Treasury Proposes to Prohibit U.S. Investment in Chinese Biotech: What It Means for China Licensing Deals

On October 26, 2026, the U.S. Treasury Department published proposed regulations (new 31 C.F.R. Part 851) in the Federal Register implementing the Comprehensive Outbound Investment National Security Act (COINS Act). The proposed regulations would prohibit investments by U.S. persons in Chinese biotechnology companies involved in the development or production of small molecules, biologics, vaccines, cell and gene therapies, and their delivery mechanisms where a biological system is used to modify, enhance, produce, or control them. The regulations also prohibit U.S. persons from establishing joint ventures with Chinese partners to conduct such activities. For companies that in-license drug candidates from Chinese biotechs, the license itself remains permitted, but several deal features that are now market practice (licensor equity, NewCos, profit-share collaborations, and certain governance terms) would carry real risk. Comments are due December 7, 2026. The rule is not yet effective. The “effective date” referenced below is the date of the entry into force of the new regulations, which is likely to be close to the end of the first quarter of 2027.

Key Takeaways

1. Biotech would be prohibited, not merely notifiable. There is no de minimis exception. Assume that essentially every innovative Chinese drug developer is a covered foreign person engaged in a prohibited technology.
2. A cash license is not regulated unless it meets other criteria. The rule reaches U.S. investments (equity, contingent equity, equitylike debt, joint ventures, greenfield investment, and directing such deals) but does not reach a pure technology license unless it meets other criteria.
3. Equity in the Chinese licensor is the clearest prohibited activity. The common “upfront plus equity investment” structure would be prohibited after the effective date unless the shares are listed and carry no governance rights beyond standard minority protections or Treasury grants an exemption.
4. NewCos and profit-share collaborations carry joint venture (JV) risk. The proposed regulations do not define “joint venture,” but Treasury has explained in the preamble that it will apply a plain-English JV test (contribution of capital or assets and sharing of profits and losses). No new entity is required, and the prong applies to a JV “wherever located,” including in Delaware. The fact that the proposed regulations do not include a definition gives Treasury flexibility to interpret “joint venture.”
5. It is not clear whether any licensee equity issued to the licensor is permitted. If Chinese persons together hold 50% or more of the licensee’s (i) voting interest, (ii) board voting power, or (iii) equity interests, or the licensor can direct or control the licensee (including by contract), the licensee becomes a covered foreign person, and every later U.S. investment in it would be prohibited. Also, if the Chinese person has certain veto or consent rights, then it may be deemed to control the licensee, resulting in the licensee being treated as a covered foreign person. Critically, even if the Chinese persons own substantially less than a 50% interest, there is a risk that the arrangements constitute a prohibited joint venture (as it would involve a contribution of assets (the license) and the sharing of profits and losses (via the equity)).
6. Joint committees likely still work, as long as the Chinese partner cannot direct decisions or policies. The existence of a joint committee likely does not per se make a license a covered transaction. But who holds final decision-making and approval rights now feeds directly into the JV and control analyses.
7. Timing. Final rules are due by about March 13, 2027. The effective date will be set in the final rule but is likely to be no more than a few months after the final rule’s publication. As drafted, the rule is not retroactive, but deals and equity tranches that close after the effective date are covered. Deals with an equity, NewCo, or profit-share component should aim to complete before then.

Which Modalities Are Covered?

The prohibition reaches the “development, engineering, or use of a biological system ... to modify, enhance, produce, or control” a pharmaceutical compound or its delivery mechanism (proposed § 851.226(r)(4)). Our practical read by modality, assuming that “biological system” encompasses manufacturing using bacteria or mammalian cell lines or fermentation processes:

Modality	How the biotech prohibition applies	Practical view
Monoclonal antibodies, bispecifics, antibody-drug conjugates, fusion and other recombinant proteins	Expressly listed; produced in engineered cell lines (a biological system).	Covered.
Cell therapies (CAR-T, TCR-T, NK, etc.)	Expressly listed (“cell and gene therapies”); involving the use of a biological system.	Covered.
Gene therapies and gene editing (adeno-associated virus and lentiviral)	Expressly listed; vectors produced in cells; also using a biological system as “delivery mechanisms.”	Covered.
mRNA therapeutics and vaccines	“Vaccines” listed; in vitro transcription uses enzymes (a “component of a biological system” or itself made using a biological system and therefore may be covered); lipid nanoparticles (LNPs) are delivery mechanisms but in themselves may not require a biological system to produce or modify.	Likely covered if bio-produced.
siRNA, antisense oligonucleotides, and other oligonucleotides	Typically chemically synthesized, but “polymers” and “delivery mechanisms” (LNP, GalNAc conjugates) may be covered themselves if they require a biological system to produce or modify.	Likely covered if bio-produced.
Small molecules	Listed as an example of a “pharmaceutical compound.” Covered where made by fermentation or cell culture or other biological systems.	Covered if bio-produced; otherwise may not be covered.
Peptides	Recombinant and cell-line produced: treated like proteins. Synthetic: treated like small molecules.	Follows the production route.
AI drug discovery, bioinformatics, lab automation, sequencing	Separate prohibited categories.	Covered regardless of modality.
Contract development and manufacturing organization (CDMO) / biomanufacturing	“Produce” includes manufacturing, testing, and quality assurance; biomanufacturing equipment separately listed.	Follows the method of production, i.e., does it use a biological system or component of a biological system to modify, enhance, produce, or control the compound.

What Is and Is Not Covered

Our assessment, assuming a Chinese licensor engaged in a prohibited technology and a closing after the effective date:

Deal feature	Status after effective date	Practical point
Cash license: upfront, milestones, royalties; no equity	Not covered unless a JV	Licensing is outside the rule unless it is a covered transaction or used to evade.
Licensee issues its own shares to the Chinese licensor, including a Newco co-formed with licensor, which contributes the asset for equity	Possibly prohibited (JV)	Could result in a JV. Could also make the licensee a “covered foreign person” (see below). CFIUS may also be relevant.
Licensee buys shares, warrants, or notes of the licensor (or its offshore affiliates)	Prohibited	Unless listed shares with no governance rights beyond standard minority protections, or an exemption.
Co-development with cost-sharing and profit-and-loss split	Possibly prohibited (JV)	May potentially be treated as a JV. Prefer cost reimbursement plus royalties.
JSC/JDC where licensee has final say	Not likely covered	Approval and tie-break rights drive JV and control analyses.
Licensee buys chemistry manufacturing and control, supply, or contract research organization (CRO) services from licensor	Not covered	Avoid convertible prepayments, equitylike loans, and funding licensor capacity.
Licensee funds a People’s Republic of China (PRC) plant or new PRC program of its own	Likely prohibited (greenfield)	Funding to “maintain” preexisting operations is excepted; scope unsettled.

Penalties and Enforcement

• Civil penalties of up to the greater of $250,000 (inflation-adjusted) or twice the value of the transaction.
• Compelled divestment. Treasury can require a U.S. person to unwind a prohibited investment. The rule does not declare the transaction void, but divestment is the practical equivalent.
• False statements to Treasury are subject to 18 U.S.C. § 1001. The COINS Act itself does not provide criminal penalties, and Treasury bears the burden of proof.
• Knowledge standard. Liability turns on what a U.S. person knew, had reason to know, or would have learned through a “reasonable and diligent inquiry.” Contractual representations help but are not a safe harbor.
• 30-day notice. A U.S. person that learns after closing of facts that would have made the deal covered must notify Treasury within 30 days. This notification does not preclude Treasury from determining the U.S. person had the requisite knowledge at the time of the transaction and requiring divestment.
• Voluntary self-disclosure is a mitigating factor but must now include a mitigation proposal, which may include divestment or disgorgement of profits.
• Indirect and evasive structures (intermediaries, structures that “obfuscate or conceal” a U.S. person’s role, or arrangements made to evade) are treated as covered.

What to Do Now

U.S. Companies

• Pipeline deals. Identify signed or near-signing deals with licensor equity, warrants, milestone share purchases, NewCo equity, or profit-sharing, and plan to complete them before the effective date.
• Contract terms. Add a change in law clause substituting cash for any equity that becomes prohibited, keep the licensee’s final say in its territory, and prefer cash and royalties to profit and loss sharing.
• Diligence. Obtain licensor representations on ownership, listing status, and technologies, keep a diligence file, and recuse U.S. person directors and officers who sit on non-U.S. company boards or collaboration committees.
• Investment Entities. U.S. persons cannot knowingly direct a non-U.S. entity to make an investment that would be prohibited or notifiable if undertaken by a U.S. person.
• NewCos. Treat any NewCo with a Chinese licensor as the highest-risk structure, and review portfolio companies and fund commitments for Chinese ownership.

Chinese Companies

• Plan for cash. Expect U.S. counterparties to replace equity, warrants, and NewCos with cash and royalties and to ask for change in law clauses. Decide your fallback now, and close any equity deal with a U.S. party before the effective date.
• Be ready. Prepare a standing diligence package on ownership, principal place of business, listing status, and technologies, and expect licensee final say and cap table limits. Most U.S. investment in a private covered company would be prohibited after the effective date.

Companies Outside the United States and China

• Map U.S. touchpoints. The rule reaches U.S. subsidiaries, U.S. person executives who direct a transaction, and U.S. investors, so steps should be taken to ensure compliance and minimize direct or indirect U.S. person involvement.
• Map China touchpoints. To avoid being treated as a covered foreign person, ensure Chinese holdings on your cap table are below 50%; ensure that you do not obtain more than 50% of your capex, opex, revenue, or income from any Chinese biotech company; and otherwise avoid Chinese control.

Questions and Answers

1. Can a U.S. company still in-license a drug candidate from a Chinese biotech?
   Yes. A license for upfront, milestone, and royalty payments is not a covered transaction unless it has other features that result in a JV or another type of covered national security transaction. The analysis changes if the deal adds an equity or loan component, for example, licensor equity or warrants, equitylike loans, a profit-and-loss-sharing collaboration, funding of PRC facilities, or payments structured to evade the rule.
2. Can the licensee issue its own shares to the Chinese licensor as part of the consideration?
   Unclear, as it is possible that Treasury would view the license plus equity as the formation of a JV. In addition, (i) the issuance must not be paired with the licensee acquiring licensor shares (e.g., a share swap); (ii) the issuance can make the licensee a covered foreign person, which would bar later U.S. investment; and (iii) CFIUS may also be an issue.
3.  Is there a “safe” percentage of licensor equity in the licensee?
   No. Staying below 50% on all three metrics avoids the ownership test, but the control test and the JV prong can apply at any percentage.
4. Can the licensee also buy shares in the Chinese licensor?
   Not after the effective date if the licensor is private, absent a national interest exemption. Listed shares bought without governance rights beyond standard minority protections should fall within the publicly traded securities exception; a board seat would take the investment outside such exception.
5. What about warrants or milestone-triggered share purchases?
   Acquiring a warrant after the effective date is itself covered, and each later purchase is a separate transaction tested at its own closing. Instruments acquired before the effective date should not be caught by the conversion prong as proposed. Build in a cash fallback for any post-effective-date share purchase.
6. Our client is forming a Delaware NewCo with U.S. VCs, and the licensor will contribute the asset for 30% and a board seat. Is that prohibited?
   Probably prohibited. With these facts, the U.S. investors’ entry into a JV with a covered foreign person is likely a covered transaction. To avoid this conclusion, reduce JV indicia (cash and royalty economics, no joint management), and aim to close before the effective date.
7. Can we keep joint steering committees?
   Probably yes, provided that the Chinese partner cannot direct decisions or policies. Give the licensee final authority in its territory, limit the licensor’s final say to its own territory and narrow protective matters (e.g., global safety), and keep the committee consultative. A licensor with approval or tie-break rights over the licensee’s development plan, budget, or regulatory strategy creates the most risk.
8. Is a 50/50 co-development and profit-share deal a problem?
   Yes. It is the contractual structure most likely to be treated as a JV, which would make it prohibited for U.S. participants. Prefer cost reimbursement plus royalties, or seek Treasury feedback or an exemption.
9. Can the licensee run China development through its own PRC subsidiary or a Chinese CRO?
   A Chinese CRO or CDMO engaged for services is a procurement contract and is not covered. A U.S. licensee generally cannot set up a new PRC subsidiary, or start a new covered program in an existing one, without an exemption. Funding to “maintain” operations that existed before the effective date is excepted, but Treasury has not decided whether that permits upgrades or expansion.
10. Does the rule apply to a European or Japanese licensee?
    Not directly, but the issue can come up in the following ways: (1) The licensee’s U.S. subsidiaries are subject to the restrictions; (2) if the European or Japanese licensees are subsidiaries of U.S. parents, then the parents must take steps to ensure that subsidiaries do not engage in transactions that would be prohibited if undertaken by a U.S. person; and (3) U.S.-person executives may not knowingly direct transactions that would be prohibited if undertaken by a U.S. person.
11. Can we get advance comfort from Treasury?
    Two routes: (i) nonbinding feedback from Treasury’s Office of Investment Security on whether a specific deal is prohibited, available only once material terms are in a binding document; and (ii) a national interest exemption, for which “U.S. public health needs” is an express factor. We expect national interest exemptions to be rare.
12. Should clients comment by December 7, 2026?
    Clients with active China licensing programs should consider it, directly or through industry associations (comments are public). Treasury expressly asked whether “pharmaceutical compounds” should be narrowed to “advanced or frontier” technologies. Useful asks include excluding synthetic small molecules, confirming that licenses and stock issued as license consideration are not JVs, a safe harbor for joint committees, and a streamlined public-health exemption.
    

The above analysis is focused only on the proposed regulations. It does not address other rules and regulations, such as the regulations related to the CFIUS, China’s Outbound Direct Investment rules, or China’s proposed regulation on prohibition and limitation on the export of certain technologies.

 

This Update is based on the proposed rule and Treasury’s Fact Sheet and FAQs of October 22, 2026, and may change in the final rule. It is for informational purposes only and is not legal advice.