The Department of Commerce’s (Commerce’s) National Institute of Standards and Technology has officially released final rules to bolster the national security measures implemented as part of the Creating Helpful Incentives to Produce Semiconductors (CHIPS) Act. The comprehensive and detailed guidelines establish criteria for limiting beneficiaries of CHIPS Act funds from increasing semiconductor manufacturing facilities in foreign countries of concern for 10 years after receiving the award, among other regulations.

The final rules also bar beneficiaries from introducing new production lines or cleanroom space that result in a facility’s manufacturing capacity expanding by more than 10% in a “foreign country of concern.” Additionally, the rules identify a list of semiconductors vital to US national security. These include chips essential for military use, quantum computing, and those utilized in radiation-intensive environments. The final rules outline limitations on joint research and technology licensing endeavors with foreign countries of concern.

During a September 19, 2023 hearing held by the House Science, Space and Technology Committee, Commerce Secretary Gina Raimondo committed that “no application will be approved or money sent out the door until the guardrails are finalized.” Now that the final rules have been released, Commerce is expected to move forward with reviewing and approving applications to begin disbursing funding to recipients.

The rules are expected to become effective 60 days after publication in the Federal Register, which will make them effective on November 24, 2023.

UPDATES TO KEY DEFINITIONS

The guardrails outlined in the final rules are integral to securing the semiconductor manufacturing ecosystem and are a culmination of deliberation and feedback from a diverse array of stakeholders, including multinational semiconductor companies, trade associations, and a foreign government.

Based on the provided feedback and insights, Commerce made updates to the following definitions originally introduced in the proposed rules.

Affiliate

This definition was removed from the final rules.

Applicable Term

Commerce removed this definition from the final rules, explaining that the term of an award will depend upon the particular award, and the applicable term of a particular award will be articulated in the relevant award documents.

Existing Facility

The final rules explain that certain facilities that are undergoing construction, expansion, or modernization may be considered existing facilities under specified conditions, and that the baseline manufacturing capacity of the existing facilities at the date of the award will be addressed in the covered entity’s required agreement.

Joint Research

Commerce excluded several activities from the definition of “joint research,” specifically:

• An exception to the Technology Clawback[1] for joint research related to standards was added to the final rules so that US entities could continue to participate in international collaborative efforts in standards organizations;
• Research and development conducted exclusively between employees of a covered entity or between entities that are related entities of the covered entity are not considered joint research;
• Joint research and development related to warranty, service, and customer support performed by a covered entity is excluded; and
• Research, development, or engineering involving drawings, designs, or related specifications for products to be purchased and sold between two or more persons are excluded to account for outsourced manufacturing activities. Commerce also added a narrow exemption for joint research, development, and engineering related to manufacturing processes for existing products to enable use of assembly, test, or packaging services for integrated circuits.

Legacy Semiconductor

The final rules modify the definition of “legacy semiconductor” to include additional categories. As such, under the final rules, the following categories are not considered “legacy semiconductors” and would be subject to the guardrails.

For the purposes of a semiconductor wafer facility: (1) a silicon wafer measuring 8 inches (or 200 millimeters) or larger in diameter; or (2) a compound wafer measuring 6 inches (or 150 millimeters) or larger in diameter.

For the purposes of a semiconductor fabrication facility: (1) a digital or analog logic semiconductor that is newer than the 28-nanometer generation (i.e., has a gate length of less than 28 nanometers for a planar transistor); or (2) a memory semiconductor with a half-pitch less than 18 nanometers for DRAM or more than 128 layers for NAND flash that uses emerging memory technologies (e.g., transition metal oxides, phase-change memory, perovskites, or ferromagnetic materials relevant to advanced memory fabrication).

For the purposes of a semiconductor packaging facility: a semiconductor that utilizes advanced three-dimensional integration packaging. Additionally, semiconductors designated as critical to national security (as further defined in section 231.118 that include, for example, semiconductors utilizing nanomaterials, compound and wide- and ultra-wide bandgap semiconductors, RHBP semiconductors, FD-SOI semiconductors, silicon photonic semiconductors, and semiconductors designed for quantum information systems) are subject to the prohibitions. A semiconductors with a post-planar transistor architecture or utilizing advanced three-dimensional integration packaging (such as by directly attaching one or more die or wafer, through silicon vias, or through mold vias) are also subject to the prohibitions.

Material Expansion

The final rules added “cleanroom or other physical space” to the definition, explaining that such metric better captures the concept of material expansion and is substantially easier to monitor, helping to prevent evasion of the restriction.

Owned By, Controlled By, or Subject to the Jurisdiction, or Direction of

This definition has been removed and incorporated into the definition of “foreign entity of concern,” which is limited to countries that are listed in 10 USC § 4872(d) (currently North Korea, China, Russia, and Iran), and applies to citizens, nationals, or residents of those countries while they are in any of those countries.

The final rules also clarify that a person holding, directly or indirectly by any combination of persons, at least 25% of outstanding voting interest in foreign entities of concern is also a foreign entity of concern itself.

Required Agreement

The final rules amend the definition of “required agreement” to allow for the Secretary of Commerce and a covered entity to amend the required agreement by mutual consent, consistent with law.

Specifically, the required agreement will memorialize (1) the covered entity’s existing facilities in foreign countries of concern; (2) ongoing joint research or technology licensing with a foreign entity of concern that relates to a technology or product that raises national security concerns; and (3) any additional restrictions that are necessary to prevent the circumvention of the Technology Clawback.

Semiconductor Manufacturing

The final rules clarify that semiconductor wafer production is also within the scope of semiconductor manufacturing. According to Commerce, semiconductor wafer production includes the processes of wafer slicing, polishing, cleaning, epitaxial deposition, and metrology. These definitions are narrow enough to encompass a wide range of transactions, but also allow recipients the ability to maintain their “existing facilities” without violating the rules.

Semiconductor Manufacturing Capacity

Because the number of stacked wafers produced is far smaller than the number of wafers started (wafers are stacked and combined), the final rules clarify that the capacity for semiconductor fabrication facilities for wafers designed for wafer-to-wafer bonding structure is measured in stacked wafers per year. The final rules also modified the definition to measure manufacturing capacity in wafers per year, instead of on a monthly basis.

Semiconductors Critical to National Security

Commerce declined to remove entirely FD-SOI (fully depleted silicon on insulator) semiconductors from the list of semiconductors critical to national security. However, Commerce made a narrow carveout, consistent with the definition of legacy semiconductors, and removed from the list those FD-SOI semiconductors that relate to semiconductor packaging operations with respect to semiconductors of a 28-nanometer generation or older.

Commerce clarified that semiconductors that are specially designed or processed to be resistant to radiation are considered semiconductors critical to national security.

Significant Transactions

The final rules removed the proposed definition of “significant transactions,” which was defined in the proposed rules as $100,000 in aggregate over the applicable term of the required agreement. In so doing, Commerce acknowledges that different thresholds for significant transactions may be appropriate for different applicants, and anticipates further guidance to be issued.

Significant Renovations

The final rules define “significant renovations” as building new cleanroom space, adding a production line, or other physical space to an existing facility that, in the aggregate during the applicable term of the required agreement, increases semiconductor manufacturing capacity by 10% or more.

Technology Licensing

The final rules clarify that (1) patents have been excluded from the scope of technology licensing under the Technology Clawback; (2) technology licensing for intellectual property licenses relating to the use of a product that is sold by a covered entity or a related entity is not prohibited; (3) outsourcing of manufacturing or packing of semiconductors is not prohibited; and (4) transactions conducted exclusively between employees of a covered entity or among entities that are related entities of the covered entity are not restricted.

UPDATES TO THE GUARDRAILS PROVISIONS

The guardrails were deemed essential to implement before any application approvals or fund disbursements under the CHIPS Act. The final rules also made several noteworthy updates, revisions, and clarifications to the provisions.

Additional Conditions on Certain Joint Research or Technology Licensing

The Secretary may impose conditions on a covered entity to mitigate the risk of circumvention of the Technology Clawback. Such provisions would allow the Secretary to recover the entire federal financial award or impose lesser consequences, such as requiring a mitigation agreement, if any related entity engages in joint research or technology licensing that would violate the Technology Clawback if engaged in by the covered entity.

Requiring Notifications of Significant Transactions

Recipients of awards will be required to notify Commerce of any significant transaction involving expansion of facilities with a foreign country of concern and must provide information about the parties and transaction details. If Commerce determines that a transaction would violate the guardrails, mitigation measures may be implemented. As explained, Commerce anticipates issuing further guidance on the thresholds for significant transactions.

Permitting Expansion of Legacy Facilities in Foreign Countries of Concern

The final rules uphold that recipients planning to expand their legacy facilities must notify Commerce to confirm compliance with the guardrails. However, the final rules now permit a 5% increase in semiconductor manufacturing capacity for ordinary course investments and facility improvements for all existing facilities.

Designating Semiconductors as ‘Critical to National Security’

Based on consultation with defense and intelligence agencies, Commerce classified certain semiconductors as “critical to national security,” including chips used for quantum computing, in radiation-intensive environments, and for military capabilities. As a practical effect, both recipients of CHIPS Act funding and other companies involved in the manufacturing of these semiconductors are now subject to closer scrutiny from the US government.

Restricting Joint Research and Technology Licensing Efforts with ‘Foreign Entities of Concern’

The rules clarify that recipients of funding cannot engage in these activities for products that raise national security concerns if working alongside a foreign entity of concern (including companies on the Entity List[2] and NS-CMIC List[3]). Given the broad definition of “foreign entities of concern” provided under Section 231.103, even minority equity interest holders and joint research or technology licensing partners could fall within the criteria for “foreign entities of concern” articulated in the rules.

Nevertheless, the rules lay out some narrow exceptions, allowing activities relating to international standards, packaging services, and research and development efforts involving two or more entities to establish or apply a specification for a product to be sold between such entities.

Identifying New Categories for ‘Legacy Semiconductor’

The rules state that, no later than August 9, 2024, and every two years thereafter for the remaining eight years after the final award is granted, Commerce will seek comment and produce a public notice identifying any additional semiconductors to include in the definition of “legacy semiconductor.” This practice will ultimately narrow the types of semiconductors and facilities excepted from the scope of “material expansion.”

CONCLUSION

The final rules indicate that Commerce is taking a holistic approach, including incorporating feedback from diverse stakeholders, to attempting to create a balanced semiconductor manufacturing ecosystem, considering both national security imperatives and industrial advancements.

Under the final rules, Commerce clarified that maintaining the present production capacity in factories in “foreign countries of concern” would still be possible under certain circumstances, and the dropping of the capped spending on investments at $100,000 will likely be regarded as a positive sign by the industry.

On the other hand, the final rules remained cognizant of national security, tightening restrictions on certain semiconductors critical to national security, including quantum computing current-generation and mature-node chips, in radiation-intensive environments, and for other specialized military capabilities.

The periodic evaluation requirements also embody a flexible yet responsive framework, to adapt to technological innovations in the semiconductor manufacturing industry while still prioritizing national security.

Companies applying for the CHIPS Act incentive program, and counsel advising them, should be prepared to address the funding and research restrictions during the application and due diligence phases.

For companies that have already applied for funding and anticipate receiving awards, issuance of the final rules indicates those companies are one step closer to receiving the funds, which also means companies should be prepared to establish and implement relevant compliance programs to ensure they do not inadvertently run afoul of the CHIPS Act funding requirements.

[1] The “Technology Clawback” prohibits a covered entity from knowingly engaging in any joint research or technology licensing effort with a foreign entity of concern that relates to a technology or product that raises national security concerns as determined by the Secretary and communicated to the covered entity before the covered entity engages in such joint research or technology licensing.

[2] The Bureau of Industry and Security publishes the Entity List, which provides the names of certain non-US persons—including businesses, research institutions, government and private organizations, individuals, and other types of legal persons—that are subject to specific license requirements for the export, reexport, and/or transfer (in-country) of specified items. The persons on the Entity List are subject to individual licensing requirements and policies supplemental to those found elsewhere in the Export Administration Regulations.

[3] The Non-SDN Chinese Military-Industrial Complex Companies List, or NS-CMIC List, is the Department of the Treasury’s list that restricts US persons from purchasing or selling publicly traded securities of companies designated as operating or having operated in the defense and related material sector or the surveillance technology sector of the economy of the People’s Republic of China.

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