30-day notification deadlines, and most of the parameters governing excepted transactions.

What changes under the Proposed Rule is that the program expands from one country of concern (China, including Hong Kong and Macau) to six (effectively five, as discussed below) and from three designated sensitive technologies (semiconductors and microelectronics, quantum information technologies, and AI) to six, adding high-performance computing and supercomputing, hypersonic systems, and biotechnology to the list. Most significantly, it would prohibit all covered transactions involving Covered Foreign Persons that develop artificial intelligence (now called “super intelligence” or “SI” following the issuance of Executive Order 14434 on September 29, 2026), and make biotechnology a prohibited technology (which was not originally included in the COINS Act).The Proposed Rule would also add new processes and enforcement features.

Treasury has released a fact sheet on the Proposed Rule. For background on the currently in effect OISP, see our earlier client alert on the implementation of the OISP and on developments in Treasury’s guidance and enforcement.

Expanded covered countries

• More countries. Cuba, Iran, North Korea, and Russia would join China (including Hong Kong and Macau) as countries of concern. Venezuela “under the regime of Nicolás Maduro Moros” is also designated as a country of concern under the COINS Act, but Treasury notes that this regime no longer exists, citing the March 5, 2026, US recognition of Delcy Rodríguez as the country’s head of state. Therefore, Venezuela’s current government would not fall within the definition. Because the other new jurisdictions are already subject to broad US sanctions, the practical effect of the country expansion is likely limited.

Expanded covered technologies

• A categorical prohibition on SI development. Part 850’s AI provisions, which turned on computing power thresholds and designed or intended end uses, would be replaced with a definition of prohibited technology that includes the development of any SI system, subsuming transactions that are currently categorized as “notifiable.” Treasury reasons that no compute or capability threshold reliably identifies advanced models, and the proliferation of SI capabilities has made end uses difficult to isolate, leading Treasury to include development of any SI system in the definition of prohibited technology. The definition of SI systems reaches any system that makes predictions, recommendations, or decisions, including generative models, agentic harnesses, and embodied systems such as robots and autonomous vehicles. Enhancing or extending the capability of a third-party model would count as development. Using an off-the-shelf model strictly for internal, noncommercial purposes would not be covered.
• Biotechnology as a prohibited-only sector. Although the COINS Act does not list biotechnology as a covered sector, Treasury would use its authority to add sectors to make certain biotechnologies prohibited. The prohibition would cover:
  • The development, engineering, or use of a biological system (a term the Proposed Rule does not define) to produce, control, or modify, among other things, pharmaceutical compounds (including small molecules, vaccines, cell and gene therapies, and monoclonal antibodies and their delivery mechanisms), restricted and novel agents and toxins, energetic materials, novel or high-performance functional materials, and biofuels;
  • Brain-computer interfaces;
  • Certain biomanufacturing equipment;
  • Biological sequencing;
  • Bioinformatics tools; and
  • Automated scientific discovery hardware and software.

With no end-use limitation and no notification tier, ordinary-course pharmaceutical research and manufacturing by a Covered Foreign Person could be prohibited. Treasury has requested comment on the scope of this coverage, including whether to limit “pharmaceutical compounds” to advanced or frontier technologies and whether the technical parameters for covered equipment should be narrowed.

• Hypersonics. Hypersonic systems (Mach 5 and above, whether military or civilian) would be added. Prohibited hypersonics would cover the propulsion systems themselves, fuels or propellants, related and enabling technologies, specified materials, and test facilities, while notifiable technologies would cover, among other things, certain sensor, guidance, navigation, and control equipment, software, and materials that could be used in a hypersonic system.
• High-performance computing. High-performance computing and supercomputing would become a standalone sector. Supercomputers were already prohibited under Part 850; the new notifiable coverage is for certain high-bandwidth, low-latency interconnects. The prohibition on supercomputers would also extend to components that enable those capabilities.
• Semiconductors. The semiconductor prohibition would expand to integrated circuits made from silicon carbide or other compound or ultrawide-bandgap semiconductors, certain radiation-hardened and photonic integrated circuits, and certain high-bandwidth memory. A new notification requirement would cover certain equipment used to design, fabricate, or package integrated circuits.
• Quantum computing. Quantum coverage, which remains prohibited-only, would expand to development of software for the purpose of designing, simulating, testing, or controlling a quantum computer and algorithms and applications for quantum information science technologies.
• Listed persons. As under Part 850, an otherwise notifiable transaction would become prohibited where the Covered Foreign Person appears on specified US government sanctions, export control, and national security lists. The Proposed Rule would add the Section 1260H list (identifying Chinese military companies operating directly or indirectly in the United States) and the BIOSECURE Act list (identifying biotechnology companies of concern for purposes of federal contracting and funding restrictions) and would extend this trigger to affiliates and subsidiaries of listed companies.

Expanded definition of covered foreign person

Unlike Part 850’s technology-linked “covered foreign person” definition, the proposed definition turns primarily on a person’s relationship to a country of concern and thus would replace Part 850’s separate definition of a “person of a country of concern.” Technology activity is addressed through the prohibited and notifiable technology definitions. The Covered Foreign Person definition expands to include members of the Chinese Communist Party Central Committee or other political leadership of a country of concern, as well as political parties and persons acting on their behalf, and entities with sufficient ownership by any of the foregoing, measured as 50 percent or more in the aggregate, directly or indirectly, by voting interest, board voting power, or equity.

The new Covered Foreign Person definition would also capture Part 850’s financial-metrics test, which covers entities that derive more than 50 percent of revenue, net income, capital expenditures, or operating expenses from Covered Foreign Persons (with a $50,000 per-entity aggregation threshold) and would add a new direction-or-control prong covering entities whose management or policies are subject to direction by Covered Foreign Persons, whether by ownership, contract, or otherwise. The direction-or-control prong has no minimum ownership threshold, and the Proposed Rule does not define the level of control required, so counterparty screening should look beyond ownership to contractual and minority rights.

Although Treasury’s FAQs for the OISP indicate that licensing, consulting, and procurement contracts are generally outside the program, a development, licensing, or supply collaboration that gives a counterparty in a country of concern approval rights over budgets, key personnel, or commercialization decisions could raise the question whether the target is subject to that counterparty’s direction or control. Treasury has not said where the line falls, which makes this a useful topic for comment.

The Proposed Rule would also adopt a broader “principal place of business” test that includes an entity’s headquarters and the location where it conducts its main business activities. Additionally, an entity may have more than one principal place of business. In Treasury’s example, a US-incorporated and US-headquartered company whose chief executive officer manages the business from a country of concern would have a principal place of business in both countries, so US-incorporated targets with management based in a country of concern warrant closer review.

Modifications to definition of covered transactions

The transaction types subject to the rule, now called “covered national security transactions,” are mostly unchanged in substance, but the Proposed Rule includes a few key modifications and clarifications to the existing transaction types:

• Knowingly directing. The most consequential refinement is that the Proposed Rule folds the term “knowingly directing” into the definition of “covered national security transaction” and extends it to both prohibited and notifiable transactions, except for (other than acquisitions of limited partner (LP) interests in non-US pooled funds. As a result, US person officers, directors, and investment committee members of non-US funds and companies who approve a notifiable transaction could have their own notification obligation unless they recuse themselves from notifiable transactions.
• Joint ventures. Treasury would also apply the plain meaning of “joint venture,” which does not require creation of a new entity, could reach some profit-sharing collaborations, and would expressly treat structures that obscure a US person’s role as indirect transactions.
• Pooled funds. Treasury states that investing in a pooled fund that already holds a Covered Foreign Person may itself be an indirect covered national security transaction. Secondary market purchases are not excluded, although Treasury acknowledges that the ability to conduct diligence may be more limited in that setting. Treasury would still assess whether an inquiry was reasonable and diligent based on the totality of the facts and circumstances. This is likely to matter most for investors that buy into existing portfolios through secondary purchases, continuation vehicles, or funds of funds, where the vehicle may already hold a covered target and diligence windows are short.

Exceptions

Most Part 850 exceptions would carry forward unchanged, including those for publicly traded securities, securities of registered investment companies, LP investments of $2 million or less or that are subject to a binding contractual assurance, intracompany transfers of funds, and binding capital commitments made before the effective date.

The principal changes are:

• De minimis. A new $50,000 exception, aggregated over the preceding 12 months, would apply only to otherwise notifiable transactions. There would be no de minimis exception for prohibited transactions.
• Financial and secondary transactions. New exceptions would cover secondary transactions (such as bank lending, payment processing, underwriting, prime brokerage, and custody), ancillary services by financial institutions, and ordinary or administrative business transactions. Temporary ownership of an issuer’s shares would no longer make underwriting a covered transaction. Despite its name, the secondary transaction exception covers these financial services, not secondary purchases of interests. The term “secondary transaction” should not be construed as “secondary market transactions,” which can still qualify as covered transactions.
• Narrowed or removed exceptions. Part 850’s exception for business development companies would not carry forward, although Treasury asks whether it should be included. Although ambiguous in the COINS Act, the Proposed Rule would include a buyout exception requiring the acquisition of all interests held by all Covered Foreign Persons, rather than the full interest of a single Covered Foreign Person. The derivatives exception would be expressly limited to derivatives of publicly traded securities, securities issued by investment companies, and LP investments. Part 850’s derivatives exception is broader but does not apply to any derivatives conferring a right to acquire equity or assets of a Covered Foreign Person. Treasury asks whether the Proposed Rule creates a loophole because it does not include the rights conferring carve-out.

Diligence, notification, and enforcement

• Treasury information as a diligence factor. In assessing whether a US person made a “reasonable and diligent inquiry,” Treasury would consider whether it appropriately considered information Treasury provided before the transaction, including any Treasury assessment that the target may be engaged in a notifiable or prohibited technology.
• Controlled foreign entities. A US person would need to notify Treasury where either the US person or its controlled foreign entity knew, or later learns, that the entity’s transaction was notifiable. Treasury is also considering extending the “parent” definition to certain sub-advisers to non-US funds and to the general manager of a non-US entity. For advisers and sponsors of non-US vehicles, Treasury proposes to clarify that the knowledge standard applies, with respect to actions of a controlled foreign entity, not just to the US parent but also to the controlled foreign entity itself.
• Expanded notifications. Notifications would require more information up front, including a fuller commercial rationale and investment timeline, copies of transaction documents, and any past, current, or future commercial arrangements with the target. The 30-day deadlines, certification, and 10-year recordkeeping requirements are unchanged.
• Anti-evasion factors. Treasury identifies factors it may weigh in assessing whether a non-US vehicle was used to evade the rules, including de facto US control; shared personnel, facilities, or branding; commingled funds; overlapping investors with an affiliated US fund; and shared beneficial ownership or rights to proceeds.
• Penalties. As under the OISP, civil penalties would be available up to IEEPA-equivalent levels, and Treasury could compel divestment of prohibited transactions. Because the COINS Act addresses only civil penalties, the Proposed Rule omits Part 850’s criminal penalty provision. This may matter little in practice because other law remains available, including criminal liability under 18 U.S.C. § 1001 for false statements or certifications to Treasury. Treasury would bear the burden of proof in enforcement actions, and a voluntary self-disclosure would need to include a proposal to mitigate any harm, which may include divestment or disgorgement of profits. Treasury’s first OISP penalty, announced on October 7, 2026, involved a failure to notify Treasury of an investment of roughly $92,000 by a non-US fund controlled by a US investor, a reminder that investments of any size are subject to Treasury’s scrutiny.
• New processes. Treasury would offer confidential nonbinding feedback or anonymized public guidance on whether an actual, prospective transaction is prohibited, although it need not respond. Only a party with a direct financial interest may request feedback, and the material terms must be set out in a binding document. Treasury would also accept confidential public submissions regarding the status of foreign entities as Covered Foreign Persons. This process adds to Treasury’s ongoing collection of tips and referrals from members of the public relating to compliance with the OISP. The COINS Act authorizes, but does not require, a public, nonexhaustive database of Covered Foreign Persons; Treasury is considering one but has not decided, and any database would supplement rather than replace diligence. Because the Proposed Rule itself does not establish a screenable list of Covered Foreign Persons, reasonable and diligent inquiry remains the primary compliance tool.
• National interest exemption. The exemption would cover only the prohibition, rather than Part 850’s prohibition and notification requirement. Treasury would add US public health needs to the factors it considers, which may be significant given the biotechnology prohibition, and Congress must be notified within five business days of any exemption.

Takeaways

• Part 850 still governs. The OISP remains in effect until the final Part 851 regulations take effect, and Treasury retains authority to enforce Part 850 for earlier conduct. Final regulations are due by March 13, 2027, and the Proposed Rule may change in response to comments.
• Rescreen portfolios and pipelines. The new countries and sectors will expand the universe of investment targets requiring review. Particular attention is warranted for targets that touch SI or biotechnology, targets with founders or management based in a country of concern, and profit-sharing collaborations that could be treated as joint ventures.
• SI systems. Because the definition reaches any SI system that makes predictions, recommendations, or decisions, investors in companies that apply machine-learning tools to drug discovery, diagnostics, or quantitative medicine, investors should consider whether an investment target’s tools, including those built on third-party models, could be viewed as development.
• Address in-process deals and follow-on investments. Parties to transactions that may close after the final rule takes effect should consider closing conditions, termination rights, and representations that address both Part 850 and the Proposed Rule. Investors should also revisit prior conclusions that a portfolio company was not covered or only notifiable before making follow-on investments.
• Update diligence and compliance materials. Questionnaires, representations and warranties, certifications, and compliance materials should reflect the six countries of concern (with the understanding that Venezuela would not be covered), the six covered sectors, the expanded list-based prohibition, and a process for escalating and documenting information that Treasury provides about a target.
• Recusal policies. With the concept of “knowingly directing” now reaching notifiable transactions, firms should map whether any US person personnel sit on investment committees, boards, advisory committees, or similar bodies of non-US vehicles and portfolio companies, and consider whether recusal procedures reach recommendations, negotiations, and transaction documents, and not only the final vote.
• Review fund documents and non-US structures. Binding capital commitments made before the effective date would be excepted, so existing LPs should be largely unaffected. Funds that admit new LPs after the final rule takes effect, however, should confirm that side letters and assurances refer to the regulations as in effect at that time, rather than citing to the prior OISP regulations. Recusal policies and controls over non-US vehicles and controlled foreign entities should now address notifiable transactions in addition to prohibited transactions.
• Consider commenting by December 7, 2026. Treasury has invited comment on, among other things, the SI and biotechnology prohibitions, the “parent” definition, the business development company exception, the changes to the derivatives exception, and a possible public database. Stakeholders in the targeted technology sectors and investors with exposure to the countries of concern should consider commenting.

If you have questions about Treasury’s Proposed Rule implementing the COINS Act, please contact your McDermott Will & Schulte lawyer or one of the authors.