Key Takeaways

• The CHIPS Program Office of the U.S. Department of Commerce's National Institute of Standards and Technology (“NIST”) proposed a rule that describes the expected procedure for reviewing outbound investments contemplated by the CHIPS and Science Act (the “CHIPS Act”).
• The Commerce Department may review certain overseas semiconductor-related transactions that CHIPS Act funding recipients (and/or their affiliates) are planning or have engaged in and, in response to a violation of the underlying “required agreement” with the U.S. government, may impose a mitigation agreement or else elect to claw back the recipient’s CHIPS Act funding.
• Although limited in scope, the outbound review mechanism in the CHIPS Act will require funding recipients to balance the benefits of funding against the restrictions on certain foreign investments, particularly those involving the development or expansion of semiconductor-related technology and production capacity in China. The CHIPS Act review mechanism also may provide some perspective on what to expect from the Biden Administration’s anticipated standalone outbound investment review mechanism.

Introduction

The CHIPS Act was signed into law in August 2022, and NIST is taking steps to implement the semiconductor-related incentives. On February 28, 2023, NIST published its first Notice of Funding Opportunity, notifying the public of the first round of funding opportunities for “projects for the construction, expansion, or modernization of commercial facilities for the front- and back-end fabrication of leading-edge, current-generation, and mature-node semiconductors.” Although pre-applications are recommended, NIST began accepting full applications for leading-edge facilities on March 31, 2023 and will continue to accept them on a rolling basis. NIST will begin accepting pre-applications for current-generation mature-node and back-end production facilities on May 1, 2023 and full applications on June 26, 2023 (each on a rolling basis). ¹

NIST submitted a proposed rule (the “Rule”) for public comment² on March 23, 2023, regarding the prevention of improper use of CHIPS Act funding. The Rule describes the outbound investment review mechanism to which CHIPS Act funding recipients and their affiliates will be subject. As we have discussed in our previous article, the Biden Administration is planning to establish an outbound investment review mechanism that will scrutinize certain foreign investments by any/all U.S. investors. For now, the CHIPS Act provides an outbound review mechanism (the “CHIPS Review”) on a smaller scale, as it is limited in scope to “significant” semiconductor-related transactions. At the same time, the review provisions apply not only to funding recipients but also to their affiliates. The CHIPS Review may foreshadow the Biden Administration’s approach to the imminent, broader outbound investment review mechanism.

The CHIPS Review

Under the CHIPS Act, each funding recipient must enter into a 10-year agreement (which the Rule has coined a “required agreement”) with the Commerce Department that describes the terms of the incentives, including semiconductor-related investment restrictions and, as a potential consequence if the agreement is violated, clawbacks of CHIPS Act funding allocated thereunder. The CHIPS Act contemplates two types of clawback: an expansion clawback and a technology clawback. Here we describe in detail the review process that could give rise to the expansion clawback. It should be noted that the Rule proposes a distinct review process for the technology clawback.

CHIPS Act funding recipients are required to notify the Commerce Secretary of any planned “significant transaction” involving the “material expansion” of “semiconductor manufacturing capacity” in a “foreign country of concern” by funding recipients and/or their “affiliates.”³ As currently drafted, a significant transaction constitutes a mere $100,000 investment (individually or in the aggregate) in semiconductor manufacturing capacity in foreign countries of concern, and Commerce noted that the Rule is intentionally drafted in this manner so the standard would be “clear and quantitative” to capture “even modest expansions by funding recipients of semiconductor manufacturing capacity in foreign countries of concern.” The Rule defines foreign countries of concern to include North Korea, China, Russia, and Iran and any other country the Commerce Secretary, in consultation with the Defense Secretary, State Secretary, and the Director of National Intelligence, determines is detrimental to U.S. national security or foreign policy. There are some exceptions to what may constitute a “significant transaction,” but funding recipients must notify Commerce even of such excepted transactions. Per the Rule, below is the anticipated procedure for the CHIPS Review:

Phase 1 – Notification Submission. Funding recipients must submit a notification to Commerce that includes the following information for the planned significant transaction:

• The funding recipient and any of its involved affiliates, including contact information for each;
• Identities and locations of all other parties;
• Information on the ownership of all parties, including organizational charts;
• Description of any significant foreign involvement⁴;
• Names and locations of any entity in a foreign country of concern at which semiconductor manufacturing capacity may be materially expanded by the transaction;
• A detailed description of current production, planned production, semiconductors involved, etc.; and
• If the transaction falls within an exception, additional documentation must be provided (e.g., where final products containing the semiconductors will be consumed, statement explaining the exception’s applicability, percent of sales revenue accounted for, etc.).

Phase 2 – Commerce’s Review. Upon receipt of a notification, Commerce may decide to (i) reject the notification if it does not meet all requirements or contains false or misleading information or (ii) initiate a review. Commerce may also initiate its own review of a non-notified transaction. Commerce will notify the funding recipient in writing that it will initiate a review, regardless of whether the transaction is notified or non-notified. Commerce’s initial review stage includes the following:

• Commerce has 90 days to review a notification/transaction and will consult with the Defense Secretary and the Director of National Intelligence to determine if a planned transaction violates a required agreement.
• Commerce may request supplemental information to deem a notification complete. The recipient must “promptly provide”⁵ such information and the 90-day review period will be suspended on the date of the request until Commerce receives complete supplemental information.

Phase 3 – Commerce’s Determination. On or before day 90, Commerce must provide an initial determination of whether the planned significant transaction violates the required agreement. The determination may result in one of three actions if the planned or engaged in significant transaction violates the required agreement:

• Commerce may determine that a funding recipient or its affiliate has planned or engaged in a significant transaction that violates the required agreement and poses a risk to national security; however, Commerce may negotiate a mitigation agreement with the funding recipient (if possible);
• The funding recipient may respond within 14 days and request a reconsideration and/or submit additional information; or
• Assuming the funding recipient does not respond within 14 days:
  • Commerce’s determination will be considered final;
  • Commerce will request an official, certified letter from the funding recipient’s CEO, president, or equivalent that the transaction has been abandoned; and
  • The funding recipient has 45 days to provide evidence that the transaction has been abandoned (by it and/or its affiliate(s)).

(Potential) Phase 4 – Commerce’s Expansion Clawback. The engagement in or failure to cease or abandon a planned significant transaction that violates the required agreement may result in Commerce recovering the full amount of the CHIPS Act funding plus interest from the time of the award.

Anticipated CHIPS Review Enforcement

In its discussion of the Rule, NIST indicates that it anticipates reviewing a relatively small number of notifications (likely not exceeding ten per year) and finding few, if any, violations that result in a clawback of funding. NIST’s discussion suggests that it views the clawback as a tool of last resort and that it anticipates most reviewed transactions will be cleared, with or without a mitigation agreement.

Conclusion

The Rule seeks to ensure that CHIPS Act funding is used to fund domestic semiconductor manufacturing and is not applied, in whole or in part, to overseas investments that may pose national security risks. Accordingly, prospective CHIPS Act funding applicants should be mindful of the contemplated semiconductor-related investment activities of their affiliates – including parent entities and subsidiaries as well as entities held by a common parent – to ensure such investments do not constitute significant transactions that would violate a required agreement. Although the CHIPS Review is limited in scope, it will prepare investors for the coming, broader outbound investment review mechanism.

Footnotes

1. The description of the application process for CHIPS Act funding is simplified here. Among other things, applicants should be aware they must submit a statement of interest at least 21 days before submitting a pre-application or full application. Thereafter, NIST will conduct its own due diligence and determine award issuance accordingly.
2. Even though the Rule is subject to change (NIST will continue to accept comments through May 22, 2023), the regulatory background of the Rule states there is “little flexibility for regulatory alternatives regarding the [Rule’s] provisions.”
3. Each of these terms is currently defined in the Rule, but they are subject to change after the comment period.
4. Neither the CHIPS Act nor the Rule provides a definition for “significant foreign involvement.”
5. The CHIPS Act and the Rule do not define “promptly” in this circumstance; however, the Rule includes a parenthetical tied to the use of “promptly” elsewhere in the Rule, stating “promptly (generally within three business days).”