On August 9, 2022, President Biden signed into law the CHIPS and Science Act of 2022 (the CHIPS Act), a significant investment in industrial policy that offers, among other things, funding for the development of facilities to research, manufacture, and produce semiconductors and semiconductor-related materials and equipment. As always, however, there is no free lunch, and this money comes with some strings attached. Many aspects of the process for obtaining federal financial assistance will ultimately be determined by the Secretary of Commerce (the Secretary), who is responsible for disbursing the funds, but the statute provides some useful preliminary guidance. In addition, there are national security and oversight considerations when receiving funding under the CHIPS Act that potential recipients should keep in mind.

This client alert focuses on the portions of the CHIPS Act related to the funding of private semiconductor-related facilities—i.e., the authorization of funding for the federal financial assistance program originally established under Section 9902 of the National Defense Authorization Act for 2021 (the NDAA 9902 Program)—and the key risks associated with obtaining that funding. The CHIPS Act (now dubbed CHIPS+) also includes various non-semiconductor-related initiatives, such as funding for basic scientific research, NASA, clean energy incubation, and other programs, which are not addressed in this alert.

Money (That's What I Want)

In funding the NDAA 9902 Program, the CHIPS Act appropriates $39 billion to be disbursed over the next five years. Under the new law, that funding is designated for non-profit and for-profit entities, whether acting alone or on consortia. Funding recipients must have a demonstrated ability to substantially finance, construct, expand, or modernize a facility relating to fabrication, assembly, testing, advanced packaging, production, or research and development of semiconductors, materials used to manufacture semiconductors, or semiconductor manufacturing equipment.

Parties who are interested in these funds must submit an application to the Secretary describing the project for which they are seeking support. The statute assigns the Secretary the right to establish procedures explaining how the federal assistance will be disbursed; for that reason, the criteria for obtaining funding are inevitably subject to further clarification. With that said, the CHIPS Act and the NDAA do provide some high-level guidance as to various aspects of the grant process:

Eligibility. Bidding parties must have:

• a documented interest in constructing, expanding, or modernizing a facility;
• an executable plan to sustain the facility without additional federal financial assistance;
• a determination as to the type of semiconductor technology, equipment, materials, or research and development the covered entity will produce;
• a determination as to the customers, or categories of customers, to which the covered entity plans to sell those items;
• an executable plan to identify and mitigate relevant semiconductor supply chain security risks, such as risks associated with access, availability, confidentiality, integrity, and a lack of geographic diversification in the covered entity's supply chain;
• with respect to any project for the production, assembly, or packaging of semiconductors: implemented policies and procedures to combat cloning, counterfeiting, and relabeling of semiconductors;
• an offer of governmental incentives to build/expand a facility in a given jurisdiction;
• an offer of workforce-related incentive or other relevant government incentives;
• commitments to worker and community investment, including through training and education benefits paid by the bidder and programs to expand employment opportunity for economically disadvantaged individuals; and
• commitments from regional educational and training entities and institutions of higher education to provide workforce training, including programming for training and job placement of economically disadvantaged individuals.

Considerations in Reviewing Applications. The Secretary must determine that applications meet the eligibility criteria described above, and also that the underlying project is in the interest of the United States. While foreign bidders may participate, "foreign entities of concern" (a broad list that includes entities under the jurisdiction of selected nations, including China, Russia, and Iran) may not apply. Further, no individual application may obtain more than $3 billion without a special finding by the President.

Prioritizing Projects. The CHIPS Act instructs the Secretary to prioritize projects across both advanced and mature technology sectors that both:

• "manufacture semiconductors necessary to address gaps and vulnerabilities in the domestic supply chain across a diverse range of technology and process nodes" and
• "provide a secure supply of semiconductors necessary for the national security, manufacturing, critical infrastructure, and technology leadership of the United States and other essential elements of the economy of the United States."

Use of Funds. Funds under the NDAA 9902 Program can be used to:

• finance facility construction, expansion, or modernization;
• support workforce development related to that facility;
• support site development related to that facility; or
• pay reasonable costs related to the operating expenses for that facility, including specialized workforce, essential materials, and complex equipment maintenance.

Brother, Can You Spare a Dime?

Parties considering bidding should be aware of conditions built into the CHIPS Act and attached to the receipt of funding that may adversely impact their ability to collaborate with foreign partners:

First, the Secretary is directed to claw back funding if, during the term of the award, the recipient knowingly engages in any joint research or technology licensing effort with a foreign entity of concern—again, this includes all entities subject to the jurisdiction of selected nations, including China, Russia, and Iran, as well as, e.g., sanctioned parties—that relates to a technology or product that raises national security concerns (as determined by the Secretary and communicated to the recipient before engaging in such joint research or technology licensing).

Second, recipients must enter into an agreement with the Secretary specifying that, during the 10-year period beginning on the date of the award, they may not engage in the material expansion of semiconductor manufacturing capacity in China or any other foreign country of concern. There are exceptions for expansion of facilities for the manufacture of older generations of semiconductor technology if those facilities are primarily aimed at serving the market in that foreign country. Violators of the agreement are also subject to the clawing back of the full amount of their funding.

You Never Give Me Your Money

While taking funds under CHIPS+ certainly provides enticing benefits, companies should also be aware that it is likely to come with increased scrutiny from both the U.S. Congress and executive branch agencies, including:

• parties responsible for overseeing U.S. government grants and contracts, such as the U.S. Department of Defense, as recipients of federal grants and contracts may become subject to a myriad of requirements (in addition to achieving the specific objectives of the grant or contract) ranging from compliance with government accounting and recordkeeping requirements to labor and employment policies;
• U.S. export control authorities, to the extent the underlying technologies are sufficiently advanced to be subject to U.S. export control; and
• foreign investment review authorities, such as the Committee on Foreign Investment in the United States (CFIUS), to the extent that a bidding group contains foreign funding.

In addition, given the significant level of appropriations, Congress will likely use its oversight and investigatory powers to ensure that the funds are used appropriately and effectively. Initially, this attention will likely target the award processes employed by the U.S. Department of Commerce. But companies awarded funding should also expect to be the subject of congressional interest. This interest can range from invitations to testify at committee hearings about how funds were expended to being the subject of congressional investigations, including numerous employee interviews and voluminous document productions. In anticipation of congressional requests, awardees should maintain thorough documentation regarding decisions about expending any CHIPS Act funding.

The increase in funding is also likely to attract the attention of the very foreign adversarial governments that the legislation is intended to help the United States compete against. Just last week, FBI Director Chris Wray noted during a Senate hearing that "the men and women of the FBI are taking on the Chinese government's broad-scale economic espionage campaign targeting our ideas, our innovation, [and] our economic security." While earlier this year the U.S. Department of Justice ended its "China Initiative" focused on prosecuting economic espionage cases linked back to China, the threat of malign actors continues to exist. Companies should be attuned to the threat of foreign malign governments co-opting company employees to steal proprietary emerging and export-controlled technologies. Should a foreign malign government be successful, a company can expect to attract the attention of federal law enforcement agencies, including the FBI, and to participate in any resulting investigation.

Further, while foreign scientists and researchers can provide significant expertise, some seek entry to the United States solely to steal emerging and export-controlled technologies. Sponsoring foreign nationals to work in export-controlled technologies—a process overseen by the Department of Commerce's Bureau of Industry and Security—may lead to increased scrutiny by the department. Any companies awarded CHIPS Act funding should ensure their emerging and export-controlled technologies are protected by effective compliance programs and that foreign national employees or contractors accessing export-controlled technologies have any required deemed export licenses in place.

We're in the Money

The NDAA 9902 Program presents an unprecedented opportunity for companies in the semiconductor sector to take advantage of federal funding to leap forward in building or expanding their operations. However, parties who hope to take advantage of that opportunity should ensure they meet the requirements and establish the appropriate safeguards before setting out in search of a major federal grant. Stay tuned for follow-up guidance once the Secretary publishes it. Interested parties should also monitor grants.gov and sam.gov—the U.S. government’s public-facing portals for all contracts and grants opportunities. For more assistance from Wilson Sonsini attorneys familiar with these CHIPS Act issues, please contact either Joshua Gruenspecht, Andrew Dockham, Janet Kim, Seth Cowell, Jonathan Davey, Kara McDonough, or Barath Chari, or other members of the firm's national security or strategic risk and crisis management practices.