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How the Outbound Investment Security Program (OISP) Affects Debt Transactions

Blog
March 11, 2025•2 min read

New U.S. Regulations Restrict Investments in Chinese Technology Sectors

The U.S. Department of the Treasury has implemented the Outbound Investment Security Program (OISP), a new regulatory framework that restricts or imposes notification requirements on U.S. investments in certain Chinese technology sectors. The rule, which took effect on January 2, 2025, applies to both equity and debt financing transactions involving “covered foreign persons” (CFPs) linked to semiconductors, microelectronics, quantum computing, and artificial intelligence.

For venture capital firms, private equity investors, and debt lenders, the OISP introduces significant compliance risks, requiring due diligence and transaction screening to avoid severe penalties, including forced divestment, substantial fines, and potential criminal liability.

How OISP Affects Debt Financing & Loan Transactions

While the OISP primarily targets equity investments, its reach extends to certain debt financing arrangements, particularly when the loan provides the U.S. investor with:

  • Contingent equity interests, such as convertible loans or warrants.

  • Profit-sharing rights or revenue-based financing arrangements.

  • Governance influence, including board appointment rights.

Debt investors engaged in secured loans, capital call financings, and royalty-based lending should assess whether their transactions fall under OISP’s covered transactions and could trigger compliance obligations or prohibitions.

Compliance Risks for U.S. Investors & Lenders

Noncompliance with the OISP can result in severe regulatory penalties, including:

  • Mandatory divestment or nullification of prohibited transactions.

  • Civil and criminal penalties for investors who knowingly engage in prohibited transactions.

  • Increased regulatory scrutiny on cross-border debt financing deals.

Lenders and investors must also be aware that “knowledge” under OISP includes constructive knowledge—meaning that even if an investor does not have direct information about a borrower’s CFP status, they may still be held liable if they fail to conduct reasonable due diligence.

How Businesses Can Ensure OISP Compliance

Given the broad application and complex regulatory requirements of the OISP, U.S. investors and lenders should:

  • Implement enhanced due diligence – Conduct detailed assessments of borrowers, ownership structures, and industry sectors.

  • Update loan documentation – Incorporate OISP-specific representations, warranties, and covenants into financing agreements.

  • Monitor ongoing regulatory developments – Stay informed about OISP enforcement trends and Treasury Department guidance.

  • Work with legal counsel – Ensure investment structures comply with U.S. regulations and mitigate cross-border legal risks.

How I Can Help

Working with me, I provide strategic legal guidance to:
✔ Private equity and venture capital firms navigating OISP investment restrictions.
✔ Lenders and financial institutions structuring compliant debt financing transactions.
✔ Corporate clients ensuring compliance in cross-border investment activities.
✔ Companies facing regulatory enforcement or requiring dispute resolution.

📩 Contact me today to assess your investment strategies and ensure compliance with the OISP.

David Orchard | Lawyer

+44 743 789 4552

Subin Jeon

Marketing communications executive

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