On August 9, 2022, the CHIPS and Science Act was signed into law allocating $52.7 billion in funding to the semiconductor industry. The legislation represents a historic investment in a critical industry and is designed to drive innovation and global economic competitiveness.
Shortly after the legislation became law, the Department of Commerce launched CHIPS.gov, a one-stop-shop for the Department’s funding opportunities, timelines, and requirements. On February 28, the first funding opportunity was announced, soliciting applications for funding related to the construction, expansion, and modernization of commercial facilities for the front- and back-end fabrication of “leading-edge, current-generation, and mature-node semiconductors.” The opportunity announcement gives the industry a look at the requirements placed on awardees and the process the Department will use to administer the CHIPS program.
Requirements on Awardees
While these funding opportunities will inject billions into the domestic industry and increase domestic technological competitiveness, the Department has articulated a number of requirements for awardees that may factor into decisions of whether to apply for federal incentives. First, applicants are required to demonstrate that funding will promote the domestic development of facilities and equipment that otherwise would not occur, be offered local or state incentives, engage with higher education institutions to implement workforce development programs, and agree not to use the funding for stock buybacks. Further requirements are placed on applicants seeking funding above $150 million as the Department conditions federal funds on an awardee’s agreement to provide affordable child care to workers and share cash flows or returns exceeding the applicant’s projections with the government.
Lastly, the legislation prohibits CHIPS awardees from “engag[ing] in any ‘significant transaction’…involving the ‘material expansion’ of ‘semiconductor manufacturing capacity’ in China or any other foreign country of concern.” This prohibition lasts for ten years after receiving an award. Importantly, the prohibition implicates entities “up the chain” of ownership as it covers the “covered entity” and the entity’s “affiliated group,” which generally is defined as an entity that owns at least 80% of the awardee’s stock by voting power and value.
The application process is poised to be very competitive, and adhering to each requirement is imperative to submitting a successful application. CHIPS Act administrators have signaled a focus on the following six priority areas that will guide application development:
- Economic and national security
- Commercial viability
- Financial strength
- Project technical feasibility and readiness
- Workforce development
- Broader impacts
The funding opportunity also outlines an application process that includes the following five major phases, which are discussed below:
- Statement of interest
- Full application
- Due diligence
- Award preparation and issuance
Statement of Interest
The statement of interest is a short description of the planned application that the potential applicant must submit. The statement will help the Department gauge interest in the program and allow the Department to prepare for the ultimate application. The statement must be submitted at least 21 days before submitting the pre- or full application.
While optional, pre-applications are strongly recommended. The step entails a more detailed description of the proposed product, including certain financial information and an Environmental Questionnaire. Most importantly, it creates an opportunity for the applicant to engage with the Department to ensure its application will meet the application requirements and discuss agency priorities. A pre-application discussion will conclude with the Department issuing a written assessment of the pre-application’s strengths and weaknesses and recommendations for improvement. The Department will also recommend the next steps, such as submitting a revised pre-application, a full application, or recommend applying at all.
The Environmental Questionnaire also serves an important purpose. Its submission allows the Department to determine the level of review necessary under the National Environmental Policy Act (NEPA) and help expedite the review process. NEPA has been an area of concern for the business community, and congressional officials worried the environmental legislation would delay construction.
Pre-applications for “leading-edge facilities” can be submitted via the CHIPS Incentives Program application portal starting March 31, 2023. Pre-applicants for “current-generation, mature-node facilities, and back-end production facilities” must wait until May 1, 2023. Provided that the pre-application window is open, pre-applications must be submitted at least 21 days after the statement of interest was submitted.
The full application contains a much more detailed proposal that includes an in-depth description of the project, company financials, the business’ commercial strategy, organizational structure, a projection of technical feasibility, and more. The application is extensive and time-consuming, making the pre-application process important to gauge the possibility of success.
Applications for “leading-edge facilities” can be submitted starting March 31, and applications for “current-generation, mature-node facilities, and back-end production facilities” can be submitted starting June 26, 2023. The applications must be submitted at least 21 days after the statement of interest was submitted. Also, applicants who have already submitted a pre-application should wait for written feedback before submitting a full application. Before moving to due diligence, the Department will offer the applicant a nonbinding “Preliminary Memorandum of Terms.”
Once the Department decides an applicant is “reasonably likely to receive an award,” after reviewing the applicant’s full application, and that the applicant would agree to the “Preliminary Memorandum of Terms,” the Department will move on to due diligence. This phase is marked by additional Departmental questions on various issues and the initiation of the environmental review. The Department will engage outside consultants, whose costs will be incurred by the applicants, to conduct additional due diligence. The Preliminary Memorandum of Terms is subject to change upon relevant new information.
After due diligence, the Department will decide whether to offer an incentive award. Award amounts will be based on a projection of expected returns but will generally range “between 5-15% of project capital expenditures.” Funding will be provided through direct funding, loans, and loan guarantees and the disbursement of funding will be fixed to project milestones, including capital expenditure and workforce development.
Funding from the CHIPS and Science Act represents an enormous opportunity for various organizations operating in the semiconductor manufacturing industry to expand production capabilities. This funding opportunity precedes more slated to be announced this spring and next fall, which will provide funding opportunities for equipment facilities and semiconductor materials and research and development facilities.
The first funding opportunity gives the industry a look at the conditions placed on awardees and even “up the chain” entities, and how the Department will evaluate applications and the process used to make awards. Eligible recipients should assess their businesses and determine whether it makes sense to submit an application, as applications can be resource intensive and may create obstacles for overseas investment and domestic requirements that should be factored into any decision. Once the decision to apply has been made, rigid compliance with the requirements is necessary to ensure a successful application.
For more information on the CHIPS Act and related government contract topics, please contact the author at firstname.lastname@example.org.