Deal on NDAA Includes New Restrictions on U.S. Outbound Investments in China

December 17, 2025

The House-passed National Defense Authorization Act (NDAA) for FY2026 includes major new restrictions on U.S. outbound investments in China, intended to prevent American capital from flowing into sectors linked with China’s military, surveillance, and strategic technology development. Limited partners (LPs) may face increased disclosure responsibilities requiring more active monitoring of fund investments, as well as potential liability if general partners (GPs) fail to disclose restricted investments. The legislation cleared the House on December 10, and the Senate is expected to approve the House-passed bill before leaving town for Christmas at the end of this week, thereby clearing the bill for President Trump’s signature.

The NDAA authorizes over $900 billion in defense spending for FY2026. It sets forth defense priorities for the next year, endorsing the bulk of the Pentagon’s weapons priorities. In addition, it would increase pay for service members by 3.8 percent, provide some military aid to Ukraine, fully repeal U.S. sanctions on Syria, and provide a comprehensive overhaul of Defense Department acquisition processes.

The NDAA also will include new restrictions on U.S. investments in China, as contained in the Comprehensive Outbound Investment National Security Act, or COINS Act, which was expanded from its earlier focus on China to apply to investments in Iran, Russia, Cuba, North Korea and Venezuela as well. The COINS Act was also adjusted to give the Treasury Department more flexibility to determine which technologies should be regulated. Federal contracts with Chinese biotech firms will also be prohibited.

While last year’s NDAA did not include such provisions due to the inability of the GOP and Democrats to reach agreement, this year proved different – although earlier, there were reports that once again, the NDAA would be free of these. Nevertheless, a deal was hammered out, and the bill passed the House by a bipartisan majority vote of 312-112, with 197 Republicans and 115 Democrats voting “aye.” Congressman Adam Smith (D-WA), the ranking Democrat on the House Armed Services Committee, said that while he had “concerns about how the Speaker and White House handled the final negotiations of the bill,” he thought the majority of the legislation “reflects months of bipartisan negotiations done in good faith between the House and Senate Armed Services Committees.”

And as a further sign of the bipartisan nature of the bill, the Senate Banking Committee’s ranking Democrat, Elizabeth Warren (D-MA), called the COINS Act’s inclusion “an important step toward ensuring the United States remains the world’s leader in advanced technology,” arguing that “our bipartisan bill will help ensure that we develop the most sensitive and cutting-edge technology here in America rather than supercharge its development in countries that do not share our values.”

The new China restrictions in the NDAA differ significantly from the Biden-era Executive Order (E.O. 14105) and Treasury’s 2024 Final Rule enforcing the EO. First, the Treasury program is codified into law, which some would say serves to replace “soft” regulations with “hard” laws, making the former legally binding and judicially enforceable, thereby promoting compliance. The NDAA provisions also expand covered sectors and impose direct reporting and disclosure obligations on LPs in private funds, which the Biden rules essentially left to GPs. [For more information on the U.S. Outbound Investment Security Program (OIR), the Treasury Department’s program that regulates U.S. outbound investment in certain sensitive technology areas, see the “NCTR FYI” for November 8, 2024, entitled “China Outbound Investment Screening Rule Finalized.”]

The law firm of Simpson Thacher & Bartlett — headquartered in New York City, employing approximately 1,500 attorneys in 13 offices worldwide, and specializing in litigation and corporate practices, particularly mergers and acquisitions and private equity – has reviewed the NDAA China provisions and has highlighted key changes to the OIR as follows:

Expand the Definition of “Country of Concern”: Originally, the term “country of concern” included only China (inclusive of Hong Kong and Macau). The NDAA expands the term to also include Cuba, Iran, North Korea, Russia, and Venezuela. Although U.S. and other jurisdictions’ economic sanctions programs largely prohibit new investments involving companies located or organized in, or those having a sufficient nexus to these newly added countries, Simpson Thacher & Bartlett notes that “these sanctions could be lifted and make this OIR expansion more impactful for future investment opportunities.”

Potentially Change the Technical Parameters for Prohibited and Notifiable Transactions: The NDAA removes the OIR’s original technical and end-use parameters for when a transaction is “prohibited” or “notifiable.” Instead, the NDAA provides that the specifics of these parameters are to be determined by new regulations. LPs should note that “[i]n theory, this could lead to a broad expansion of the types of transactions that are deemed prohibited or notifiable under the OIR,” Simpson Thacher & Bartlett points out.

Except Underwriting and Related Activities: Unlike the current OIR, the NDAA explicitly excepts “the temporary acquisition of an equity interest for the sole purpose of facilitating underwriting services.” Simpson Thacher & Bartlett emphasizes that this has been a critical issue for the global capital markets because the current OIR and guidance suggest that such transactions “might be covered despite good arguments to the contrary.”

Create Additional Exceptions: The NDAA excepts certain transactions not expressly excepted under the current OIR, including: (1) transactions determined by Treasury to be de minimis; (2) certain ancillary transactions by financial institutions; and (3) transactions “secondary” to covered transactions, including, as previously noted, underwriting services.

Add Hypersonic Systems as a New Sensitive Technology: The NDAA adds “hypersonic systems” to the list of covered technology sectors. “Thus, when regulations are promulgated, the OIR will cover the hypersonic systems, semiconductors and microelectronics, quantum computing, and artificial intelligence sectors,” Simpson Thacher & Bartlett underscores. Furthermore, the specifics of what types of products and technologies are covered will be determined by the regulations. [Although not currently defined in the bill, “hypersonic systems” is generally understood to relate to the delivery of advanced weapons at high speeds and is a key area of geostrategic competition for the United States, according to Simpson Thacher & Bartlett.]

With regard to this addition, it appears that while President Biden’s 2023 executive order issuing the OIR clearly focused on China and certain technologies within highly specific technical parameters, “Congress is, at a minimum, clearly comfortable expanding the OIR beyond what the Biden administration originally intended,” Simpson Thacher & Bartlett explains. But it also stresses that “certain changes open the door for both expansion and constriction.” That is, under the NDAA, Treasury could expand or change the scope of technologies that would bring a transaction within the scope of the OIR, but it could also eliminate the technical specifications altogether.

Additional OIR Updates:

Guidance Provision: The NDAA requires future regulations to provide for a process to request non-binding feedback on a confidential basis or anonymized guidance to the public, Simpson Thacher & Bartlett notes, but the current OIR does not provide for this. This mechanism (once available) “could help U.S. persons navigate changes in regulations and better understand Treasury’s views on certain transactions,” the law firm underscores.
Public Database of Covered Foreign Persons: Treasury is authorized to create a public database of “covered foreign persons,” but the NDAA also includes authority to establish a mechanism for such persons to petition for removal from or inclusion in the database. The creation of this database is discretionary (not required).
Report to Congress: The NDAA would require Treasury to submit a report to Congress within 18 months identifying all enforcement actions and notifications to date, including those under the current OIR, and assess the overall impact of the program in its current form.
Self-Disclosures: The NDAA would provide for a voluntary self-disclosure process for U.S. persons to report potential violations of the regulations.
Sanctions Provisions: The NDAA would add and require updates to existing U.S. sanctions programs, including some related to the OIR.

Once the NDAA becomes law, Simpson Thacher & Bartlett explains that Treasury will have 450 days from the effective date to promulgate new regulations. “While new regulations are unlikely to be finalized in time to affect any currently contemplated investment activity, they could (and presumably will) be finalized before many investments are exited and therefore could affect investment strategies,” the law firm stresses.

In summary, then, the NDAA — and the COINS Act that it incorporates — would codify the Administration’s plans for expanding the outbound investment rule as well as provide civil penalties, forced divestment and “appropriate relief” as directed by the President, according to Kharon, a global risk analytics firm that provides data, research, and technology to help companies and governments identify and manage sanctions, illicit finance, and supply chain risks. In short, codification increases risks for LPs, who could be confronted with civil penalties, contract loss, and potential criminal liability if disclosures are false or incomplete.

As noted previously, the bill would also add Cuba, Iran, North Korea, Russia and Venezuela to its list of specified “countries of concern,” joining China, Hong Kong and Macau, and it directs the executive branch to identify “additional technologies” to be covered under the rule.

Additionally, it would expand the covered foreign parties under the outbound investment rule to include:

those incorporated in, that have a principal place of business in or that are “organized under the laws of” a country of concern;
members of the Chinese Communist Party (CCP) or political leadership of a country of concern;
those “subject to the direction or control of” a country of concern;”
those that “knowingly engaged in significant operations” in the defense or surveillance technology sectors of the economy of a country of concern; and
entities owned in the aggregate, directly or indirectly, 50 percent or more by a country of concern.

The COINS Act would also impose restrictions on a broader range of national-security-related transactions involving such covered persons, as Kharon explains, including:

acquisitions of an equity interest or contingent equity interest;
loans to a covered foreign person;
joint ventures that engage or plan to engage in prohibited tech;
acquisitions, leasing or other development of land or property;
acquisitions of a limited partner or an equivalent interest in a venture capital fund, private equity fund or other pooled investment fund.

“In short, it’s a comprehensive bulk-up,” Kharon underscores.

NCTR will be working with the Institutional Limited Partners Association (ILPA) – which intends to put together a summary document that highlights differences and similarities to what is currently in effect – as well as with other interested parties in closely following the regulations implementing the COINS Act and other related provisions contained in the NDAA as they are proposed. We will also consult with our member systems in deciding whether to file comments at the appropriate time concerning direct reporting obligations on LPs, for example, and would appreciate any initial observations with which members may wish to provide us.