Treasury just published new proposed Outbound Investment regulations, which would represent a significant expansion of the existing program. This is just a proposed rule, and it deserves a thorough review, but some initial reactions: 1. The rule would prohibit most private investment in any Chinese firm that develops an “SI system,” including any product that operates using an SI system. It defines “SI system” extremely broadly, such that it likely captures the vast majority of Chinese software products. As a result, the proposed rule likely would prohibit most private investment in Chinese software firms, as well as Chinese firms that build products that incorporate AI (i.e., the entire Chinese robotics and drone industry, and undoubtedly many others). 2. The rule adds biotech as a covered sector and would prohibit most private investment in the vast majority of the sector. It would ban private investment in Chinese companies that use biological systems to modify, enhance, produce, or control any pharmaceutical compound, to include both small and large molecules. This likely captures most Chinese firms engaged in biologic drug manufacturing or drug discovery. Biotech and biomanufacturing are areas where U.S. investment has massively fueled China’s capabilities, which are rapidly approaching--and in some cases surpassing--those of the United States. The scope of this rule signals that the administration sees this as a massive national security concern. 3. The rule does not make major changes to the types of transactions covered. Crucially, this means it does NOT prohibit investment in publicly traded securities of these companies, the purchase of goods or licensing of products from these companies, or the export of goods to these companies. But it does ban most types of private investment (i.e., VC, PE, joint ventures, greenfield investments, etc) in companies engaging in these activities. 4. This rule will no doubt change before it is finalized, and I expect the definitions of prohibited activity related to SI and biological systems will be narrowed in the final rule. But it is also a strong signal that the administration does not want U.S. investment or know-how supporting China’s development of advanced technologies, and as a result may be willing to significantly expand outbound investment restrictions. 5. Finally, this highlights a major schism inside the administration on how to prevent China from catching up to the United States in the most advanced technologies. The Treasury Department is signaling that it is willing to significantly tighten restrictions on Americans’ ability to invest in critical technology sectors in China that would help develop these technologies, given their importance to national security. And meanwhile, the Department of Commerce is taking the exact opposite approach, loosening restrictions on American companies that seek to export goods to these companies. It doesn’t make sense for the administration to be tightening restrictions on investments, while loosening restrictions on exports. Something has to give.