CHIPS Act Funds Start to Flow

The first funding opportunity is for projects to construct, expand and/or modernize commercial facilities to produce leading-edge, current-generation and mature-node semiconductors. This includes both front-end wafer fabrication and back-end packaging, testing and assembly. Funding will include direct funding (through grants and cooperative agreements), loans and loan guarantees, and there is no fixed amount for how much any given project can receive. The funding opportunity for equipment facilities and semiconductor materials will be released in the late spring, and one for research and development facilities will be released this fall.

The application process for commercial facilities incentives will be rigorous and highly competitive—with program administrators evaluating applications against adherence to baseline eligibility requirements but also against six priority areas: (1) economic and national security; (2) commercial viability; (3) financial strength; (4) project technical feasibility and readiness; (5) workforce development; and (6) broader impacts, including future planned investments in the domestic semiconductor industry, community investment, creation of opportunities for minority-owned, veteran-owned and women-owned businesses, climate and environmental responsibilities, and commitment to using iron, steel and construction materials produced in the United States.

Through this initial funding announcement along with the future expected announcements, a wide range of businesses stand to benefit from CHIPS Act dollars, including not only semiconductor manufacturers, equipment and materials manufacturers and R&D facilities, but also suppliers, vendors, investors and end-users. Further, while the funding is targeted towards manufacturing and R&D facilities, fabless semiconductor firms may consider joining consortiums with manufacturers and others to take advantage of downstream benefits.

For eligible chips manufacturers—along with others in the semiconductor ecosystem—now is a critical time to assess the opportunity and move forward with an application. Key details are included below.

What is the CHIPS and Science Act?

In August 2022, Congress passed the bipartisan CHIPS Act which directs $280B in spending over ten years, with the majority of this funding provided for scientific and R&D objectives through programs administered by the National Science Foundation, Department of Energy and other agencies. Of these funds, $52.7B is directed to boost the domestic semiconductor industry, including $39B in semiconductor incentives, $13B in R&D and workforce development, and $500M to strengthen global supply chains. Another $24B is provided through tax credits for chip production.

$39B in Semiconductor Manufacturing Incentives

The CHIPS Act allocates $39B for incentives—in the form of grants, cooperative agreements, loans and loan guarantees—for semiconductor manufacturing. The funding—administered by the CHIPS Program Office within the U.S. Department of Commerce—will be distributed to (1) attract large-scale investments in advanced technologies such as leading-edge logic and memory, and (2) incentivize expansion of manufacturing capacity for mature and other types of semiconductors.

The funds will be distributed through a series of competitive funding opportunities. The first opportunity—released on February 28, 2023—is for commercial fabrication facilities. Additional funding opportunities will be available for equipment and materials manufacturing facilities and R&D facilities.

Baseline Eligibility Criteria

Funding will be available to private companies, non-profit organizations and consortia thereof. Eligible organizations must be able to substantially finance, construct or expand a U.S. facility that fabricates, assembles, tests, packages, produces or researches either semiconductors, semiconductor materials, or equipment used in the manufacturing of semiconductors. However, CHIPS Program Office guidance—and the specifications set forth in the first funding opportunity announcement—make clear that baseline eligibility is only the first step. Ultimate success in securing incentives will hinge on a host of other factors. Further, FAQs clarify that the eligibility of foreign entities to apply for and receive CHIPS incentives will be at the sole discretion of the Commerce Department. Foreign companies are advised to seek guidance from the CHIPS Program Office pursuant to submitting a statement of interest.

Funding Opportunity—Commercial Fabrication Facilities

The first funding opportunity—announced on February 28, 2023—seeks applications for projects involving the construction, expansion or modernization of commercial facilities for the fabrication of leading-edge, current- generation and mature-node semiconductors. This includes both front-end wafer fabrication and back-end assembly, testing and packaging.

This funding opportunity will provide direct funding (through grants and cooperative agreements), loans and loan guarantees. There will be no fixed amount for how much direct funding a project can receive, but most direct funding awards are expected to range between five and 15% of project capital expenditures. There is similarly no fixed limit on loans or loan guarantees, and applicants may request loans or loan guarantees to provide debt financing that is not available on comparable terms on the private market.

The Application Process

The funding announcement described a five-part application process including (1) a statement of interest, (2) a pre-application, (3) a full application, (4) CHIPS Program Office due diligence, and (5) award preparation and issuance.

Pre-applications and full applications for leading-edge facilities will be accepted on a rolling basis beginning March 31, 2023. Pre-applications for current-generation, mature-node and back-end production facilities will be accepted on a rolling basis beginning May 1, 2023, and full applications for these categories will be accepted beginning June 26, 2023. Statements of interest are accepted immediately.

Evaluation Priorities

Applications will be reviewed through the lens of six priority areas:

• Economic and National Security: Incentives will be directed to projects that increase domestic semiconductor production and strengthen global supply chains, as well as projects that further national security interests by, for example, providing the Department of Defense with access to onshore access to semiconductors.
• Commercial Viability: Incentives will go to applicants with plans for reliable cash flows and continued investment to make sure the facility remains active for the long-term.
• Financial Strength: Applicants must submit a detailed financial model for projects and maximize private-sector contributions.
• Technical Feasibility and Readiness: Applicants must provide clear plans, including major construction and operational milestones and construction rights and permits. Projects that can meet environmental and permitting requirements in a timely manner will be prioritized.
• Workforce Development: Applicants must commit to developing and maintaining a highly skilled, diverse workforce, including by hiring economically disadvantaged workers. Applicants are encouraged to engage government organizations, educational institutions, unions, industry associations and others to meet workforce needs.
• Broader Impacts: A CHIPS program goal is to extend the incentives benefit through communities. As such, projects will be evaluated based on applicants’ plans to commit to future investment in the semiconductor industry; create opportunities for minority-owned, women-owned and veteran-owned businesses; demonstrate climate and environmental responsibility; invest in communities by addressing barriers to economic inclusion; and commit to using iron, steel and construction materials produced in the U.S.

Additional Requirements

Applicants must:

• Demonstrate that the funding will incentivize facilities and equipment in the United States that would not occur otherwise.
• Be offered an incentive from a state or local government.
• Secure commitments from training entities and institutions of higher education to provide workforce training.
• Agree not to use CHIPS funds for dividends or stock buybacks. All applicants must further detail their intentions with respect to stock buybacks over five years.

Applicants seeking more than $150M in funding must further:

• Submit a plan to provide affordable child care for workers.
• Share cash flows or returns that exceed the applicant’s projections by an agreed-upon threshold with the federal government.

Restrictions on Investments in China

Pursuant to the CHIPS Act, an awardee “may not engage in any ‘significant transaction’. . . involving the ‘material expansion’ of ‘semiconductor manufacturing capacity’ in China or any other foreign country of concern” over the ten-year period after receiving an award. The CHIPS Program Office is expected to issue additional detail on the specific scope of this restriction.

This restriction on Chinese investments covers both the “covered entity” receiving the federal funding, as well as that entity’s “affiliated group,” which means one or more chains of includible corporations connected through stock ownership with a common parent. Generally, at least 80% of stock, by both voting power and value, must be owned by the parent or by another corporation in the chain.

The restrictions on Chinese investments do not apply to (i) existing facilities or equipment used to manufacture legacy semiconductors or (ii) the material expansion of legacy semiconductor manufacturing that predominantly serves the market of a foreign country of concern. A “legacy semiconductor” is defined as a “semiconductor technology that is of the 28-nanometer generation or older for logic.”

This restriction creates a critical decision point for companies that do business in both the United States and China. Indeed, the CHIPS Act incentives are designed to serve as a catalyst for companies to choose the United States for all large-scale investments in the near-term.

The Advanced Manufacturing Investment Credit

Applicants are encouraged to claim the Advanced Manufacturing Investment Credit, which provides a federal tax credit for qualifying capital investments in a facility for which the primary purpose is the manufacturing of semiconductors or semiconductor manufacturing equipment.

State and Local Incentives

Under the CHIPS Act, applicants must be offered a state and local incentive to support their project. The intent behind this rule is to ensure that projects benefit for a range of support, not just federal incentives. In practice, this requirement means that applicant success will be tied to the availability and level of support provided by their state, setting off furious competition across the country.

Many states—and even local governments—have begun announcing various incentive packages, ranging from state and local tax credits to state-run grant programs to support workforce development initiatives. A key issue will be how states with a high population of eligible applicants—like California—will respond to the requirement.

Next Steps for Applicants

This first funding opportunity marks a pivotal moment for companies seeking to invest in semiconductor manufacturing to benefit from CHIPS Act dollars. Because applications will be evaluated on a rolling basis it is crucial for interested companies to start preparing statements of interest and application packages. Further, companies must carefully hone their application packages to meet the nuanced application requirements and rigorous evaluation process. This will require interfacing with industry partners, local, state, federal and other institutional stakeholders, to secure required commitments.

Please contact the authors of this alert or any member of Pillsbury’s Government Law & Strategies team if you have questions about the application process or how to position your company for a successful outcome.