The Department of Commerce (the “Department”) announced the launch of the first Notice of Funding Opportunity (“NOFO”) under the CHIPS Act’s incentive program.1 This program aims to strengthen the U.S. semiconductor supply chain through federal grants, loans, and loans guarantees. Entities, including private and public-private consortia can request funding to construct, expand, or modernize semiconductor facilities in the United States. While this first NOFO is limited to a specific group of facilities, the Department also announced that it will launch two more encompassing additional groups of facilities in 2023. Applications for semiconductor materials and manufacturing equipment facilities are expected to open late spring and research and development facilities in the fall. Companies in the semiconductor industry should consider the application criteria and compliance requirements in order to maximize the opportunity and be prepared for significant government oversight in operations that intertwine with other government agencies export control efforts.
I. Funding Opportunity
Under the recently announced NOFO, the Department seeks to fund facilities that test, fabricate, assemble, package, and produce a limited type of semiconductors. Only facilities with the following capabilities are currently eligible to apply:
- Leading-Edge – Production of 1) logic, using extreme ultraviolet (“EUV”) lithography tools; 2) for memory, 3D NAND flash chips with 200 layers and above, and/or dynamic random-access memory (“DRAM”) chips with a half-pitch of 13 nm and below.
- Current-Generation – Production of semiconductors up to 28 nm process technologies, and include logic, analog, radio frequency, and mixed-signal devices.
- Mature-Node – Production of 1) logic and analog chips that are not based on FinFET, post-FinFET transistor architectures, or any other sub-28 nm transistor architectures; 2) discrete semiconductor devices such as diodes and transistors; 3) optoelectronics and optical semiconductors; and 4) sensors.
- Back-end Production – The assembly, testing, or packaging of semiconductors that have completed the front-end fabrication process, including advanced packaging of semiconductors.
Of note, the purpose of the funding is to “incentivize” investment, not subsidize entire projects. Similarly, the requirements outlined in the first NOFO reflect the Department’s intention to award funds to applicants that are not primarily reliant on federal funding. As such, federal funding for each individual project is capped at $3B, barring exceptional circumstances. Applicants can generally expect to receive grant awards ranging between 5 percent to 15 percent of the projected capital expenditures, which will be paid overtime as certain agreed milestones are achieved. Other types of funding including loans, loan guarantees, and tax credits are excluded from this calculation.
Although there is no fixed limit on the loans or loans guarantees an applicant may receive, the stated purpose of this type of funding is to “supplement and not substitute for private funding.” Before considering a loan or loan guarantee, applicants should ensure comparable financing is not available to them via private funding. Moreover, the Department’s personnel emphasized that this type of funding will be subject to rigorous underwriting and due diligence. In contracts with other federal loan programs from recent memory, loans and loans guarantees will only be issued if the Department determines the applicant has reasonable prospects of repaying the principal and interests.
II. Qualification Requirements
During the review process, applicants are required to demonstrate how the requested funding will result in investments that the applicant would not have otherwise undertaken without the incentive. For example, applications for expansions and modernization will be assessed based on the size of the proposed investment relative to current production capacity.
Applicants must also be able to show a “documented interest” in pursuing the proposed construction, expansion, or modernization. At the outset, applicants must have determined the types of semiconductors the facility will produce or package. This requirement also entails identifying the customers (or categories of customers) that will be targeted by the facility’s output.
Further, the Department will only find that an applicant meets this criterion after it has:
- Been offered an incentive from a state or local jurisdiction where the project is located;
- Made commitments to invest in training and education benefits that expand employment for economically disadvantaged individuals;
- Secured commitments from educational institutions of higher education to provide workforce training for economically disadvantaged individuals; and
- Documented its workforce needs and produced a strategy to meet such needs.
To meet these requirements, the NOFO indicates that applicants must describe how the facility will meet the Good Jobs Principles.2 This initiative outlines the approach applicants should take regarding the recruitment, hiring, and management of the facility’s construction and operating workforce. In particular, applicants must submit a “workforce development plan” that emphasizes recruitment and hiring from underserved communities. The management of the facility’s workforce should also highlight that the applicant will allow labor unions and prohibit retaliation based on related concerted activities. Besides being a requirement, abiding by the Good Jobs Principles may serve as a strong marketing tool to rally community support for the facility. This may also provide leverage to obtain additional economic incentives from state or local governments.
The Department will also determine whether there is a documented interest by requiring specific protocols in place. While not specifically stated in the NOFO, applicants may want to consider the following requirements by giving significant weight to one of the main legislative objectives of the CHIPS Act—strengthening national security. Applicants must have “an executable plan” for the sustainable operation of the facility without additional federal funding and to mitigate potential supply chain security risks. Finally, applicants will be required to have policies and procedures in place to prevent the “cloning, counterfeiting, and relabeling of semiconductors” produced at the facility.
III. Compliance Requirements
Approved funding, whether in the form of grants, loans, and loans guarantee, may only be used for certain eligible uses. The application must specify in detail the proposed use of the funding which must comply with listed eligible uses. Funding may be used to develop the facility’s site and workforce, finance the facility and equipment, and pay for reasonable operating expenses. The Department will determine which specific operating expenses are considered reasonable for each applicant, likely using traditional government contracting and Office of Management and Budgeting criteria. The NOFO anticipates that not all activities requested in the applications will be eligible for funding.
In addition, applicants should be aware of the explicitly stated restrictions placed on both—the applicant and the funds—by the statutory language of the CHIPS Act. Approved applicants are prohibited from engaging in any “significant transactions” involving the expansion of semiconductor manufacturing capacity to foreign countries of concern3 for a period of 10-years. This prohibition will be enforced by a written agreement between the Department and the approved applicant. As this is likely a material condition of funding, the failure to comply could lead to significant False Claims Act liability and potential exposure to treble damages. As the concept of “significant” is subjective, recipients must have robust compliance programs in place to engage in firewalls and potential decoupling of supply chains through certain countries, most importantly, China.
Specifically, during the applicable funding period, approved applicants cannot engage in any joint research or technology licensing with a foreign entity of concern4 involving technology that raises national security issues as determined by the Department. Failure to abide by this provision allows the Department to clawback the full amount of the award. The NOFO indicates that additional information about these restrictions will be provided to the approved applicants before funding the award. It is expected that Foreign Ownership Control in Investments (“FOCI”) principles and the Committee on Foreign Investment in the United States (“CFIUS”) regulations may also be applicable. These, and other export control agencies, will likely coordinate to ensure compliance in this area.
The remaining restrictions on the funds are akin to what applicants may expect from other federal funding programs. The funds may not be used for facilities outside of the Unites States or to relocate a substantial amount of an existing facility already operating in the Unites States. However, funding will be approved to onshore a qualifying facility. The funds may also not be used for stock buybacks, dividend payments, or capital distributions. This is not an exhaustive list of prohibited uses. The Department has sole discretion to establish prohibited uses for the funds.
Furthermore, approved applications will be expected to comply with additional socio-economic requirements that other government contractors are already subject to. These include small business subcontracting plans, affirmative action programs, Buy American related to the sourcing of domestic content, use of labor unions, and requirements related to labor wage determinations. In addition, approved applications will likely be required to implement active ethics programs that ensure fraud, waste, and abuse reporting mechanisms. As with all recent U.S. Government funding, approved applications will likely have to meet cybersecurity requirements.
IV. Application Process
The application as outlined by the NOFO involves four main steps: 1) submitting a statement of interest; 2) pre-application; 3) full application; and 4) due diligence.
- Statements of interest are required for all applicants and must be submitted at least 21 days before a pre-application or full application is accepted. It consists of a brief description of the planned construction, expansion, or modernization.
- Pre-Applications are not required, but according to the Department’s personnel are highly encouraged. This step provides additional background including financial and environmental information. It also provides the Department with the opportunity to confirm funding edibility.
- Full Applications are required to be officially considered for funding. The application provides the Department with the bulk of information necessary to make an award determination. It should address any feedback provided during the pre-application step. Approved applicants will receive a non-binding Preliminary Memorandum of Terms.
- Due Diligence is conducted when the Department determines an approved applicant is likely to receive an award. Acceptance of the award is not a pre-requisite. The Department will request additional information from the applicant during this step.
V. Summary
The NOFO details a multi-step application process that entails disclosing to the Department extensive background, financial, environmental, and national security information. Particularly during the due diligence step. It also requires compliance with various federal statutes and regulations. Some which have recently been enacted into law. Others, such as export compliance, the Good Jobs Principles, and robust FOCI controls are well established and should be highlighted in any submission.
Furthermore, as the CHIPS Act is not designed to serve as the primary funding source, incentives from other federal agencies, state or local governments, and private funding must be considered. These other government funding sources will have separate socio-economic requirements (especially in regard to labor wages and health benefits) and reporting functions. Finally, fully understanding any milestones and complying with the award requirements will be necessary.
Applicants must remember that the source of this funding is the U.S. Government. The failure to properly complete an application and, upon receipt of funding, complying with the terms of the program can lead to liability under the False Claims Act, among others. Accordingly, experienced export compliance and government contracting counsel should be consulted to assist with the application process and to analyze the impact of accepting an award under the CHIPS Act.
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