On Feb. 28, 2023, the CHIPS Program Office released its first notice of funding opportunity (NOFO) under the CHIPS and Science Act of 2022 (“CHIPS Act”). This announcement represents the initial distribution of funds appropriated through the CHIPS Act and promises billions to boost American semiconductor manufacturing, supply chains and research and development. With a special focus on promoting U.S. national security, the CHIPS Program Office is hoping this unprecedented effort can ensure U.S. technical and manufacturing leadership in a space that recently has been centralized in China and Southeast Asia and is essential to nearly all sectors of the economy.
While organizations involved at all ends of semiconductor creation are encouraged to look into this notice, the introductory grants and loans are focused on chip fabrication and packaging. As the United States looks to wean itself off of foreign microprocessors and give itself a competitive advantage over international rivals, the private sector should be ready to compete for funding in this area.
Background
The bipartisan CHIPS and Science Act of 2022 provides $52.7 billion in federal funding to revitalize the U.S. semiconductor industry, including $39 billion in semiconductor incentives, $13.2 billion in research and development (R&D) and workforce development, and $500 million to strengthen global supply chains. The CHIPS Office NOFO will tap into the $39 billion pot of funding. Of this amount, the office plans to allocate $6 billion to support loans and loan guarantees, which they hope will be leveraged to support up to a $75 billion credit program.
The main focus of the act is to reduce American reliance on foreign producers for their semiconductor demand and reduce the risk of supply shocks like those experienced during the COVID-19 pandemic. Currently, the U.S. produces only around 10%–12% of the world’s chips. Part of this is due to the American system of semiconductor plants only producing their own chips, while foreign producers normally contract with multiple clients to create larger fabrication operations. This has led to a situation where America is designing and engineering the semiconductors but they’re actually being made in China, Southeast Asia and elsewhere.
The office’s current proposal distributes its subsidies in three separate notices. The first notice is designed to construct, expand or modernize fabrication facilities that produce current-generation or advanced semiconductors. These include industrial centers involved in part creation, assembly, testing and packaging. The CHIPS office envisions these funds will be used to build “large-scale clusters” where fabrication suppliers will be able to support their full operations in the communities they operate in, with the hope of at least two of these clusters being established by the end of the decade.
Another major focus of the first round of funding will be on the assembly, testing and packaging (ATP) of semiconductors, an area where U.S. abilities trail East and Southeast Asia competitors. While the U.S. is not well suited for conventional packaging, which will instead be secured through its international allies (especially those in the Indo-Pacific Economic Framework), the CHIPS Program Office is committed to increasing American capabilities in advanced packaging. The latter is critical to advances in artificial intelligence, cloud computing and new medical technologies.
The CHIPS office wants to make sure both logic and memory chips see investment with this package. There is a specific focus on the production of dynamic random-access memory (DRAM) chips that are seen as critical to supercomputing.
Finally, the pandemic exposed the supply chain’s weaknesses with current-generation and mature-node semiconductors, which this round of funding hopes to address. With China also subsidizing legacy chips, America’s ability to produce these types of chips is critical to reducing reliance on China for chips used in automobiles, medical devices, aerospace defense, infrastructure and more. Producers that can shift their production between different chips based on demand to prevent supply shocks will be given priority.
Program Vision
Alongside the NOFO, the CHIPS program office published a vision document outlining nine principles it will follow to measure the success of the program. The principles include:
- Catalyzing Private Investment: CHIPS funding will not fully fund any individual project. Instead, the program is intended to attract new and existing investors into the U.S. semiconductor industry. Applicants will be required to show that the funds they are requesting will incentivize investments that would not occur without CHIPS.
- Encouraging Customer Demand: This is a two-pronged approach of asking funding applicants to secure new orders to create a more predictable market, and the CHIPS office encourages customers to purchase more U.S.-made chips to shore up the U.S. supply chain.
- Engaging with U.S. Partners and Allies: Increasing the supply of U.S.-made chips will require coordination among U.S. allies to ensure other government incentive programs are addressing mutual security concerns. The CHIPS office does not foresee the United States becoming fully self-sufficient in semiconductor production.
- Building a Skilled and Diverse Workforce: Applicants will be required to identify ways that they have worked with educational institutions, labor unions and workforce development organizations to create a durable semiconductor workforce.
- Reducing Time to Build: The CHIPS Program Office will prioritize applicants who have a clear path to quickly building their project, such as through securing permitting agreements.
- Reducing Costs Through Innovation: Applicants are encouraged to include plans that invest in new manufacturing methods and tools that reduce per-unit cost, utilize new technologies to streamline fabrication operations and make use of ATP infrastructure to enhance the value for customers. By building out domestic manufacturing, the office is hoping for an increase in American know-how regarding semiconductor production, leading to innovations in fabrication. Applicants that can demonstrate how they plan to lower costs, in the long run, will be given priority.
- Promoting Operating Security, Supply Chain Security and Cybersecurity: Priority will be given to those that can prove they will have secure operations that reduce risks to operational security, supply chain security and cybersecurity.
- Spurring Regional Economic Development and Inclusive Economic Growth: The program is focused on creating fabrication “clusters,” with a focus on bringing multiple steps of semiconductor production to a single area; for example, having fabrication and packaging plants in the same community. The applicant’s plans to invest in the U.S. semiconductor industry, workforce development and community growth will be considered.
- Enforcing Guardrails: The CHIPS office expects a strict following of the guardrails laid out in the funding opportunity. More information on those restrictions is below.
Program Priorities
The CHIPS office will use the following six criteria to award funding.
- Economic and National Security – To avoid the risks associated with an international reliance on semiconductors, projects that can meaningfully increase American production of chips and strengthen the nation’s supply line will be given priority. Organizations that can supply the U.S. national security community, including the Department of Defense, with an onshore supply of semiconductors will be given preference. This criterion will be the most heavily weighted in the application process.
- Commercial Viability – Applicants must have a plan for sustained cash flow as well as an outline of how they will invest in their facility to remain viable in the long term. They are also encouraged to identify key suppliers with a preference toward those that can find suppliers that will locate in the same area as the fabrication facility.
- Financial Strength – A detailed business plan including rates of return, cash flow and profitability is required. Since it is unlikely that CHIPS funding will be enough to stand up the desired semiconductor production, applicants must also show they can raise private-sector funding for their project.
- Project Technical Feasibility and Readiness – Applicants will need to submit their execution plan with construction and operational milestones as well as plans to obtain proper permits and contractual agreements. Those that can demonstrate their ability to meet environmental and permitting requirements quickly, through existing infrastructure or by obtaining advance agreements from permitting authorities and those that have experience in executing similar projects will be given priority.
- Workforce Development – To receive funds applicants must submit their plan to hire economically disadvantaged individuals. Also, any organization requesting more than $150 million in funding must include its strategy to provide child care to facility and construction workers.
- Broader Impacts – The CHIPS Program Office is interested in applicants that can build beyond the initial project they are applying for. They are looking for organizations that will commit to future investment in the U.S. semiconductor industry, including building R&D facilities in the United States; supporting CHIPS research and development programs; creating opportunities for minority-owned, veteran-owned and women-owned businesses; demonstrating climate and environmental responsibility; invest in their communities by addressing barriers to economic inclusion; and commit to using iron, steel and construction materials produced in the United States.
Funding Protections
The CHIPS program office, likely aware of the oversight it will receive from Congress, has set up guardrails in their guidance on this funding. With the stated goal of economic and national security, the protections fall into the same categories.
Taxpayer Protections
The CHIPS office plans to closely monitor projects once approval is granted to ensure organizations meet the goals promised in their applications. According to this oversight, funding will be disbursed in tranches tied to the construction and operational milestones set by the application process. Those that are unable to hold to their commitments risk suspension of payments, loss of their award and the forced repayment of funds.
The office also set restrictions on how the funds can be spent. No money obtained from CHIPS can be used for stock dividends or buybacks, and organizations willing to commit to limiting buybacks for five years after they receive their award may receive priority. Also, any recipients awarded more than $150 million will be required to enter a profit-sharing agreement with the government on any funds that exceed the applicant’s project projections. The agreement will be negotiated with each applicant and the funds will be used to further the U.S. microprocessor ecosystem, though the Commerce Department has committed that the maximum government recovery would be 75% of the award.
National Security Protections
Any applicant that is caught knowingly engaging in any joint research or technology licensing effort with a foreign entity of concern will forfeit any future award and be required to return any funds they received. Recipients must also agree to not engage in certain significant transactions involving semiconductors with these same entities for 10 years after being selected. More information about these restrictions is expected from the Commerce Department in the future. Brownstein will be tracking this guidance.
The Application Process
Interested applicants must follow a five-step application process.
1) Statement of interest – Applicant briefly describes their project and how this opportunity applies, designed for the CHIPS Program Office to gauge interest.
2) Pre-application (optional) – In this stage, the applicant may submit a more detailed plan for the program office’s feedback. The office can give insight into whether an organization should proceed with a full application from here.
3) Full application – The full application lays out all the details of the project, including how the organization will meet the priority criteria laid out above. Applicants who make it through the initial stages may be offered a non-binding Preliminary Memorandum of Terms that could provide recommendations for the award amount, form and any related terms.
4) Due diligence – Once the CHIPS office decides that an applicant will likely receive an award or the non-binding memorandum is agreed upon, the office will begin an extensive process of verifying the information in the application. Any advisors, consultants or lawyers needed for this process are procured at the expense of the applicant.
5) Award preparation and issuance – Once all of these steps are completed, the Department of Commerce will prepare and issue the award in the tranches described above.
Next Steps and Analysis
Applicants should read the CHIPS office guidance thoroughly to understand the guardrails placed on the funding. The NOFO includes some unexpected items, such as the profit-sharing provision, as well as potential limits on the equity upside for applicants through the five-year stock buyback provision. Future guidance could include further limits.
The initial focus on funding current-generation and legacy chips instead of only advanced technologies may make this a great opportunity for those in the former sectors. This is backed by the Commerce Department’s commitment that the $2 billion set for legacy-node semiconductors is a floor, not a ceiling. Also, the engagement in the chips supply chain, including packaging, should open funding to a wider collection of organizations.
Finally, the future guidance on international commerce relating to organizations utilizing CHIPS funds is an area to pay attention to. A proposed rule from the Commerce Department regarding investment and activities with foreign entities of concern, particularly China, should be of great interest to potential applicants. Intel’s upcoming acquisition of Tower Semi, and any requirements the Chinese government stipulates in that purchase, will be important to watch in this space.
This release of funds is the first of three disbursements by the CHIPS Program Office. The next announcement, expected in late spring of 2023, will be for semiconductor materials and manufacturing equipment facilities, and the final announcement, slated for fall of 2023, will be focused on R&D. Also in the R&D space, the Department of Commerce will soon release their strategy for the $11 billion National Semiconductor Technology Center. Applicants for all programs are encouraged to submit their statements of interest as soon as possible so the office can gauge interest.
Between CHIPS and separate tax credits, most advanced chips projects should receive 30% to 40% of project capital expenditures (capex) as a true subsidy, with current federal investment tax credits providing a base 25% capex subsidy. CHIPS grants will range between 5%–15% of project capex with grants and loans to not exceed 35% of the total capex. Any organizations looking to receive the maximum out of these funding opportunities should reach out to the authors of this alert for more information.
THIS DOCUMENT IS INTENDED TO PROVIDE YOU WITH GENERAL INFORMATION REGARDING NEW CHIPS FUNDING OPPORTUNITIES. THE CONTENTS OF THIS DOCUMENT ARE NOT INTENDED TO PROVIDE SPECIFIC LEGAL ADVICE. IF YOU HAVE ANY QUESTIONS ABOUT THE CONTENTS OF THIS DOCUMENT OR IF YOU NEED LEGAL ADVICE AS TO AN ISSUE, PLEASE CONTACT THE ATTORNEYS LISTED OR YOUR REGULAR BROWNSTEIN HYATT FARBER SCHRECK, LLP ATTORNEY. THIS COMMUNICATION MAY BE CONSIDERED ADVERTISING IN SOME JURISDICTIONS.