Mr Dominic James
Partner

DOMINIC JAMES is a partner in Sidley’s International Funds practice based in Hong Kong. He has extensive experience advising multinational private fund managers in contentious and non-contentious regulatory matters. His practice often involves helping clients across Asia, North America, Europe and offshore jurisdictions access to the Hong Kong financial markets and resolve complex cross-border challenges they encounter.

How U.S. Outbound Investment Policy is Reshaping Fund Management

Executive Summary

Recent changes to U.S. regulation of outbound investments signals significant changes for fund managers, particularly those with Chinese investment exposure. The landscape has evolved rapidly with three major developments:

• the Outbound Investment Regulations (OIR), which took effect on January 2, 2025, prohibit or require notification of certain investments by U.S. persons into China (including Hong Kong and Macau) and China-related companies;
• the Comprehensive Outbound Investment National Security (COINS) Act of 2025, enacted on December 18, 2025, will be implemented through regulations to be issued within 450 days (by early March 2027) and will expand the existing OIR to cover several additional countries and industries; and
• the new frequently asked questions (FAQs) issued by the U.S. Treasury Department on December 23, 2025, regarding the interpretation of the OIR with respect to foreign investments in publicly traded securities, clarify the scope of certain exceptions to the OIR that will be helpful when funds acquire shares through subscriptions to an IPOs and acquire other publicly traded securities.

This article examines the impacts on fund management operations and strategy in the APAC region, including the need to assess portfolio exposure, update compliance frameworks, and prepare for a significantly more restrictive investment environment.

What is in Scope?

The existing OIR established prohibitions and notification requirements for certain investments by U.S. persons (or their controlled foreign entities) into China or Chinese-affiliated entities in semiconductors, artificial intelligence, and quantum computing. Under the COINS Act, this framework will expand significantly in both scope and geographic coverage. First, the list of “countries of concern” will expand from only China (including Hong Kong and Macau) to include Russia, Iran, North Korea, Cuba, and Venezuela (under the Maduro regime). Given recent developments regarding Maduro’s capture by the U.S. government, it remains unclear whether Venezuela will be treated as a country of concern once the U.S. Treasury issues new regulations.

Second, the list of Chinese-affiliated investment targets will expand from entities that are, for example, incorporated, have their principal place of business, or are organized in a country of concern; government-controlled entities; and entities that are 50% or more owned by such entities. Under the COINS Act, covered foreign persons will include any member of the Central Committee of the Chinese Communist Party or any member of the political leadership of a country of concern and entities “subject to the direction or control of” such individuals, a country of concern, or entities from a country of concern. The legislation leaves it to the U.S. Treasury to define “direction” or “control”.

Third, the COINS Act expands covered technologies to include five sectors: advanced semiconductors and microelectronics, artificial intelligence systems, quantum information technologies, high-performance computing and supercomputing, and hypersonic systems. While the first four categories are covered by the existing regulations to at least some extent, hypersonic systems are an entirely new category of products not covered under the current OIR. The legislation also authorizes the U.S. Treasury to designate additional technologies in the future, either on its own initiative or at congressional request.

Key Clarifications on the Publicly Traded Securities Exception

In general, all acquisitions of equity or convertible interests are in scope under the OIR, except in certain limited circumstances. The list of exceptions includes, for example, investments in any publicly traded security. Publicly traded securities are securities that are traded on a securities exchange or through any other method of trading that is commonly referred to as ‘over-the-counter’ in any jurisdiction.

This exception only applies if the investor does not get any rights other than “standard minority shareholder protections”. The FAQs provide crucial clarifications that significantly impact how fund managers assess compliance.

Settlement Timing is Decisive

The new FAQs confirm that the date of execution of the subscription agreement is not dispositive for determining exception eligibility. Rather, the focus is on the time of actual settlement – when shares are actually transferred. If settlement occurs after listing takes place, the acquisition falls within the publicly traded securities exception, even for pre-IPO subscription agreements. Similarly, securities acquired by U.S. funds through standby underwriting agreements where settlement occurs after the listing are within the scope of the exception. In both instances, for the exception to apply, the investment must not give the investor rights in a covered foreign person that go beyond standard minority shareholder protections.

Revised Position on Minority Shareholder Protections

Treasury has substantially revised its interpretation of “standard minority shareholder protections”. Previously, Treasury took the position that certain rights automatically granted by operation of law upon reaching certain ownership thresholds (such as the right to nominate directors in China at 1% ownership) exceeded standard protections.

The new FAQs reverse this position. Treasury now considers a shareholder’s right to “nominate” a director (i.e. the right to propose a director for election) to be a standard minority shareholder protection if such right is generally available to similarly situated shareholders solely by virtue of their minority shareholding. However, the right to “appoint” a director remains beyond standard protections in all scenarios.

Follow-On Offerings and Convertible Securities

The FAQs confirm that follow-on offerings fall within the exception if the securities are of the same class as already publicly traded securities and will be fungible upon issuance (e.g., same identification number; identical material rights and privileges). Additionally, contingent equity interests convertible exclusively into publicly traded securities are within the exception scope, provided they don’t afford rights beyond standard minority shareholder protections.

Due Diligence Requirements

As there is no definitive list of securities that are in/out of scope, each investment requires individual assessment through a “reasonable and diligent inquiry”. While the precise actions required to make an inquiry “reasonable and diligent” depend on the facts of a transaction, the inquiry often involves searching publicly available information, questioning targets when possible, and seeking contractual representations when feasible. The COINS Act authorizes the U.S. Treasury to publish a non-exhaustive list of covered foreign persons that engage in prohibited or notifiable technologies. However, this list will not eliminate transaction-specific diligence since it will be non-exhaustive. Entities will be able to petition for inclusion or removal from the list.

Potential Application to Non-U.S. Investment Managers and Funds

Current regulations apply to investments made or knowingly directed by U.S. persons (or by “controlled foreign entities” of U.S. persons) in “covered foreign persons”. The “U.S. person” definition is broad enough to capture any U.S. person within a fund who knowingly directs an investment that would have been prohibited if it were undertaken by a U.S. person (which includes any entity organized under the laws of the U.S. or any jurisdiction within the U.S., including any foreign branch of any such entity, or citizen or lawful permanent resident of the U.S., or any person in the U.S.). For example, a U.S. person who works for a non-U.S. investment manager outside America cannot knowingly direct an investment by the non-U.S. investment manager that would have been prohibited if undertaken by a U.S. fund.

Current regulations also require U.S. persons to take all reasonable steps to ensure that their “controlled foreign entities” do not undertake transactions that would be prohibited if undertaken by a U.S. person. Where a U.S. investment manager/GP exercises investment discretion on behalf of a foreign fund, that fund will be presumed to be a “controlled foreign entity” of the U.S. investment manager/GP.

Limited Partner (LP) Investments Under Scrutiny

Perhaps most significantly for fund managers, the COINS Act may fundamentally alter the LP investment framework. Under the current OIR, U.S. LPs can invest in non-U.S. funds if they obtain binding contractual assurances that their capital will not be used to engage in a transaction that would be prohibited or notifiable if undertaken by a U.S. person.

Potential Expanded Scope of Covered Transactions

Under the COINS Act, the limited partner would need to obtain a contractual assurance that its capital in the fund will not be used for a “covered national security transaction.” That term encompasses investments in “covered foreign persons” regardless of sector. Additionally, unlike in the current regulations, the term “covered foreign person” in the COINS Act is defined without reference to engagement in covered activities – the definition refers only to certain connections to a country of concern. This means that under the COINS Act, the contractual assurance required to make use of the limited partner exception would need to provide that the fund will not invest in any entities from a country of concern, even if the target entity has no connection to sensitive technologies. If this was the intent, this represents a substantial narrowing of the limited partner exception and, if implemented as written, could significantly restrict U.S. participation in non-U.S. funds with exposure to countries of concern. However, it is not clear whether this was the intention or just an error in the drafting that Treasury could address in the regulations.

LP Investments in Non-U.S. Funds

Under the OIR, a U.S. person may not “knowingly direct” non-U.S. persons to undertake transactions that would be prohibited if undertaken by a U.S. person. The knowing direction obligation does not apply to situations in which a U.S. person knowingly directs non-U.S. persons to undertake transactions that would be merely notifiable if undertaken by a U.S. person. The COINS Act seems to provide that (a) a U.S. person may not knowingly direct non-U.S. persons to undertake transactions that would be prohibited if undertaken by a U.S. person, and (b) if a U.S. person knowingly directs non-U.S. persons to undertake transactions that would be notifiable if undertaken by a U.S. person, the U.S. person must notify Treasury. Furthermore, unlike the OIR, the “knowing direction” obligation does not apply to limited partner investments in non-U.S. funds.

Other Exceptions

Other exceptions also already apply to LP investments in non-U.S. funds. For example, the OIR creates exceptions for (a) capital commitments of no more than US$ 2 million, aggregated across any investment and co-investment vehicles of the fund, and (b) transactions pursuant to binding, uncalled capital commitments entered before January 2, 2025.

Enhanced Administrative Framework

The COINS Act provides Treasury with new administrative tools that could benefit fund managers while expanding oversight capabilities.

Nonbinding Feedback Mechanism

Treasury may provide nonbinding feedback regarding whether transactions would be prohibited, either confidentially or through anonymized public guidance. Treasury may decline to respond to frivolous requests. While the COINS Act doesn’t provide similar mechanisms for notifiable transactions, Treasury may indicate in practice that transactions are not prohibited but subject to notification.

Voluntary Self-Disclosure Framework

The COINS Act establishes a self-disclosure framework for violations consistent with other national security regulatory programs. Disclosures must include relevant facts, explanations of why conduct violated the regime, and proposals to mitigate resulting harm. While not explicitly stated, self-disclosure would presumably mitigate penalties.

Expanded Exception Categories

The COINS Act directs Treasury to establish several new exceptions:

• De minimis transactions: Treasury must establish monetary thresholds below which transactions would be excluded
• Ancillary transactions: New exceptions for bank lending, underwriting, and debt rating services
• Ordinary business transactions: Exceptions for routine business activities, to be defined through regulation
• Regulated foreign investment companies: Potential exceptions for investments in foreign funds subject to regulatory oversight comparable to SEC supervision

Practical Implications for Fund Managers

The impact of these changes will ripple through every aspect of fund management. Investment strategies with historically significant exposure to countries of concern will require comprehensive reassessment. Fund managers may need to pivot toward opportunities in U.S. allied nations while developing more sophisticated screening mechanisms for potential investments.

Enhanced Due Diligence Requirements

Due diligence processes will become more complex and time-consuming. Managers must delve deeper into ownership structures, revenue sources, and capital expenditure patterns of potential connections to restricted entities through joint ventures or licensing agreements. Enhanced scrutiny will likely extend transaction timelines and increase operational costs.

Overhaul of Compliance Frameworks

Compliance frameworks will require substantial updating. Fund managers must develop new monitoring and reporting systems while ensuring transparent communication with investors about evolving risks and restrictions. Fund documentation needs revision to reflect new investment restrictions and risk factors, with particular attention to side letter provisions affected by the changing regulatory environment.

Impact Across Fund Types

Different types of funds face unique challenges under the new framework. Private equity managers must navigate more complex exit strategies and potentially restructure co-investment arrangements. Traditional exit routes through strategic buyers may be limited if those buyers have connections to countries of concern. Venture capital funds, for example, may need to redirect their focus from technology startups in restricted countries toward emerging opportunities in allied nations.

Current Status and Immediate Action Items

The current OIR remains in effect until Treasury issues new regulations implementing the COINS Act. Treasury has 450 days from December 18, 2025, to promulgate implementing regulations, providing a transition period where fund managers must comply with existing rules while preparing for substantially more restrictive requirements.

Fund managers must prepare for a more restrictive investment environment through (i) conducting comprehensive audits of existing portfolio exposure to covered sectors and all countries of concern, including indirect exposure through subsidiaries or joint ventures, (ii) updating compliance programs to address expanded geographic and technology coverage and (iii) enhancing investor communications about regulatory developments and potential portfolio impacts.

Strategic planning becomes crucial in this evolving landscape. Managers should explore alternative investment approaches involving new geographic markets or investment themes in allied nations that align with both regulatory requirements and investment objectives. Those with existing exposure to potentially restricted sectors should develop contingency plans for various scenarios, including enhanced monitoring requirements, potential divestiture requirements, and modified exit strategies accounting for restricted buyer pools.

Looking Ahead

New U.S. restrictions on outbound investment represent more than just additional regulation – they fundamentally reshape fund management through expanded restrictions, enhanced compliance requirements, and reorientation toward domestic and allied nation investments. The COINS Act provides statutory permanence to what began as regulatory policy, signaling long-term structural changes in global capital markets.

Success in this environment will require not just financial expertise but also sophisticated understanding of national security considerations and geopolitical dynamics. As the regulatory landscape continues evolving over the 450-day implementation period, fund managers should engage in comprehensive preparation while monitoring Treasury’s rulemaking process for opportunities to influence implementation outcomes.

As Sidley lawyers continue monitoring regulatory developments and agency-level implementation, we are available to answer questions about compliance requirements and strategic implications for fund management operations.

Acknowledgements/Disclaimers: The author wishes to thank James Mendenhall, a partner in Sidley’s Global Arbitration, Trade and Advocacy group in Washington D.C., for his invaluable contributions. This article provides general information, does not constitute advice, and should not be relied on as such. Professional advice should be sought prior to any action being taken in reliance on any of the information.

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