Heads Up: COINS Act Proposal Takes Aim at Biotech and AI Investment in China

On October 22, 2026, the US Treasury Department proposed a draft rule implementing the Comprehensive Outbound Investment National Security (COINS) Act¹ — a major expansion of the existing outbound investment screening regime that could reshape how US investors approach cross-border deals with China (and other countries) that involve biotechnology, AI, and other sensitive technologies.

The proposed regulations are not yet effective and will not be retroactive. We expect a final rule (with amendments) by early 2027. Until then, the existing Outbound Investment Security Program (OISP) remains in place. Please refer to our prior client alert on the current OISP regime.

The proposed regulations differ from the existing OISP in three important respects. First, they broadly prohibit investments in the biotechnology sector. Second, they further restrict — and in many cases prohibit — investments in the AI sector (now called “super intelligence” or SI systems) and semiconductor and microelectronics sectors. Third, they add restrictions for investments in the quantum, supercomputing, and hypersonics sectors. As before, the target companies must have a requisite nexus to China (including Hong Kong and Macau), although the proposed regulations would also include Cuba, Iran, North Korea, and Russia within the defined “countries of concern.”

Notably, the proposed regulations do not prohibit or restrict pure licensing-only transactions with China — a key concern for the biotechnology community. But any transactions that involve equity, contingent equity, or even joint ventures are potentially prohibited.

Violations can result in civil fines up to twice the amount of the investment and, for prohibited transactions, forced divestment.

The Treasury Department is accepting public comments on the proposed rule until December 7, 2026. Given the potential for disruption to US investment in AI and biotechnology, industry stakeholders are expected to engage heavily in shaping the final version.

Which Investors and Types of Investments Are Affected?

As under the existing OISP regime, the proposed regulations primarily apply to direct or indirect investment activity by “US persons,” which includes US citizens or permanent residents, entities organized within the United States (including foreign branches of such entities), and any persons located in the United States.

Covered transactions (designated “covered national security transactions” in the proposed rule) would include direct or indirect:

• Acquisitions of equity interest or contingent equity interests
• Provisions of a loan or debt financing, but only when such financing affords the US person an interest in profits, the right to appoint board members, or other comparable financial or governance rights characteristic of an equity investment but not typical of a loan
• Entrance into joint ventures
• Conversion of a contingent equity interest to an equity interest
• Acquisition, leasing, or other development of operations, land, property, or other assets
• Direction of a transaction by a foreign person that the US person knows at the time of the transaction would be covered if engaged in by a US person
• Acquisition of limited-partner (LP) interests in a fund that a US person knows at the time of the acquisition will likely invest in relevant sectors in countries of concern

In each case, transactions are covered only when the target company has a sufficient nexus to a country of concern and engages in a notifiable or prohibited technology.

As a practical matter, foreign (non-US) funds that take investments from US LP's will also be impacted by the regulations. Although the foreign fund may not itself have US-person participation in the fund structure or control of the fund, the proposed regulations would still apply to the US LPs’ indirect investments through the foreign fund. As before, the proposed regulations provide an exception where the US LP’s committed capital does not exceed $2 million (aggregated) or when the US LP has secured a binding contractual assurance from the fund that its capital will not be used to engage in a prohibited or notifiable transaction.

What constitutes a prohibited “joint venture” remains murky. The proposed regulations do not provide a definition and instead refer to the plain English meaning of the term, i.e., as involving the contribution of capital and/or assets by two parties and the sharing of profits and losses, though the Treasury Department clarified that a joint venture does not require the establishment or formation of a new entity.

What Nexus to a Covered Foreign Person Is Required?

The proposed regulations prohibit or require notification for certain covered national security transactions involving “covered foreign persons.” The definition of covered foreign person is expansive: companies that have direct touchpoints to countries of concern (e.g., organized in China) or indirect touchpoints (e.g., a US business with significant ownership or control by a Chinese shareholder, or a Cayman holding company with a Hong Kong operating subsidiary) are captured.

Specifically, a covered foreign person includes any of the following:

1. An individual who is a citizen or permanent resident of a country of concern (and not a US citizen or permanent resident)
2. An individual member of the Central Committee of the Chinese Communist Party or otherwise a member of the political leadership of a country of concern
3. An entity that is organized in, has a principal place of business in,² or is a governmental entity of a country of concern
4. An entity that is directly or indirectly subject to the direction or control³ of, or 50% or more owned based on, outstanding voting interest, voting power of the board, or equity interest by any persons in (1) through (3)
5. An entity that holds any downstream voting interest, board seat, or equity interest in, or any contractual power to direct or cause the direction of the management or policies of, person(s) described in (1) through (4) where more than 50% of revenue, net income, capital expenditure, or operating expenses of that entity is attributable to persons in (1) through (4)

There is no exclusion for US-organized companies. Although the statutory language seemed to require that a covered foreign person be a “foreign person,” the Treasury Department departed from that framework to retain the OISP’s ownership-based triggers. In practice, this means that US persons could be prohibited from investing into a US company that has all operations and personnel in the United States — if founded by a US-based PhD student with a pending green card application, for example.

The added element of being “subject to the direction or control” of a covered foreign person could also have significant impact and ambiguity. Unlike the bright-line 50% ownership thresholds, a control test removes certainty on whether a company has a sufficient nexus to a country of concern. It also lowers the threshold for being a covered foreign person, including based on contractual rights or minority shareholding by a strategic partner or founder.

What Transactions Could Be Prohibited or Notifiable?

Prohibited investments involve covered foreign persons who develop⁴ certain SI systems and biotechnology — for which there is no level of “notifiable technology.” See further discussion on these two sectors below. Other prohibited technologies include software for integrated circuits, semiconductor and lithography fabrication equipment, integrated circuit packaging equipment, advanced integrated circuits, quantum computing and related information technologies, quantum network and communication systems, supercomputers, and certain hypersonic systems and components.

Fewer investments would require notification to the Treasury Department than under the OISP, including those involving covered foreign persons who engage with certain integrated circuits, equipment for integrated circuits, interconnects for high-performance computing, and certain other hypersonic systems and components. An otherwise notifiable investment involving a restricted party (e.g., 1260H list designees), however, would be prohibited.

While changes to the draft rule are expected, US investors should consider whether the rule could impact transactions with:

• An entity organized or headquartered in a country of concern and that engages in prohibited or notifiable activities
• An entity (e.g., organized in the United States) engaging in prohibited or notifiable activities with sufficient ownership or control by covered foreign persons
• An entity (e.g., organized in the United States) that derives or incurs more than 50% of its revenue, net income, capital expenditures, or operating expenses from covered foreign persons that engage in prohibited or notifiable activities
• A joint venture entered with a covered foreign person and that plans to engage in prohibited or notifiable activities — including in the United States

US companies that are covered foreign persons may face difficulty attracting US investment or experience heightened diligence on their activities within the covered technology sectors.

Notably, the rule does not govern pure licensing-only transactions (e.g., a Chinese company licensing its technology to a US company), but many licensing transactions may be captured as covered transactions (e.g., licensing that accompanies an equity investment or entrance into a joint venture, which is broadly defined). The rule also provides exceptions for certain LP investments under $2 million; notifiable-only transactions under a $50,000 de minimis threshold; and investments in publicly traded securities, index funds, mutual funds, exchange-traded funds, similar instruments issued by regulated investment companies, and certain derivatives, among others.

What Are Potential Impacts for the Biotechnology Sector?

Though biotechnology is not named in the COINS Act, the Treasury Department — having determined that the biotechnology sector enables the military, intelligence, surveillance, or cyber-enabled capabilities of countries of concern — has thus proposed prohibiting US investments in biotechnology-related companies. If finalized as proposed, the Treasury Department’s inclusion of biotechnology may reach well beyond the COINS Act’s intended (or authorized) national security mandate and into widely developed therapeutics and the everyday toolkit of the biotechnology industry.

Bio-Derived Technologies

The draft rule defines prohibited technology to include the development, engineering, or use of a biological system (or components thereof) to modify, enhance, produce, or control the following items:

• Select agents and toxins and other export-controlled biological materials
• Energetic precursors or materials
• Bio-derived products that exhibit novel or enhanced properties, such as adaptive or protective coatings, bio-cement or other material for agile infrastructure, material capable of self-repair or self-assembly, and biosensors
• Pharmaceutical compounds (e.g., small molecules, polymers, vaccines, blood and blood components, allergenics, cell and gene therapies, and monoclonal antibodies or other recombinant therapeutic proteins) and related delivery systems
• Biofuels

Setting aside the “biological system” qualifier, such pharmaceutical compounds and their delivery systems are generally developed or produced by biotechnology and pharmaceutical companies in the United States and globally. An overbroad prohibition on investment into their development or production could negatively impact a US company’s global market share, opportunities for cross-border collaboration, and vendor and supply chain access, and it could increase compliance burdens for domestic biotechnology companies.

As outlined above, the proposed prohibition is limited to enumerated bio-derived technologies — i.e., from a biological system. However, there is no definition for the term “biological system,” leaving the prohibition scope unclear. The term could conceivably encompass, for example, cell lines, genetically engineered animal models, CAR-T cells, viral vectors, bacteria, and yeast — all of which are ubiquitous in the biotechnology sector.

Given the imprecise nature of the terms used for prohibited biotechnology in the draft rule, we expect that these are among the main areas where industry commentary will (and should) focus. The Treasury Department itself appears to recognize the challenges in regulating such a wide swath of activity and specifically invites public comment on the description of biological systems, limiting prohibited “pharmaceutical compounds” to “advanced or frontier technologies,” and narrowing the scope of prohibited biofuels, among others. This presents a critical opportunity for interested parties to comment on how best to narrow and clarify the scope of prohibited biotechnology in the final rule.

Biotech Tools

The scope of prohibited technology also captures the development or production of life sciences tools, equipment, components, and related software — including biological sequencing technology (both short-read and long-read platforms); certain flow cytometers and cell sorters; certain liquid chromatography mass spectrometry instruments; certain computational and bioinformatics tools; and hardware, robotics, or software used for automated scientific discovery or experimentation, such as laboratory automation and cloud lab infrastructure. These tools are foundational to routine drug discovery, diagnostics development, and basic research. If the draft rule is finalized as proposed, biotechnology companies — particularly those relying on cross-border collaborations or outsourced lab services — could be severely constrained.

The Treasury Department acknowledges that biotechnology restrictions may pose “countervailing effects on national security” by harming public health and US business, encouraging comment on the impact of such prohibition.

Licensing Exclusion

The rule does not prohibit pure licensing-only deals, which currently represent a significant share of cross-border biopharmaceutical activity between the United States and China. For example, in their biopharma M&A outlook for 2026, IQVIA reported that, in 2025, 40% of all assets in-licensed by large pharmaceutical companies had a Chinese licensor, and the leading therapy areas benefiting from such in-licensing were in oncology, immunology and cardiovascular-renal-metabolic disease, including obesity.

But many licensing-related transactions — including those in which the licensors obtain equity in a US NewCo — could be impacted by the rule if the NewCo constitutes a covered foreign person or joint venture and engages in a prohibited technology. Nonequity structures, such as those involving milestones or royalties, should be carefully reviewed, especially if the parties anticipate joint development or collaboration.

Inclusion of pure licensing transactions is explicitly contemplated by the proposed Biotech Investment National Security Act of 2026 (also known as the BINSA amendment to the COINS Act), which is currently pending in Congress and would therefore be on a separate rulemaking track from this proposed rule. Whether BINSA proceeds to enactment will be influenced, in part, by public reaction to the COINS Act regulations, the US midterm elections, and, on a long enough time horizon, the economic impact on the US biotechnology sector.

What Are Potential Impacts for the AI Sector?

The draft rule would also significantly expand prohibitions for companies that develop AI systems (now referred to as SI systems⁵), with no remaining lower category of notifiable transactions.

All SI systems are captured, regardless of performance capabilities or intended use. The draft rule removes the computational thresholds and end-use categories of the OISP that separate AI development into unregulated, notifiable, or prohibited triggers. The Treasury Department’s rationale is that SI systems can now achieve notable performance gains through means other than computing power and that general-purpose SI systems not designed for national security-relevant applications may nonetheless exhibit high-risk capabilities.

At the same time, the draft rule expands the type of regulated development activities — which previously excluded the development of items that only used third-party AI models without further design or substantive modification of the underlying model, such as fine-tuning open-source models. Now, the development of secondary items — including any data system, software, hardware, application, tool, or utility that operates using an SI system — would be subject to transaction prohibitions if the developed item “enhances or extends the capability” of the third-party SI system.

For example, unlike in the prior regime, developing an application layer, with no changes to the underlying SI model, could be a prohibited technology because it extends the model’s capability. Similarly, hardware that calls on or utilizes an onboard SI system could be captured. While the draft rule specifically mentions industrial robots, bipedal or humanoid robots, autonomous vehicles, and unmanned systems, it could encompass any hardware development with a requisite nexus to an SI system.

As with the existing regime, the draft rule excludes use of an off-the-shelf third-party SI system strictly for internal, noncommercial purposes.

This escalation would make US and global investment into China-related companies that leverage SI systems nearly impossible. It also makes transactional diligence critical (and more burdensome) to avoid costly violations.

Additionally, a broad prohibition on SI system development could distance the United States from technological progress in sectors extending well beyond advanced AI/SI. Many modern companies “develop” some form of AI/SI, even where their primary technology sector is healthcare, advertising, logistics, cybersecurity, financial services, energy, manufacturing, biotechnology, or consumer software. If every such company is supposedly engaged in prohibited technology, the rule could convert a range of otherwise ordinary commercial companies into prohibited investment targets.

The impact could be particularly perverse for US companies that qualify as covered foreign persons, thus preventing growth investment in the United States. For example, a Chinese national PhD-founded startup could be blocked from receiving US capital, forcing the brightest engineers to leave the United States and develop leading SI businesses elsewhere. Softening the treatment for US businesses could significantly mitigate the negative domestic impact.

The Treasury Department encourages comment on the definition of “SI system” and potential implications of broadly defining investment prohibitions. Interested parties should submit feedback on the potential impact on US businesses and consumers, perhaps offering alternative approaches or exclusions.

What Other Sectors or Technologies Are Captured?

Semiconductors and Microelectronics: The draft rule adds to notifiable technology the design, fabrication, or packaging of integrated circuits that fall outside the prohibited-technology thresholds, as well as certain equipment designed or intended for use in that design, fabrication, or packaging. More advanced activity is separately captured as prohibited technology under “advanced semiconductor technology and microelectronics,” including electronic design automation software; front-end fabrication and advanced packaging equipment (e.g., extreme/deep ultraviolet lithography tools); integrated circuit designs meeting Bureau of Industry and Security-identified advanced thresholds; certain high-bandwidth memory; and certain specified, radiation-hardened, or photonic integrated circuits.

Quantum Information Technologies: The draft rule treats all quantum information technologies as prohibited technology, with no technical parameters proposed for permissible (and notifiable) transactions. The draft rule covers the development and production of quantum computers, including their critical components and related software, algorithms, and applications, as well as certain quantum sensing platforms, networks, and communication systems. The draft rule defines a quantum computer as “a computer that performs computations that harness the collective properties of quantum states, such as superposition, interference, or entanglement.”

High-Performance Computing/Supercomputing: The draft rule treats as notifiable technology the development or production of high-bandwidth, low-latency interconnects (for system-on-chip, system-in-package, scale-up, and scale-out networks) that are not otherwise designated as prohibited (such as quantum), reflecting their role in enabling SI clusters, high-performance computing environments, and modern data centers. Separately, the proposed rule prohibits the development, installation, sale, or production of any supercomputer enabled by advanced circuits capable of a certain theoretical compute capacity, as well as components designed to enable such capabilities.

Hypersonic Systems: The draft rule defines hypersonic systems as military or civilian vehicles or weapon delivery systems capable of sustained atmospheric or very-low-Earth-orbit flight at Mach 5 or greater (including glide vehicles, cruise missiles, air-launched/aeroballistic missiles, maneuvering reentry vehicles, and reusable vehicles), as well as related digital twin and digital thread technology. Proposed prohibited technology includes the development or production of a hypersonic system, a propulsion system capable of enabling hypersonic flight, fuels or propellants for hypersonic propulsion systems, or certain materials designed for (or intended for) a hypersonic system. Proposed notifiable technology includes the development or production of technologies for (or intended for) a hypersonic system or its components, such as sensor, guidance, navigation, or control equipment; certain research/testing software; and specified materials not otherwise classified as prohibited.