On August 9, 2022, President Joseph R. Biden signed the CHIPS and Science Act of 2022 (the “CHIPS Plus Act”). As enacted, the CHIPS Plus Act amends legislation and appropriates funding for semiconductor incentives originally passed in the National Defense Authorization Act (“NDAA”) for Fiscal Year (“FY”) 2021, which included the Creating Helpful Incentives to Produce Semiconductors for America Act (“CHIPS for America Act”). This earlier legislation authorized a set of ambitious programs to promote the research, development, and fabrication of semiconductors in the United States.

The CHIPS Plus Act provides substantial opportunities and financial incentives to manufacturers in the semiconductor supply chain. However, applicants should understand the conditions attached to the federal grants in terms of foreign investment and sourcing limitations. The CHIPS Plus Act contains eligibility requirements and prohibitions that companies should take into account as they consider pursuing incentive funding to expand domestic manufacturing in the semiconductor supply chain. Pursuant to the new law, the U.S. Department of Commerce (“Commerce”) will establish a process to review and grant applications for funding. Applicants should carefully and thoughtfully navigate that process from legal and government policy perspectives.

Section 102 of the CHIPS Plus Act makes $52.7 billion available to private entities, non-profit entities, or public-private consortia to support the implementation of the semiconductor manufacturing provisions included in the FY 2021 NDAA. Funding is allocated among the following programs:

(1) $50.0 billion for a CHIPS for America Fund: funds will be used to fund domestic production of semiconductors, semiconductor materials, and semiconductor manufacturing equipment, and to support research and development (“R&D”) and workforce development programs authorized by the FY21 NDAA. The following appropriations are available:

a. Incentive Program (Grants, Loans, And Loan Guarantees): $39 billion to implement the programs authorized in Section 9902 of the Act, which is the core of the funding available to entities seeking to support expansion of the domestic supply chain for semiconductors. This includes funds for grants as well as the cost of direct loans and loan guarantees. The funding is designed to “incentivize investment in facilities and equipment in the United States for semiconductor fabrications, assembly, testing, advanced packaging, production, or research and development.”1 Eligible entities may apply for this funding for a variety of purposes, including:

b. Mature technology nodes: $2 billion of the $39 billion allocation for Section 9902 will fund legacy chip production technologies/facilities to support critical manufacturing industries.

c. Industry Survey and Report. Another $2.3 billion of the $39 billion for Section 9902 will go to Commerce for funding for to prepare a comprehensive industry-wide survey and report on the global semiconductor supply chain, involvement with Chinese companies, and gaps in U.S. domestic production. This assessment will require companies in the supply chain to provide substantial information to Commerce regarding their technology and global operations.

d. Commerce research and development (“R&D”) and workforce development programs: $11 billion to implement programs authorized in Section 9906, including the National Semiconductor Technology Center, the National Advanced Packaging Manufacturing Program, and other R&D and workforce development programs authorized in Section 9906.

(2) $2 billion for a CHIPS for America Defense Fund: funds allocated to the Department of Defense to establish a national network for microelectronics R&D on new materials and device prototypes, and to accelerate commercial adoption of new technologies.

(3) $500 million for a CHIPS for America International Technology Security and Innovation Fund: funds will be allocated to the Department of State, the Export-Import Bank, the International Development Finance Corporation, and other U.S. agencies to coordinate with foreign governments to support cooperation in information and communications technology security and semiconductor supply chain activities.

(4) $200 million for a CHIPS for America Workforce and Education Fund: funds will be provided to the National Science Foundation to promote growth of the semiconductor workforce source of information for companies that seek to determine their status as a critical infrastructure provider. The Act also specifies that CISA will conduct outreach to “likely covered entities” to inform them of the requirements.

Section 107 of the CHIPS Plus Act creates an advanced manufacturing investment tax credit for domestic investments in semiconductor manufacturing. The credit is equal to 25 percent of a qualified investment. A qualified investment is an investment in “a facility for which the primary purpose is the manufacturing of semiconductors or semiconductor manufacturing equipment.” Notably, this definition does not expressly include facilities producing materials used to manufacture semiconductors (i.e., input and/or raw material suppliers).

Eligibility and Considerations for Approval

The CHIPS Plus Act and the earlier CHIPS for America Act outline eligibility for grant funds. To be eligible for a grant, an applicant must:

Commerce cannot approve a grant application unless it finds the project “is in the economic and national security interests of the United States,” taking into account the type of technology produced by the applicant. Furthermore, Commerce may consider whether the project meets specific needs identified by the Department of Defense or other defense and intelligence agencies. The CHIPS Plus Act directs Commerce to prioritize grant awards that will address gaps in the domestic supply chain across a diverse range of technologies, including both advanced and mature technology nodes.

Grant recipients will be subject to a variety of other compliance obligations, including prevailing wage requirements. We expect the Biden Administration will also require applicants to provide a plan for equity issues related to economic opportunity, environmental concerns, and labor involvement.

Prohibitions Involving “Foreign Entities of Concern” and “Foreign Countries of Concern”

Section 102 of the CHIPS Plus Act prohibits using the funds for stock buybacks. Specifically, grant recipients “may not use [the funds] to purchase an equity security that is listed on a national securities exchange of such person or any parent company of such person” or “to pay dividends or make other capital distributions with respect to the common stock (or equivalent interest) of the person.”8

The full scope of program eligibility and prohibitions is not fully defined in the CHIPS Plus Act or CHIPS for America Act. As a result, companies that intend to pursue grants or tax credits should carefully assess the corporate structure and ownership of entities seeking to benefit. Affected stakeholders also should take steps now to formulate advocacy positions in any forthcoming rulemaking process regarding the implementation of the CHIPS Plus Act, and particularly how agencies will further define “foreign entity of concern” and “new manufacturing capacity.”

We expect that Commerce will issue implementing regulations with further guidance on these and other points. Agency funding announcements may also provide additional insight into agency interpretations and expectations. Industry will very likely have formal and informal opportunities to comment on proposed regulations to implements CHIPS Plus Act funding. In fact, this is one of the best avenues for companies to help shape the policy environment for the CHIPS Act programs and similar future supply chain initiatives. Affected companies should engage with policymakers as the implementation process unfolds.

Semiconductor manufacturers, upstream materials suppliers, and equipment manufacturers can greatly benefit from the grants and investment tax credits provided by the CHIPS Act to expand their U.S. production capacity. Companies should prepare for the grant process now by assessing the value of these incentives for a company’s long-term business and developing an appropriate application and advocacy strategy. As part of this, companies should monitor and develop advocacy on issues of importance to them during the comment process for implementing regulations to maximize this opportunity. Developing a plan and engaging with policymakers now will help companies lay the groundwork for successfully obtaining funding in a compliant manner.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© King & Spalding | Attorney Advertising

This website uses cookies to improve user experience, track anonymous site usage, store authorization tokens and permit sharing on social media networks. By continuing to browse this website you accept the use of cookies. Click here to read more about how we use cookies.

Copyright © JD Supra, LLC