Treasury's Outbound Investment Rule Could Send China-Origin Biotech Deals, and U.S. Jobs, to Europe

To be submitted electronically via regulations.gov once the portal opens

Meena R. Sharma
Director, Office of Investment Security Policy and International Relations
U.S. Department of the Treasury 
1500 Pennsylvania Avenue NW
Washington, DC 20220

Re: Outbound Investment Security Program Regulations — Proposed Rule
Docket No. TREAS-DO-2026-0595; RIN 1505-AC94; 31 CFR Parts 850 and 851

Dear Director Sharma:

Locust Walk and Banyan BioInnovations appreciate the opportunity to comment on the Department of the Treasury’s proposed rule implementing Title VIII of the Defense Production Act (the “Proposed Rule”). Locust Walk is a global investment bank focused exclusively on biopharma, advising companies on licensing, partnering, and M&A transactions. Banyan Bio forms and finances new U.S. companies built around clinical-stage drug candidates, including through the Banyan BioInnovations Capital Fund I. We work directly on the cross-border transactions the Proposed Rule would most affect.

We support the Proposed Rule’s goal of keeping U.S. capital and expertise from advancing the military, intelligence, surveillance, or cyber-enabled capabilities of countries of concern. Our comments are directed at one transaction structure that does not raise those concerns but that the Proposed Rule, as drafted, could prohibit: a U.S.-headquartered, U.S.-controlled company (a “NewCo”) that acquires rights to a novel drug candidate from its originating company in the People’s Republic of China, paying license fees and granting the originator a minority, non-controlling equity position.

Summary of Recommendations

• Confirm that a minority, non-control equity position held by an originating licensor in a U.S.-controlled NewCo is not a covered national security transaction, and adopt an express excepted transaction for this structure in § 851.501.
• Define “joint venture” in § 851.209(a)(3) to require joint control and shared profits and losses, and exclude arm’s-length license transactions for which the licensor receives license fees and minority non-control equity.
• Narrow the biotechnology definition in § 851.226(r)(4) so it is no broader than the export controls China itself proposed on October 16, 2026, which reach platform technology ownership transfers while expressly preserving product licensing.
• Clarify related provisions so that ordinary NewCo operations (China-based CROs and clinical sites, follow-on financings of entities formed before the effective date) are not swept in unintentionally.

I. Minority, non-control equity granted to an originating licensor does not present a national security risk

A. The NewCo model moves innovation into the United States

The Proposed Rule is directed at outbound investment: U.S. capital and the “intangible benefits” that accompany it flowing to companies in countries of concern. The NewCo structure works in the opposite direction. In a typical transaction:

• A U.S. NewCo is incorporated in the United States, headquartered here, and managed by U.S. executives and a U.S.-majority board.
• The NewCo acquires exclusive rights (typically worldwide or ex-China) to a specific drug candidate that was discovered by the originating company in China.
• The NewCo pays for those rights with cash license fees (upfront, development and regulatory milestones, and royalties) and grants the originator a minority equity position as part of the consideration.
• From then on, U.S. investors fund global development, which is conducted under FDA oversight and controlled by the NewCo. The resulting clinical data, regulatory filings, manufacturing know-how, and economic value accrue to a U.S. company.

The net effect is a transfer of a novel asset, and of control over its development, into the U.S. biopharmaceutical ecosystem. Besides the license economics, U.S. capital funds a U.S. company, not the originator. The originator does not gain access to U.S. technology, U.S. talent, or U.S. managerial assistance in any way that would advance a country of concern’s military or surveillance capabilities.

B. The licensor’s equity is passive consideration, not a channel for control or technology transfer

The originator’s minority equity is part of the purchase price for the license. It is commonly agreed to so that the licensor shares in the asset’s success, aligning its incentives on technical and knowhow transfer and supply, and it reduces the cash the NewCo has to pay upfront allowing for more capital to be invested in clinical development. In the structures we advise on, the originator:

• holds well under a majority of the NewCo’s equity, voting interests, and board seats with a typical range of 10 – 20%;
• has no right to direct the NewCo’s management or policies, and no veto over development, commercialization, or financing decisions;
• holds, at most, protections similar to the standard minority shareholder protections Treasury has already recognized in § 851.501(a)(2); and
• does not share in the NewCo’s losses or have any obligation to fund its operations.

Treasury’s own framework already treats a position like this as low risk. The Proposed Rule uses the 50 percent ownership and “direction or control” tests in § 851.208(a)(5)–(6) to identify entities that are effectively controlled by a country of concern. Treasury also recognizes in § 851.501(a)(2) that standard minority shareholder protections do not convey meaningful governance. A NewCo that falls below each of these thresholds, and whose principal place of business is in the United States or territories outside a country of concern under § 851.224, is by design not a covered foreign person. Its passive minority holder should not bring it back within the rule’s scope through the joint venture prong.

C. Prohibiting the structure would harm U.S. patients and U.S. leadership in biopharma

China-origin innovation is now a large share of global pharmaceutical dealmaking. In 2025, Chinese drug developers signed a record $135.7 billion in outbound licensing agreements, about one-third of global licensing spend, and they were the licensors in 39 of the year’s 88 megadeals. The NewCo structure is one of the main ways U.S. companies and U.S. investors acquire these assets and bring them to U.S. patients under U.S. control. If U.S. investors cannot participate, these assets will not stop being developed. They will be developed by non-U.S. acquirers and investors, and the data, manufacturing, and value they generate will sit outside the United States.

Section 851.502(b) lists “U.S. public health needs” and “U.S. technological leadership globally” as national-interest considerations. Those considerations argue for addressing this structure in the rule itself rather than through case-by-case exemption requests, which are slow, uncertain, and impractical for venture-backed companies. It has the impact of slowing transactions such that investors will look elsewhere for opportunities.

II. “Joint venture” is overly broad and must be defined

A. The plain-English meaning stated in the preamble reaches ordinary licensing NewCos

Section 851.209(a)(3) makes entering into “a joint venture, wherever located, that is formed with a covered foreign person” a covered national security transaction. Unlike the ownership and control tests, it has no ownership threshold. The Proposed Rule does not define the term. The preamble says that Treasury relies on its plain-English meaning, “the contribution of capital and/or assets by two parties and the sharing of profits and losses,” and that no new entity is required.

Read literally, that formulation could describe almost any company with more than one shareholder. Under it, a licensor that contributes IP rights and receives shares could be treated as having “formed” a joint venture with the U.S. investors that contribute cash, whatever its ownership percentage and even though it has no control. That reading would make the 50 percent and control thresholds in § 851.208 irrelevant for biotechnology and prohibit every U.S.-led NewCo with any China-origin equity holder. We do not believe Treasury intends that result. The uncertainty alone, however, is already chilling transactions and financing.

B. A license-plus-equity NewCo is not a joint venture

A true joint venture is a partnership-like enterprise. Each party contributes capital, technology, or other assets to a common undertaking, the parties jointly control it, and they share its profits and losses. A licensing NewCo is different in every respect:

Our position is simple: when the NewCo pays the originator for a license, and the originator has no control, the parties are not running a common enterprise. They are a licensee and a licensor with a passive equity holder.

C. Proposed definition

We recommend that Treasury add a definition to Subpart B along the following lines:

§ 851.2XX Joint venture. The term joint venture means an arrangement in which a U.S. person and a covered foreign person each contribute capital, technology, or other assets to a common enterprise and jointly control, and share in the profits and losses of, that enterprise. The term does not include an arrangement in which:

(a) a covered foreign person licenses or assigns intellectual property or other assets to an entity, and receives consideration for that license or assignment, including license fees, milestone payments, royalties, or equity, or any combination of these;

(b) the entity is not itself a covered foreign person under § 851.208; and

(c) covered foreign persons, individually and in the aggregate, do not hold a majority of the entity’s board seats and do not hold rights with respect to the entity beyond the standard minority shareholder protections described in § 851.501(a)(2), together with customary information rights and rights under the license or assignment agreement.

III. Whether a biotechnology company is actually “Chinese” is not black and white

The Proposed Rule assumes that a covered foreign person can be identified readily. In biotechnology, it often cannot. “Chinese biotech company” is shorthand used in the press and the market, but the Proposed Rule applies defined legal tests, and the facts rarely line up with the shorthand. The final rule and Treasury’s guidance should reflect that.

A. Companies described as Chinese often have deep ties to the United States

Companies described as Chinese do not fit a single profile. In many cases:

• the founders and chairmen were educated in the United States, trained or worked at U.S. universities, hospitals, or pharmaceutical companies, and are U.S. citizens or lawful permanent residents whose families live in the United States;
• the company operates U.S. sites, such as research laboratories, clinical and regulatory teams, or commercial offices, staffed by U.S. scientists and executives;
• the parent is domiciled in the Cayman Islands, Singapore, or another third country, a common holding-company structure for companies that raise capital from investors around the world and list in Hong Kong, the United States, or elsewhere; and
• the shareholder base spans several countries and includes U.S. and other non-Chinese institutions.

The reverse also happens. A company with a U.S. address, a U.S. site, or a non-Chinese holding company may in substance be managed and operated from China. A rule applied by label rather than by the facts that matter will be wrong in both directions.

B. The common shortcuts do not answer the question

Market participants often reach for simple tests. Each one breaks down on ordinary facts.

• Do Chinese investors make a company Chinese? Not by themselves. The Proposed Rule asks whether persons of a country of concern hold 50 percent or more of an entity, or direct or control it (§ 851.208(a)(5)–(6)). Answering that requires looking through funds and holding companies to determine whether each owner is itself a person of a country of concern, which turns on citizenship, residency, organization, and control, not on ancestry or the original source of capital. Capital of Chinese origin held through U.S. citizens, non-Chinese funds, or minority positions below the thresholds does not make a company Chinese. Conversely, a company funded largely by non-Chinese investors can still be run from China.
• Does a CEO of Chinese origin who is not a U.S. citizen make the company Chinese? Not on that fact alone. As we read the Proposed Rule, the individual test turns on citizenship or permanent residency in a country of concern, not on national origin, ethnicity, birthplace, or education. A chief executive who is a citizen of a third country, or a U.S. citizen or permanent resident, is not a person of a country of concern, whatever his or her ancestry. Even where an executive is a citizen of a country of concern, the entity tests turn on where the company is organized, headquartered, and principally operated, who owns it, and who directs it. The executive’s nationality is relevant, if at all, to the direction-or-control inquiry.
• Does a site in China make the company Chinese, or a U.S. site make it American? Neither follows. Under § 851.224, a company’s principal place of business turns on where it is headquartered and where it conducts its main business activities. A company can run laboratories, clinical sites, CROs, or manufacturing in China and remain U.S.-headquartered and U.S.-managed, as many U.S. and global companies do. Equally, a company can maintain a U.S. office or laboratory while its headquarters, decision-makers, research, and most employees and assets are in China.
• Does a Cayman Islands or other foreign domicile settle the question? No, in either direction. The Cayman Islands is not a country of concern, so incorporation there does not by itself make an entity Chinese. But it does not take the entity outside the rule if its headquarters, main business activities, ownership, or control are in China.

C. Treasury should confirm that the test is functional and give practical guidance

Without clarity, U.S. investors must decide on incomplete information, and under a knowledge standard, whether a counterparty is a covered foreign person. Faced with that uncertainty, many will walk away from legitimate transactions, including ones in which U.S. citizens control the company, the technology moves to the United States, and nothing about the structure raises a national security concern. A test that turns on ancestry, education, or family ties would also cast suspicion on U.S. citizens and permanent residents and the companies they lead, with no basis in the statute and no bearing on actual risk. We recommend that the final rule or accompanying guidance:

• confirm that covered foreign person status is determined by the objective tests in §§ 851.208 and 851.224 (organization, headquarters and main business activities, 50 percent ownership, and direction or control), and that none of the following is sufficient alone: an officer’s or director’s ethnicity, ancestry, birthplace, education, or family ties; the national origin of investors holding less than the threshold; the presence of a site or service provider in a country of concern; or domicile in a third country such as the Cayman Islands;
• confirm that U.S. citizens and lawful permanent residents are not persons of a country of concern, regardless of national origin;
• publish worked examples for these fact patterns, including U.S.-controlled NewCos, Cayman Islands holding companies with U.S. operations, and global companies with China-based clinical or manufacturing sites;
• confirm that a U.S. person that has made a reasonable and diligent inquiry, based on the totality of the facts and circumstances, as under Part 850, is not treated as having knowledge of facts it could not have discovered; and
• establish a process for requesting a written determination of whether a specific entity is a covered foreign person.

These clarifications would focus the rule on companies that are genuinely controlled from, and operated in, a country of concern, and would give U.S. investors a workable way to tell the difference.

IV. The biotechnology restrictions should be no broader than those China itself has proposed

A. China’s October 16, 2026 export controls target platform ownership and preserve product licensing

On October 16, 2026, China’s Ministry of Commerce and Ministry of Science and Technology proposed adding biotechnology entries to China’s export control catalogue (Announcement No. 48 of 2026; comments due November 15, 2026). The proposal is narrow and targets platforms:

• It prohibits transfers of ownership of proprietary cell and gene therapy technology platforms, siRNA drug technology platforms, and certain pathogen genetic-modification (gain-of-function) technologies.
• It restricts, under licensing with facilitation, technologies for discovering and validating wholly novel drug targets in cell and gene therapy and siRNA.
• It expressly excludes licenses that leave ownership with the licensor, outsourced research and manufacturing services, and processes needed to develop, test, manufacture, and commercialize a specific drug product in international cooperation and business development.

In other words, China has chosen to protect what it considers strategic: the reusable platforms that generate new drugs. It has deliberately left product-level licensing, the basis of the NewCo model, open.

B. The Proposed Rule is far broader

Section 851.226(r)(4), by contrast, would prohibit U.S. investment in any covered foreign person that uses a biological system to develop or produce any “pharmaceutical compound,” including small molecules, polymers, vaccines, blood products, allergenics, cell and gene therapies, monoclonal antibodies, recombinant proteins, and their delivery mechanisms. That description covers almost all modern drug development, including conventional, non-frontier modalities.

Treasury has asked whether and how “pharmaceutical compounds” should be “more precisely scoped to focus on advanced or frontier technologies.” We believe it should. At a minimum, U.S. restrictions in this sector should go no further than China’s own: (i) limit the prohibition to genuinely frontier platform technologies and to the select-agent, gain-of-function, and dual-use categories already listed in § 851.226(r)(1)–(2); (ii) treat other pharmaceutical development, if covered at all, as notifiable rather than prohibited; and (iii) expressly exclude product-specific licensing transactions and U.S.-controlled licensing NewCos as described in Parts I and II.

C. Going beyond China’s regime invites reciprocal escalation

China’s proposal shows that Beijing is already watching how cross-border biotech transactions are regulated, and that it has the tools to go further. If the United States adopts restrictions that effectively shut off product-level licensing and NewCo formation, we believe China is likely to respond in kind, for example by extending its own controls from platform ownership to product licenses, or by conditioning outbound licenses on approvals that U.S. licensees cannot obtain. That would cut U.S. headquartered companies and patients off from a source of roughly one-third of global licensing activity. U.S. biopharma would lose access to the assets, and the asset flow would continue to non-U.S. acquirers. Some biopharma companies could decide to redomicile outside the U.S. or new companies to launch outside the U.S. from the start. That is not a national security gain. It is a loss of U.S. competitiveness and of U.S. control over where these medicines are developed.

A proportionate U.S. rule, aimed at the same kinds of strategic platform technologies China itself protects, would address the real risks without provoking that cycle.

V. The Proposed Rule would give European investors and executives a competitive advantage at the expense of their U.S. counterparts

A. Europe has no comparable restriction and could in-license the same assets

The Proposed Rule binds U.S. persons. It does not bind investors, executives, or companies based in Europe. We are not aware of any comparable restriction on biopharma licensing or NewCo formation in the European Union, the United Kingdom, or Switzerland. European investors and executives would remain free to in-license China-origin drug candidates into European NewCos on the same terms U.S. investors use today: license fees, milestones, royalties, and a minority equity position for the originator.

The assets would not stop moving. Chinese originators would continue to license them, and those assets would be developed. The only open question is whether the capital, ownership, and jobs that come with them land in the United States or in Europe. Under the Proposed Rule as drafted, U.S. investors and executives would be barred from competing for these deals, and European counterparts would be left to compete only with one another.

B. Capital, headquarters, and jobs would follow these assets across the Atlantic

Venture capital goes where transactions can be done. If U.S. investors cannot participate in these structures, the NewCos will be formed elsewhere, and the consequences would extend well beyond the individual deals:

• Capital. Investors who want exposure to China-origin innovation would raise and deploy their funds in Europe, and U.S. funds would lose both the returns and the ability to compete for the best assets.
• Headquarters and leadership. The executives, boards, and management teams that build these companies would be based in Europe, and the experience of building them would build up there as well.
• Jobs. The scientists, clinical operations and regulatory staff, and finance and business development professionals these companies hire would likely be employed in Europe rather than in the United States, along with the service providers that support them.

European markets have long struggled to attract capital anywhere near the scope of the U.S. market. The Proposed Rule would hand them a pipeline of high-quality assets and a reason for investors to move their capital there. The effect would be to reduce the dynamism of the U.S. capital market, which is the foundation of U.S. leadership in biopharma, and to encourage capital to flee to a market that is otherwise struggling to compete for it.

Those companies could still sell their medicines in the United States, as any other company can with FDA approval. U.S. patients would be no better protected. The headquarters, the employment, and the value created would simply have moved across the Atlantic.

C. This is the outcome the 2017 tax reform sought to prevent, and it would be worse than an inversion

The Tax Cuts and Jobs Act of 2017 lowered the U.S. corporate tax rate and moved the United States toward a territorial system, in part to reduce the incentive for U.S. companies to invert and relocate their domicile abroad. The policy judgment behind that reform, that the United States should not give companies and capital a reason to leave, applies with equal force here.

The Proposed Rule would produce a result worse than an inversion. An inversion typically changes a company’s tax domicile while leaving its U.S. employees and operations largely in place. Here, the company would never form in the United States at all. Its capital, headquarters, executives, and employees would be in Europe from the start. China would give up little, because its originators would license on the same or similar terms to European NewCos.

We urge Treasury to weigh this competitive effect under § 851.502(b), which lists “U.S. technological leadership globally” among the national-interest considerations, and to adopt the excepted transaction described in Part VI so that U.S.-controlled licensing NewCos continue to be formed in the United States.

VI. Specific drafting recommendations

To give the market a bright line, we recommend adding a new excepted transaction to § 851.501:

(m) U.S.-controlled licensing transactions. A U.S. person’s acquisition of an equity interest or contingent equity interest in, or formation of or participation in, an entity, where:

(1) the entity is organized under the laws of the United States and its principal place of business, as defined in § 851.224, is in the United States;

(2) the entity acquires rights to one or more specific product candidates from a covered foreign person by license or assignment, in exchange for consideration that includes license fees, milestone payments, or royalties, and that may include equity;

(3) covered foreign persons, individually and in the aggregate, hold less than 50 percent of the entity’s outstanding voting interest, voting power of the board, and equity interest, and do not have the power to direct or cause the direction of the entity’s management or policies; and

(4) covered foreign persons hold no rights with respect to the entity beyond the standard minority shareholder protections described in § 851.501(a)(2), customary information rights, and rights under the license or assignment agreement.

We also ask that Treasury clarify that:

1. Contracting with CROs, CMOs, or clinical trial sites in a country of concern on arm’s-length terms, or running part of a global clinical program there, does not by itself make a country of concern the location of the entity’s “main business activities” under § 851.224(b).
2. Follow-on financings of an entity formed, and meeting the conditions above, before the effective date of the final rule are not covered national security transactions merely because the original licensor remains a minority equity holder.
3. Customary anti-dilution and pro-rata participation rights held by a minority licensor do not, by themselves, constitute “direction or control” under § 851.208(b) or cause the licensor’s position to exceed the thresholds of § 851.208(a)(5).

VII. Conclusion

U.S.-controlled licensing NewCos bring novel medicines, the data supporting them, and the economic value they create into the United States. A minority, non-control equity position held by the originating company, granted on top of cash license fees, does not give a country of concern any control, access, or capability the Proposed Rule is designed to prevent. We respectfully urge Treasury to define “joint venture,” adopt the excepted transaction described above, and scope the biotechnology provisions so they are no broader than those China itself has proposed. We would welcome the opportunity to discuss these comments or to provide additional transaction data.

Respectfully submitted,

Geoff Meyerson
Co-founder & Chief Executive Officer
Locust Walk | Banyan Bio
gmeyerson@locustwalk.com

Sources cited: Proposed Rule, Docket No. TREAS-DO-2026-0595, §§ 851.208, 851.209, 851.224, 851.226, 851.501, 851.502 and accompanying preamble; MOFCOM/MOST Announcement No. 48 of 2026 (Oct. 16, 2026).