Treasury Draft Regulations Would Prohibit Certain U.S. Investments in Biotech Sector in China

Legal Background and Expected Timeline

For several years, Treasury has administered regulations in response to executive orders governing certain U.S. outbound investments in specific strategic sectors of China's economy. In addition to these regulations, the COINS Act was enacted on December 18, 2025, as part of the FY2026 National Defense Authorization Act.

The COINS Act requires Treasury to undertake further outbound investment regulatory efforts focused on five technologies (semiconductors, artificial intelligence, quantum computing, supercomputers, and hypersonic systems). It also authorizes Treasury to include additional technologies that enable military, intelligence, surveillance, or cyber-enabled capabilities in China, as determined by Treasury. Treasury is now using this discretionary authority to propose adding biotechnology as a sixth technology in which certain U.S. investment would be prohibited.

Treasury is seeking public comments on its proposal, which must be received by December 7, 2026. After considering the comments, Treasury must issue final rules to implement the COINS Act within 450 days of its enactment (i.e., March 13, 2027). The final rule will specify when it becomes effective, which could be as soon as the rule is issued (i.e., immediate effectiveness) or could have a delayed effectiveness or transition period, as will be specified in the final rule when it is issued.

The final rule should not apply retroactively. While existing outbound investment regulations will continue to apply to transactions completed prior to the final rule's effective date, the existing outbound investment regulations do not include biotechnology as such, and so biotech deals completed prior to such effective date (as long as they do not involve investments in other currently covered sectors) should generally be unaffected.

Proposed Treasury Rule vs. BINSA

The proposed Treasury rules are similar to pending legislation titled the Biotech Investment National Security Act (BINSA), but there are key differences. Notably, BINSA proposes to include licensing within the scope of transactions that would be governed by the COINS Act, whereas the proposed Treasury rule does not extend to pure licensing transactions that do not bundle equity investments within the transaction. Although BINSA remains under consideration by the U.S. Congress (currently before the House Financial Services Committee), the final Treasury rule is expected to be issued and become the operative framework governing these transactions well before BINSA could realistically be enacted.

Which Chinese Entities and Biotech Sectors Are Impacted?

The proposed regulation specifies that entities incorporated in or organized under the laws of China, entities that have a principal place of business or are headquartered in China, and entities in which at least 50% of the voting interests, equity interests, or board votes are held by Chinese citizens or permanent residents would all be covered by the proposed regulations if the entity:

1. Develops, engineers, or uses a "biological system" to modify, enhance, produce, or control "pharmaceutical compounds," which is defined to include small molecules, polymers, vaccines, blood, blood components, allergenics, cell therapies, gene therapies, monoclonal antibodies and other recombinant therapeutic proteins, and their delivery mechanisms;
   
   
2. Develops or produces hardware, robotics, or software for automated scientific discovery or experimentation, including laboratory automation or cloud lab infrastructure;
   
   
3. Develops, engineers, or uses a "biological system" to modify, enhance, produce, or control certain agents and toxins that are export-controlled or capable of similar harmful effects; propellants, explosives, and pyrotechnics; novel or high-performance functional materials, such as adaptive or protective coatings, bio-cement or other material for agile infrastructure, material capable of self-repair or self-assembly, or biosensors; and biofuels;
   
   
4. Develops or produces brain-computer interfaces;
   
   
5. Develops, constructs, or produces certain biomanufacturing equipment targeted toward chemical and biological weapons; or
   
   
6. Develops or produces biological sequencing technology; flow cytometers and cell sorters designed for spectral analysis or that contain 26 or more detectors or channels; liquid chromatography mass spectrometry instruments designed for top-down proteomic analysis; or computational or bioinformatics tools for biological systems.
   
   

Of these categories, the first two are potentially the most far-reaching and could cover large parts of the pharmaceutical and biotech industry in China, depending on how the proposed rule is interpreted. In an effort to balance national security with public health risks or harm to U.S. pharmaceutical and biotech businesses, Treasury is specifically asking for public comment on how to precisely describe "biological systems," and whether and how to more precisely scope the definition for "pharmaceutical compounds" to focus on advanced or frontier technologies. The ultimate definition and interpretation for these two key terms that is adopted in the final rule will be critical to understanding how broadly the COINS Act will apply to the pharmaceutical and biotech industries.

What Type of Investments Are Impacted?

If the proposed rule is finalized as drafted, the COINS Act would prohibit U.S. citizens, residents, and entities organized in the U.S., as well as their foreign subsidiaries, from making certain types of investments in Chinese entities that engage in any of the activities noted above. The specific investments covered by the COINS Act are:

• Equity and contingent equity investments;
  
  
• Debt financing with equity-like components such as profits interests, board seats, or other comparable financial or governance rights;
  
  
• Joint ventures;
  
  
• Greenfield formation of a Chinese entity to engage in the prohibited activities noted above; and
  
  
• Investments in non-U.S. private equity or venture capital funds that are likely to invest in Chinese entities that engage in the prohibited activities noted above.

There are certain exceptions for investments in publicly traded securities, intracompany transfers of funds to controlled subsidiaries of U.S. companies, and full buyouts of all Chinese-held interests in an entity or assets located outside of China.

Pure Licensing. Pure licensing contracts fall outside the scope of the proposed rule, as long as they are not combined with the other prohibited transaction types noted above. By contrast, licenses that grant the U.S. licensee upfront equity, warrants, or options to purchase equity in the Chinese licensor would be prohibited. In addition, certain licensing transactions based on co-development and co-commercialization arrangements may be deemed to be a joint venture and prohibited, as discussed below. The final text of the rule, any additional guidance, and Treasury's practice with respect to interpreting and applying the rule's "evasion" and "avoidance" provisions should all be carefully evaluated following the rule's publication.

NewCo Transactions. A common structure in recent U.S.-China biotech transactions involves the formation of a NewCo outside of China that acquires or in-licenses biotechnology from China and attracts investors in the United States. This type of transaction would be subject to the proposed Treasury rule if Chinese entities, citizens or permanent residents hold 50% or more of the voting interests, equity interests, or board votes of the NewCo, if the NewCo is incorporated in, headquartered in, or organized under the laws of China or has a principal place of business in China, or if the NewCo constitutes a joint venture, as discussed below.

Joint Ventures. The proposed rule would prohibit U.S. citizens, residents, and entities organized in the U.S., as well as their foreign subsidiaries, from entering into a joint venture with a Chinese citizen, permanent resident or Chinese entity to engage in any of the activities noted above. The proposed rule refers to "joint ventures" as any arrangement that involves the contribution of capital and/or assets by two parties and the sharing of profits and losses, regardless of the JV's location and regardless of whether a JV entity is established or utilized. As such, a wide range of strategic partnering arrangements and collaborations, including certain co-development, co-commercialization, profit-and-loss sharing, and NewCo structures, could potentially fall within the scope of regulation, notwithstanding the absence of a formal joint venture label or entity.

Mergers & Acquisitions. Acquisition structures could also be implicated by the proposed Treasury rules. The current Outbound Investment Security Program ("OISP") rules (31 C.F.R. Part 850) contain an exemption for U.S. persons to acquire the entire Chinese-held equity or other interests of an entity. The proposed Treasury rule has a similar exemption, but it is limited to certain buyouts of all Chinese-held interests in an entity or assets located outside of China, whereas the current OISP exemption can be applied to entities or assets located outside or inside China, as long as it is a full buyout of the entity. Acquisitions should be carefully designed to comply with the new rule when it is published.