Treasury issues first outbound investment penalty

On October 7, 2026, the U.S. Department of the Treasury announced that, in July 2026, it issued its first civil penalty under the Outbound Investment Security Program (OISP). Treasury penalized a U.S. company $200,000 for failing to submit a required notification of an investment by the company’s controlled foreign entity, a Chinese fund. On April 19, 2025, that fund invested approximately $92,478 in a private Chinese company that develops artificial intelligence, robotics, and embodied intelligence. Treasury stated that it identified the transaction through its regular and ongoing compliance and market monitoring efforts.

Key takeaways

• The violation was a missed notification. The penalty did not involve a prohibited transaction. It was imposed for failing to file a notification that the rules required.
• U.S. persons are responsible for their controlled foreign entities. Under the OISP, a U.S. person must (a) notify Treasury of any transaction by its controlled foreign entity that would be notifiable if engaged in by a U.S. person and (b) take all reasonable steps to prohibit and prevent any such transaction that would be prohibited if engaged in by a U.S. person.
• Deal size did not prevent enforcement. The penalty ($200,000) was more than twice the amount invested (approximately $92,478).
• Treasury is monitoring the market itself. Treasury found this transaction through its own monitoring. It evaluates potential enforcement on the facts and circumstances, including the aggravating and mitigating factors in its OISP Enforcement Overview and Guidance.

The current rules (in effect now)

The OISP implements Executive Order 14105 (August 9, 2023) through Treasury’s final rule at 31 C.F.R. Part 850, which took effect on January 2, 2025. In summary:

• Scope. The rules apply to U.S. persons that invest in “covered foreign persons” connected to China, including Hong Kong and Macau, that engage in specified activities involving semiconductors and microelectronics, quantum information technologies, or artificial intelligence. Depending on the activity, a transaction is either prohibited or must be notified to Treasury.
• Covered transactions. These include equity acquisitions, certain debt arrangements, joint ventures, greenfield investments, and certain LP investments in non-U.S. funds.
• Exceptions. These include publicly traded securities, certain LP investments (where committed capital is $2 million or less, or the LP has a binding contractual assurance that its capital will not be used for prohibited or notifiable transactions), and transactions made after January 2, 2025, under a binding, uncalled capital commitment entered into before that date, among others. The publicly traded securities, LP, and derivative exceptions do not apply if the investment gives the U.S. person rights beyond standard minority shareholder protections.
• Notification deadlines. A notification is due no later than 30 calendar days after the completion date of a notifiable transaction, including one by a controlled foreign entity. A U.S. person that learns only after completion that a transaction was covered (whether notifiable or prohibited) must notify Treasury within 30 calendar days of acquiring that knowledge. Filers must keep the notification and supporting documentation for 10 years from filing.
• Knowledge standard. Obligations turn on what a U.S. person knows or has reason to know after a reasonable and diligent inquiry, so documented diligence is central to compliance.

What is coming: the COINS Act

The Comprehensive Outbound Investment National Security Act of 2025 (COINS Act), enacted on December 18, 2025, as part of the FY2026 National Defense Authorization Act, codifies the program in statute and expands it. Treasury has 450 days from enactment (until about March 13, 2027) to issue implementing regulations. Until it does, the current rules remain fully in effect. Once implemented, the COINS Act will:

• Add countries of concern: Cuba, Iran, North Korea, Russia, and Venezuela (the statute refers to the Maduro regime, so political developments may affect how it applies to Venezuela).
• Add technology sectors: high-performance computing and supercomputing, and hypersonic systems.
• Replace the current 50% financial-metrics test with a simpler definition of covered foreign person, based on factors such as where an entity is organized or headquartered, whether it is under the direction or control of a country of concern, and whether a country of concern or its government owns 50% or more of it.
• Change the exceptions, including a de minimis threshold for LP investments (to be set by Treasury) and new categories such as certain financial-institution, secondary, and ordinary-course business transactions.
• Create new tools: non-binding pre-transaction feedback, a non-exhaustive public database of covered foreign persons, and an updated, formalized voluntary self-disclosure framework.

Recommended steps

• Map controlled foreign entities, especially non-U.S. funds and accelerators, and require them to escalate potentially covered transactions to the U.S. parent before closing.
• Screen every potentially covered transaction, including small ones, and keep a written record of the diligence performed.
• Review transactions completed on or after January 2, 2025, for missed notifications, and consult counsel on remediation promptly. Notifications are due within 30 calendar days of a transaction’s completion date, and a U.S. person that learns only after completion that a transaction was covered has 30 calendar days from acquiring that knowledge to notify Treasury.
• Review fund documents and side letters, including LP assurances and LP advisory committee recusal procedures.
• Prepare for the COINS Act by assessing exposure to the new countries and sectors, and watch for Treasury’s proposed rules.

Reed Smith regularly advises investors, fund managers, and portfolio companies on OISP compliance, notifications, and enforcement. Please contact your Reed Smith relationship partner for assistance.

This alert is for general informational purposes only and does not constitute legal advice.