US Treasury details outbound investment curbs on foreign AI

The US Department of the Treasury has issued a proposed rule that restricts American outbound investments in foreign artificial intelligence, semiconductor, and quantum computing ventures.

The draft regulations implement Executive Order 14105, signed by President Joe Biden in August 2023. The framework targets cross-border capital flows into "countries of concern", currently designating the People's Republic of China alongside the special administrative regions of Hong Kong and Macau.

Under the proposed rule, the Treasury creates two distinct regulatory tiers for covered transactions: outright prohibitions and mandatory notifications. The restrictions apply across private equity, venture capital, greenfield projects, joint ventures, and certain convertible debt arrangements that provide equity-like returns or governance rights.

For artificial intelligence, the divide between prohibition and notification hinges on end-use capabilities and computational scale. The Treasury proposes barring transactions involving AI systems designed exclusively for, or intended for, military, government intelligence, or mass-surveillance applications. Prohibitions also extend to software trained using computing power exceeding specified technical thresholds, measured by total floating-point operations. Systems trained above lower computational benchmarks or adapted for non-prohibited sensitive end-uses will trigger mandatory disclosure requirements instead.

The proposal places diligence obligations on American investors through a defined knowledge standard. A US person must conduct reasonable enquiry to determine whether a target entity qualifies as a covered foreign person engaged in restricted activities. Conscious disregard or deliberate avoidance of relevant facts will not shield investors from liability.

Certain categories of transactions remain exempt from the draft rules. Carve-outs apply to investments in publicly traded securities, index funds, mutual funds, and limited partner commitments falling below specified capital thresholds. Secondary distributions and intra-company transfers between American entities and foreign affiliates also escape review, provided they do not fund covered offshore expansion.

The Treasury has opened a public consultation period to refine the technical definitions and compliance standards before issuing a final rule. The draft leaves significant administrative burdens on dealmakers assessing complex AI supply chains and compute metrics across Asian tech hubs.

How effectively will cross-border investment screening hold as venture capital syndicates route compute-intensive research through intermediary jurisdictions?