Outbound and Down: Biotech Joins Semiconductors, Quantum and AI on Government Watch List

The U.S. Department of the Treasury issued a Notice of Proposed Rulemaking (NPRM) on October 22, 2026, implementing the Comprehensive Outbound Investment National Security Act of 2025 (COINS Act) that would add biotechnology to the categories of technologies subject to U.S. outbound investment restrictions. It follows calls from members of the U.S. Congress and the Trump Administration's February 2025 "America First Investment Policy," which directed the Treasury Department to consider extending outbound restrictions to biotechnology, hypersonics, aerospace, advanced manufacturing and directed energy. (For more information, see Holland & Knight's previous alerts, "America First Investment Policy," February 28, 2025, and "Outbound Investment Screening Rule Goes into Effect," January 10, 2025.)

Background: From Executive Order to Statute

OISP was established under Executive Order 14105 dated August 9, 2023, and the Treasury Department's implementing rules took effect on January 2, 2025. The current program prohibits or requires notification of certain investments by U.S. persons in Chinese or Chinese-owned companies – including those in Hong Kong and Macau – engaged in the semiconductors and microelectronics, quantum information technologies and artificial intelligence (AI) sectors. The existing AI rules already reach some biology-related activity: The computing power threshold for prohibited AI transactions is 10^24 computational operations for AI systems trained primarily on biological sequence data.

On December 18, 2025, the COINS Act was enacted as part of the fiscal year (FY) 2026 National Defense Authorization Act (NDAA). The COINS Act places OISP on a statutory footing, adding a new Title VIII to the Defense Production Act, and:

• expands the "countries of concern" for certain provisions beyond China to include Cuba, Iran, North Korea, Russia and Venezuela
• adds hypersonic systems and high-performance computing and supercomputing to the covered technologies
• replaces the current revenue-attribution test for covered foreign persons with a direct or indirect 50 percent ownership rule
• codifies the Treasury Department's authority to add new industry sectors
• contemplates – but does not require – a public, non-exhaustive list of covered foreign persons and directs the Treasury Department to establish an advisory opinion process
• requires implementing regulations within 450 days of enactment, i.e., by March 13, 2027

The Treasury Department confirmed in FAQs released December 23, 2025, that the existing outbound rules remain in effect until COINS Act regulations are issued.

In fact, the Treasury Department is enforcing the current rules. On October 7, 2026, it announced its first OISP civil penalty, a $200,000 penalty issued in July 2026 against a U.S. company for failing to submit a required notification of a $92,478 investment by its controlled foreign entity, a Chinese fund, in a Chinese-embodied AI company.

Congressional Pressure to Cover Biotechnology

Because the COINS Act does not list biotechnology, members of Congress have urged the Treasury Department to add it as prohibited technology:

• Select Committee Letter (May 21, 2026). John Moolenaar (R-Mich.), chair of the U.S. House of Representatives Select Committee on Strategic Competition between the United States and the Chinese Communist Party, wrote to Treasury Secretary Scott Bessent urging the Treasury Department to designate biotechnology as a "prohibited technology" under the COINS Act "as soon as possible," citing large U.S. out-licensing transactions and flagging pharmaceutical intellectual property, drug discovery platforms, clinical research and development (R&D) capabilities, and biologics manufacturing and commercialization know-how as warranting particular consideration.
• Biotech Investment National Security Act (BINSA). On June 2, 2026, Chair Moolenaar and Rep. Debbie Dingell (D-Mich.) introduced H.R. 9102, and on August 6, 2026, Sens. Elissa Slotkin (D-Mich.) and Pete Ricketts (R-Neb.) introduced a U.S. Senate companion (S. 5316). BINSA would amend the COINS Act to add biotechnology, including pharmaceutical development, biologics manufacturing and clinical research, as a covered sector and would make pharmaceutical licensing deals, joint ventures and equity investments with Chinese covered foreign persons subject to review by the Treasury Department. It would also require the Treasury Department to issue implementing rules within one year of enactment.

What the Proposed Rule Would Do

The NPRM covers six sectors: the five named in the COINS Act (semiconductors and microelectronics, AI systems, quantum information technologies, high-performance computing and supercomputing, and hypersonic systems) and biotechnology, which the Treasury Department added under the Act's authority to designate technologies that enable the military, intelligence, surveillance or cyber-enabled capabilities of a country of concern. It also addresses requirements for U.S. persons and their controlled foreign entities, covered foreign persons, notification contents, a process for requesting nonbinding feedback, the knowledge standard and penalties.

For life sciences investors, the key points are:

Scope of "Biotechnology"

The Treasury Department stated that certain advanced biotechnologies could pose an acute risk to national security, citing the proliferation of biological weapons, the development of brain-computer interfaces and harm to U.S. supply chain security.

As proposed, prohibited technology includes controlled or novel toxins, energetic materials, advanced bio-derived materials, pharmaceuticals and their delivery systems, and biofuels. The U.S. biotechnology sector stands to be the most impacted by the Treasury Department's proposed scoping of pharmaceuticals to include small molecules, polymers, vaccines, blood and blood components, allergenics, cell and gene therapies, and monoclonal antibodies or other recombinant therapeutic proteins, as well as their delivery mechanisms.

Given the extent of international partnerships, it is too soon to determine the impact of this proposal on the biotech industry and investors. It is expected that, as the rulemaking process goes forward, the administration will work with the biotechnology community to ensure the rule protects national security while preserving the ability to identify promising technologies from other countries.

Prohibited vs. Notifiable

As reported, the proposed rules would require notification of certain transactions across three of the six sectors with AI super intelligence (SI) systems, quantum information technologies and biotechnology investments prohibited outright. The Treasury Department cites the potential exploitation of biotech investment by countries of concern for the proliferation of biological weapons, development of brain-computer interfaces, disruption of the U.S. supply chain, and indigenization of technologies for military and mass surveillance end uses in its decision to exclude biotechnology from notifiable transactions.

Licensing Transactions

A Treasury Department official stated that the proposed rules do not include licensing agreements by U.S. pharmaceutical companies with Chinese counterparties for technology or technical knowledge transfers. Covered transactions continue to include equity acquisitions, certain debt financing, greenfield investments, joint ventures and certain limited partner (LP) investments. In-licensing of China-originated assets, often structured as upfront payments, milestones and royalties, therefore would remain outside the regime unless BINSA or a later rule extends coverage. Equity-linked structures, such as new company arrangements in which a Chinese licensor receives equity in an offshore entity, and joint ventures are more likely to be covered.

Exceptions

The NPRM includes excepted transactions such as investments in publicly traded companies and transactions valued at less than $50,000. However, this de minimis exception applies only to notifiable transactions and is unavailable to biotechnology prohibited transactions. Biotechnology investors may instead request exemptions for transactions in the U.S. national interest. As for the full buyout exception created in the COINS Act, the Treasury Department clarified statutory ambiguity by limiting its use to a U.S. person's acquisition of all equity owned by all covered foreign persons. The Treasury Department keeps in place existing exceptions for LP investments of $2 million or less, as aggregated across any investment and co-investment vehicles of the fund.

Countries of Concern

The Bolivarian Republic of Venezuela under the regime of Nicolás Maduro Moros remains listed as a country of concern, but the Treasury Department recognizes "that regime no longer exists" and Venezuela does not currently meet the NPRM's definition. However, the proposed rule could still apply to certain investments in Venezuelan entities. The remaining countries of concern are China (including Hong Kong and Macau), Cuba, Iran, North Korea and Russia.

Practical Implications for Life Sciences Companies and Investors

Companies, venture capital and private equity funds, and LPs active in U.S.-China life sciences transactions should consider these steps:

• Map Exposure. Inventory existing and pipeline investments, joint ventures, corporate structures and licensing arrangements with Chinese counterparties, including indirect exposure through third-country entities that are 50 percent or more owned by persons of a country of concern. Parties with impacted financial interests can request nonbinding feedback from the Treasury Department on potential transaction prohibitions.
• Build Regulatory Flexibility into Deal Terms. Consider regulatory-change termination rights, conditions precedent, structural alternatives (e.g., cash licensing in lieu of equity consideration) and representations regarding covered activities.
• Update Diligence Protocols. The OISP knowledge standard includes what a U.S. person could have learned through a "reasonable and diligent inquiry." Document diligence on targets' biotech activities, ownership and end uses now.
• Review Controlled Foreign Entities. U.S. persons must take all reasonable steps to prevent controlled foreign entities from undertaking transactions that would be prohibited for a U.S. person and may not "knowingly direct" such transactions. The Treasury Department's first enforcement action involved a controlled foreign entity. At this time, the Treasury Department does not intend to establish a designated covered foreign persons database and instead will rely on U.S. persons to undertake due diligence.
• Coordinate with Other Laws and Regulations. A biotech deal may also implicate the BIOSECURE Act (enacted in the FY 2026 NDAA), U.S. Department of Defense Section 1260H list, Committee on Foreign Investment in the United States (CFIUS) review of inbound transactions involving genomic or other sensitive personal data, and China's own investment security review.
• Participate in the Comment Process. Comments on the NPRM are due December 7, 2026, and may be submitted through regulations.gov. The Treasury Department revised several provisions of the original OISP rules in response to public comments, so industry input on the biotech definitions can make a difference. In particular, the Treasury Department is soliciting feedback on the precise definition of covered biological systems and proposed scope of pharmaceutical compounds.
• Monitor and Participate in Congressional Action. It is likely that Congress will continue to legislate or hold hearings on issues relating to biotechnology investment in China and related issues.

Key Dates

Holland & Knight Can Help

Holland & Knight's Public Policy & Regulation Group and Life Sciences Policy, Government Relations and Regulatory Compliance Team will continue to monitor developments. If you have any questions about the potential impact to your business, contact the authors or another member of the team.

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem, and it should not be substituted for legal advice, which relies on a specific factual analysis. Moreover, the laws of each jurisdiction are different and are constantly changing. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. If you have specific questions regarding a particular fact situation, we urge you to consult the authors of this publication, your Holland & Knight representative or other competent legal counsel.