US Department of Commerce Details Proposed National Security Guardrails for CHIPS Incentives Program

The comment period has opened for the US Department of Commerce’s recently issued CHIPS for America incentive program notice of proposed rulemaking, which lays out funding requirements, incentives, and restrictions for potential funding recipients, with the aim of bolstering the US semiconductor industry. 

The US Department of Commerce (Commerce) recently issued a notice of proposed rulemaking (NPRM) detailing the national security guardrails for the “CHIPS for America” incentive program, as outlined in the CHIPS and Sciences Act (CHIPS Act). The bipartisan CHIPS Act aims to strengthen America’s national security by providing funding and incentives to bolster the domestic semiconductor industry. The statute also prohibits funding recipients from engaging in certain types of significant transactions that would be detrimental to US national security.

The CHIPS Program Office within Commerce’s National Institute of Standards and Technology (NIST) is now seeking comments on national security guardrails and procedures for funding recipients to notify the secretary of commerce of any planned significant transactions that may be prohibited under the statute. According to Commerce, these guardrails “will advance shared national security interests as the U.S. continues coordinating and collaborating with allies and partners to make global supply chains more resilient and diversified.”

The March 21, 2023 NPRM was designed to provide interested parties the opportunity to understand the anticipated requirements for funding, the factors Commerce expects to consider, and the framework within which the US government will provide funding. As an NPRM, parties may comment to provide the agency additional insight in its preparation of proposed or final guidance or regulations, and Commerce has indicated that it will accept comments for 60 days, or until May 22, 2023.

Commerce states that it anticipates publishing the final rule later in 2023. However, we note that Commerce is currently seeking to fill positions to advise the agency on these issues, and, even with NIST’s involvement, it may be challenging to publish a final rule by the end of the year unless Commerce quickly fills the many open positions it is advertising.

Concurrently, the US Department of the Treasury issued a separate NPRM detailing the Advanced Manufacturing Investment Credit (Investment Tax Credit), a federal income tax credit for qualifying investments in facilities manufacturing semiconductors or semiconductor manufacturing equipment. As these two NPRMs work in tandem, they aim to create a comprehensive framework to support the domestic semiconductor industry. And subsequently, on March 27, 2023, Commerce released a collection of preapplication materials, including an instruction guideline, a white paper, guiding principles, an environmental questionnaire, and a workforce development planning guide, to facilitate and streamline the application process.

In addition to these initiatives, on March 14, 2023, the US Department of State (State) also announced plans to implement the International Technology Security and Innovation Fund appropriated under the CHIPS Act. This fund provides State with $500 million ($100 million per year over five years, starting in fiscal year 2023) to strengthen the international technology infrastructure and foster innovation, ultimately enhancing national security by creating a more robust and secure global supply chain. This demonstrates the US government’s interest in pursuing multilateral engagements to share in the commitment to not balance the supply chain for semiconductors and related industries. This is part of the overall domestic and “friendshoring” concept that the US government has been pursuing since 2022.

Funding Restrictions and Expansion Clawback

In furtherance of the CHIPS Act’s limitations on funding recipients to ensure that funding does not directly or indirectly benefit “foreign countries of concern,” the NPRM proposes prohibitions on “significant transactions” involving the “material expansion” for “semiconductor manufacturing capacity” for leading-edge and advanced facilities in foreign countries of concern for 10 years from the date of the award. Key terms define the scope of the prohibitions and a failure to comply with the restrictions may result in Commerce seeking recovery of the full funding amount (Expansion Clawback):

• “Semiconductor manufacturing” is defined as semiconductor fabrication and/or packaging and includes both front-end fabrication and back-end manufacturing (assembly, testing, and packaging of semiconductors).
• “Significant transactions” is defined as any investment that is valued at $100,000 or more, or any series of transactions that in the aggregate during the applicable term of a required agreement is valued at $100,000 or more.
• “Material expansion” is defined to include the construction of new facilities and the addition of new semiconductor manufacturing capacity and uses a quantitative measure of 5% of existing capacity to provide clear and predictable scoping.
• “Foreign countries of concern” are the Democratic People’s Republic of North Korea, the People’s Republic of China (to include Hong Kong), the Russian Federation, and the Islamic Republic of Iran, as well as any country that the secretary of commerce, in consultation with the secretary of defense, the secretary of state, and the director of national intelligence, determines to be engaged in conduct that is detrimental to the national security or foreign policy of the United States.

Exceptions

As with other national security legislation and regulations, exceptions exist to maximize the executive branch’s flexibility when implementing requirements related to protection of US interests. The CHIPS Act requirements follow this approach. The proposed rule outlines exceptions to the prohibitions, including the use of CHIPS funds in “existing facilities” manufacturing “legacy semiconductors” and for significant transactions involving semiconductor manufacturing capacity expansion for new facilities producing legacy semiconductors that “predominately serve the market” of a foreign country of concern.

The NPRM provides several key terms for these exceptions:

• “Affiliate” is broadly defined to include the funding recipient’s parent company or parent companies (i.e., entities that directly or indirectly own a majority of the funding recipient’s voting interest), the funding recipient’s majority-owned subsidiaries, and entities that are majority owned by a parent company or any majority-owned subsidiary of a parent company.
• “Existing facility” is defined as any facility built, equipped, and operating at the semiconductor manufacturing capacity level for which it was designed prior to entering into the required agreement with the funding recipient. If a funding recipient engages in transactions violating these restrictions, Commerce can claw back the entire funding award. Facilities that undergo “significant renovations” (by adding an additional line or otherwise increasing semiconductor manufacturing capacity by 10% or more) after the required agreement shall no longer be considered an existing facility.
• “Legacy semiconductor” is defined to include logic semiconductors, but not as it pertains to other types of semiconductors (e.g., memory) or for “packaging” of semiconductors.
  • Specifically, “legacy semiconductor” means (1) a digital or analog logic semiconductor that is of the 28-nanometer (nm) generation or older (i.e., has a gate length of 28 nm or more for a planar transistor); (2) a memory semiconductor with a half-pitch greater than 18 nm for Dynamic Random Access Memory (DRAM) or less than 128 layers for Not AND (NAND) flash that does not utilize emerging memory technologies, such as transition metal oxides, phase-change memory, perovskites, or ferromagnetics relevant to advanced memory fabrication; or (3) a semiconductor identified by the secretary of commerce in a public notice issued under 15 USC § 4652(a)(6)(A)(ii).
  • The proposed definition of “legacy semiconductor” excludes 3D packaging (i.e., semiconductors with a three-dimensional integrated circuit, such as FinFET and GAAFET), which are increasingly being used in a wide range of advanced processor and circuit designs. Commerce’s proposed exclusion of 3D packaging from the “legacy semiconductor” definition likely reflects its concern that 3D packaging could be used by a foreign country of concern to become a workaround to the regulation of advanced packaging processes that achieve similar results.
  • Additionally, Commerce does not consider legacy semiconductors as “semiconductors critical to national security,” and a list of such semiconductors that are critical to national security is provided in the proposed rule. The list covers, among others, compound semiconductors and current-generation and mature-node chips used for quantum computing, in radiation-intensive environments, and for other specialized military capabilities.
  • As a result of these changes, the proposed rule aligns prohibited technology thresholds for memory chips (i.e., DRAM memory chips of 18 nm half-pitch or less, and NAND flash memory chips with 128 layers or more) with export controls and CHIPS national security guardrails. However, the proposed rule is expected to apply a more restrictive threshold for logic chips than Commerce’s October 2022 export controls rules on advanced semiconductor and manufacturing equipment, which restrict logic chips with non-planar transistor architectures (i.e., FinFET or GAAFET) of 16 nm or 14 nm or below.
• “Predominately serves the market” refers to where the final products incorporating the legacy semiconductors are used or consumed. Under this definition, expansions where at least 85% of a facility’s output by value serves a foreign market will be allowed.

The proposed rule also notes that if any recipient plans to expand legacy chip facilities under these exceptions, the recipient will be required to notify Commerce so the department can confirm compliance with national security guardrails.

Research Restriction and Technology Clawback

The proposed rule restricts recipients from engaging in “joint research” or “technology licensing” efforts with a “foreign entity of concern” that relates to a “technology or product that raises national security concerns.” Failure to comply with this restriction will also result in recovery of the full funding amount (Technology Clawback). The proposed rule expands the prohibition to the funding recipient’s affiliates.

The NPRM provides several key terms relevant to the Technology Clawback reach:

• A “joint research” effort means any research and development undertaken by two or more persons.
• “Technology licensing” means an agreement to make patents, trade secrets, or know-how available to another party.
• The proposed rule designates three additional categories of entities as “foreign entities of concern.” Specifically, the proposed rule also adds (1) entities from the Bureau of Industry and Security’s Entity List, (2) the Treasury Department’s Chinese Military-Industrial Complex Companies (NS-CMIC) list, and (3) the Federal Communications Commission’s Secure and Trusted Communications Networks Act list of equipment and services posing national security risks.

Recognizing that some funding recipients may have existing joint research contracts or technology licensing agreements with foreign entities of concern that relate to a technology or product that raises national security concerns, the NPRM invites comments on the impact of the proposed rule on such existing agreements.

Recordkeeping, Notification, and Review Process

Recipients and affiliates must maintain records related to significant transactions for specified durations. The proposed rule requires funding recipients to notify the secretary of commerce of any planned significant transactions involving the material expansion of semiconductor manufacturing capacity in a foreign country of concern.

The notification must include specific information detailed in the NPRM:

• The parties to the transaction, including their primary point of contact, location, phone, email, and ownership structure
• A description of any significant foreign involvement in the transaction
• The names and locations of any entity in a foreign country of concern at which semiconductor manufacturing capacity may be materially expanded by the transaction
• A description of the transaction, including current and planned types of semiconductors, current and planned production technology nodes, and current and planned semiconductor manufacturing capacity
• If involving the material expansion, documentation as to where the final products incorporating the legacy semiconductors are to be used or consumed
• If applicable, a statement explaining how the transaction meets the requirements for an exception to the prohibition

Upon receipt of a notification, the secretary of commerce, secretary of defense, and director of national intelligence will issue an initial determination as to whether the transaction would violate the CHIPS funding agreement, and the funding recipient may provide further responses. The process for initial and final determinations, as detailed in the NPRM, is as follows:

• Upon receipt of a notification, the secretary of commerce may ask for supplemental information and, no later than 90 days after a notification is deemed complete, the secretary of defense and director of national intelligence will issue an initial determination as to whether the transaction would violate the CHIPS funding agreement.
• The funding recipient may respond within 14 days by submitting additional information (including tangible evidence) or requesting that the initial determination be reconsidered.
• If the funding recipient does not request that the initial determination be reconsidered within 14 days, the initial determination will become a final determination, after which the funding recipient must cease or abandon the transaction and submit evidence within 45 days of the initial determination.

Cost-Benefit Analysis

Commerce believes that domestic investments will advance US economic and national security, enhance global supply chain resilience, and cement US leadership in designing and building semiconductor technologies. Commerce does not appear to be as concerned about the potential negative impact of the proposed guardrails, explaining that recipients with existing facilities in countries of concern would be able to continue current operations as long as overall production capacity is not materially expanded.

As with all other Commerce regulations, the details of the final rule will matter as Commerce, similar to the Department of Treasury, has recently been prone to making broader, more sweeping statements and interpretations than were expected by industry members.

Additionally, Commerce expects that administrative costs and monitoring and enforcement efforts will be low because only a fraction of domestic semiconductor manufacturing companies are likely to apply for and receive funding through this program, a few companies currently maintain productive capacity in foreign countries of concern and produce semiconductors that fall within the aforementioned thresholds, and a small number of funding recipients are expected to submit notification seeking evaluation as to whether the transaction meets one of the permissible criteria. There is no real evidence presented for Commerce’s conclusions here, and it may come as a surprise to the agency when more parties than expected submit requests for funding. Given the manner in which the qualifying companies are defined, there may be a broader interest in accessing the monies than originally anticipated.

On the other hand, Commerce believes that the proposed regulations likely will catalyze long-term economically sustainable growth in the US semiconductor industry, as well as additional capacity to be built outside countries of concern.

Next Steps

Commerce invites comments on the proposed rule, providing stakeholders with an opportunity to express their views and concerns. While Commerce acknowledges potential impacts on existing agreements, it believes that the proposed regulations will ultimately contribute to the long-term growth and security of the US semiconductor industry and encourage additional capacity to be built outside of foreign countries of concern.