On February 28, 2023, the U.S. Department of Commerce (“Commerce”) released details on the application process for projects to construct, expand or modernize commercial facilities for the production of leading-edge, current-generation, and mature-node semiconductors. This includes both front-end wafer fabrication and back-end packaging (see CHIPS Incentives Program – Commercial Fabrication Facilities). Awards will take the form of direct funding, federal loans, and/or federal guarantees of third-party loans.
Commerce will be releasing separate Notices of Funding Opportunity (NOFO) for semiconductor materials and equipment facilities in the late spring, and one for research and development facilities in the fall. Direct funding for all three NOFOs is available in an amount up to $38.22 billion and up to $75 billion in direct loan or guaranteed principal amounts.
Below is a detailed discussion of eligible projects, amount and types of funding, the application process and timing, evaluation criteria and restrictions for awardees. Notably, however, Commerce has left many important questions unanswered. Neither the NOFO nor the fact sheets provide guidance on the manufacturing clawback or the technology clawback.
With regard to the manufacturing clawback, the NOFO simply states the following:
Under the CHIPS Act, a successful applicant must enter into an agreement specifying that during the 10-year period beginning on the date of the award, it may not engage in any significant transaction involving the material expansion of semiconductor manufacturing capacity any foreign country of concern, except under certain limited conditions. Additional information on the implementation of this provision will be provided to applicants prior to award.
For the technology clawback, the NOFO provides:
Under the CHIPS Act, the Department shall recover the full amount of an award provided to a successful applicant if, during the applicable term with respect to the award, the applicant knowingly engages in any joint research or technology licensing effort (i) with a foreign entity of concern; and (ii) that relates to a technology or product that raises national security concerns, as determined by the Department and communicated to the applicant before engaging in such joint research or technology licensing. Additional information on the implementation of this provision will be provided to applicants prior to award.
For many potential applicants, answers to these questions will be critical to a decision to invest in the application process. Commerce notes in the Frequently Asked Questions that the Department “will be issuing, and requesting public comments on, a proposed rule on the guardrails. The proposed rule will define important terms related to the national security limitations and lay out procedures for funding recipients to notify the Department of any planned transactions involving expansion of semiconductor manufacturing in foreign countries of concern."
Eligible Projects under Current NOFO
1. Leading-Edge Facilities that utilize the most advanced front-end fabrication processes which achieve the highest transistor and power performance. For logic, this currently includes facilities that produce semiconductors at high volumes using extreme ultraviolet (EUV) lithography tools. For memory, this currently includes facilities capable of producing 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.
2. Current-Generation Facilities that produce semiconductors that are not leading edge, up to 28 nm process technologies, and include logic, analog, radio frequency and mixed-signal devices. New and expanded current-generation front-end fabrication facilities will deliver manufacturing capacity for current-generation semiconductor technologies, as well as new and specialty technologies such as devices based on compound semiconductor materials.
3. Mature-Node Facilities that fabricate generations of (a) logic and analog chips that are not based on FinFET, post-FinFET transistor architectures or any other sub-28 nm transistor architectures; (b) discrete semiconductor devices such as diodes and transistors; (c) optoelectronics and optical semiconductors; and (d) sensors.
4. Back-end Production Facilities for the assembly, testing or packaging of semiconductors that have completed the front-end fabrication process. This category includes advanced packaging of semiconductors.
Amount and Types of Funding Available
Direct Funding. Commerce “expects” that direct funding from the U.S. government using CHIPS Act funding will only constitute 5-15 percent of total project costs. However, there “is no fixed amount for how much a project can receive in CHIPS Direct Funding.” Commerce expects that the level of support from CHIPS Direct Funding will vary based on the specific characteristics of individual projects and the 5-15 percent range for funding may be higher if a project is not eligible for the Investment Tax Credit.
Loans and Loan Guarantees. There is no fixed limit on the loans or guarantees that a project may receive. Loans and loan guarantees will be used by Commerce “to provide debt financing that is not available on comparable terms on the private market.”
Commerce expects that the total amount of a CHIPS Incentives Award, inclusive of direct funding and the principal amount of loans and loan guarantees, will not exceed 35 percent of project capital expenditures
The Application Process and Timing
1. Statement of Interest (SOI). SOI will be required for all applicants for all three NOFO (including semiconductor materials and equipment facilities and research and development facilities) and is currently open for submissions for all potential applicants. SOIs must be submitted at least 21 days prior to submitting a pre-application or full application, but will not be used for the purpose of award evaluations.
2. Pre-Application (optional). For leading edge facilities (as defined above), the optional pre-application process opens on March 31, 2023. For current-generation, mature-node and back-end production facilities, optional pre-applications will be accepted on a rolling basis beginning on Monday, May 1, 2023. If a pre-application is submitted, a full application cannot be submitted until after an applicant receives written feedback from Commerce on its pre-application submission.
3. Full application. Full applications for leading edge facilities will be accepted on a rolling basis beginning on Friday, March 31, 2023. Full applications for current-generation, mature-node and back-end production facilities will be accepted on a rolling basis starting Monday, June 26, 2023.
4. Issuance of non-binding Preliminary Memorandum of Terms. If Commerce determines that a full application is reasonably likely to receive an award, Commerce will issue a non-binding Preliminary Memorandum of Terms to the applicant.
5. Due diligence. Commerce will require the applicant to provide additional information on national security, financial, environmental and other issues. If Commerce intends to initiate an environmental review, the Department will request that the applicant, under the supervision of the Department, prepare required documentation (e.g., a draft environmental assessment or draft environmental impact statement), technical studies and consultations, and provide other information as requested. Commerce will engage outside advisors, consultants and/or attorneys at the due diligence stage, and the applicant will be responsible for their fees and costs.
6. Award negotiation. Changes and negotiations relative to the non-binding Preliminary Memorandum of Terms based on new or additional information identified during the due diligence phase and further negotiations.
7. Award.
Evaluation Criteria
Applications will be qualitatively evaluated based upon the following six criteria with the first criteria—the extent to which the application addresses the program’s economic and national security objectives—of primary importance and receiving the greatest weight:
1. Economic and National Security. Evaluators will assess how an application (1) advances economic security by building sustainable domestic capacity that reduces U.S. reliance on vulnerable or overly concentrated production, and (2) addresses national security considerations, including by securing supply chains for technologies used by government organizations and their contractors.
2. Commercial Viability. Evaluators will assess the project’s long-term commercial viability to ensure there is a reasonable market environment and demand for the project’s output.
3. Financial Strength. Evaluators will assess the project’s financial strength and its ability to withstand stress in market downturn conditions.
4. Technical Feasibility and Readiness. Evaluators will assess the feasibility of execution of the project from construction to ongoing operational execution and maintenance, including organization readiness, the likelihood of technical and manufacturing execution success, construction plan, and environmental risk.
5. Workforce Development. Evaluators will assess the degree to which the workforce development plans set out a coherent, achievable, and equitable strategy to address talent needs and generate the workforce needed to execute on the applicant’s project goals.
6. Broader Impacts. Evaluators will assess the degree to which the proposed project will provide broader public impacts, including the following:
a. Stock buybacks. Applicant’s commitments to refrain from or limit stock buybacks over the next five years.
b. Research and Development (R&D). Commitment to building domestic R&D facilities (and in participating in other major R&D efforts in the United States) to ensure process technology innovation is occurring in the United States, including commitment to support CHIPS R&D programs such as the National Semiconductor Technology Center (NSTC) and National Advanced Packaging Manufacturing Program (NAPMP) and other programs that strengthen and advance U.S. leadership in R&D.
c. Diverse and Underserved Suppliers. Quality and comprehensiveness of the applicant’s strategy for engaging with small, minority-owned, veteran-owned and women-owned businesses as strategic partners, suppliers or contractors or subcontractors.
d. Climate and Environmental Responsibility. Quality of the applicant’s climate and environmental responsibility plan, including renewable energy use, climate resilience, water conservation, sustainability transparency and addressing environmental justice concerns.
e. Local Community Investments. Quality and comprehensiveness of the applicant’s plans to develop local community investments that will drive regional equity and inclusion and broad-based growth.
f. Buy America. Strength of intent to use domestically produced iron, steel and construction materials.
Restrictions and Additional Requirements
The Department of Commerce has not released any actual terms and conditions that will be applicable to these awards and have not clarified whether existing regulations under 2 C.F.R. § 200 et. al. will apply to these awards. The NOFO, however, does include the following notable restrictions and requirements.
1. Demonstration that CHIPS Incentive Required for U.S. Investment. Applicants must demonstrate how the CHIPS Incentives requested will incentivize the applicant to make investments in facilities and equipment in the United States that would not occur in the absence of the CHIPS Incentives.
2. Covered Incentive. Each applicant must provide a letter from a state or local government entity to demonstrate that they have been offered a qualifying covered incentive, indicating the estimated size and nature of the incentive. The offer of a covered incentive may be contingent; if so, any contingencies need to clearly be specified in the letter. A “covered incentive” may take many forms, including a tax incentive for the purposes of constructing, expanding, or modernizing a facility within that jurisdiction. A covered incentive can also take the form of a workforce-related incentive (including a grant agreement relating to workforce training or vocational education), any concession with respect to real property, funding for research and development with respect to semiconductors, or any other incentive determined appropriate by the CHIPS Program Office.
3. Childcare. Any applicant requesting CHIPS direct funding over $150 million must provide a plan for access to child care for facility and construction workers, e.g., through on- or near-site child care, pre-arranged agreements with existing child care providers, child care subsidies or other similar measures.
4. Sharing in Profits. Recipients receiving more than $150 million in CHIPS direct funding will be required to share with the U.S. government a portion of any cash flows or returns that exceed the applicant’s projections.
5. Foreign Control. Each applicant must identify any foreign entity that exercises control over the applicant or a proposed project or has access to confidential information about the proposed project. The applicant should also identify any potential transactions occurring during the application process that could result in such control by a foreign entity or sharing of confidential information with a foreign entity.
6. Davis-Bacon Act. All laborers and mechanics employed by the applicant, sub recipients, or contractors or subcontractors in the performance of construction, alteration, or repair work funded in whole or in part under the NOFO shall be paid Davis-Bacon Act wages.
We look forward to discussing these and other issues with you during our webinar on Thursday, March 2 from 4:00 p.m. – 5:30 p.m. EST. To register for this webinar, please click here.
