DoD Opens Loan Applications for $1 Billion in Funding for Critical Technologies

The new year has brought with it new funding opportunities from the US government in support of companies developing technologies crucial to national security. On January 2, 2025, the Office of Strategic Capital (OSC) of the US Department of Defense (DoD) opened applications for its capital loan program to support companies developing certain dual-use technologies. Companies, including those with no previous experience working with the DoD, may seek financing for the construction, expansion, or modernization of commercial equipment in the United States to support certain technologies that are critical to the national and economic security of the country.

Applications are currently available online. Instructions for each part of the application, frequently asked questions, and other useful materials can also be found on the website.

The financial upshot for a successful application is significant: OSC is expected to issue between $10 million and $150 million in loans to approximately 10 applicants for up to almost $1 billion in aggregate funding. Part 1 applications are due by February 3, 2025 (Application Part 1). Following the review of Part 1 submissions, OSC will invite certain applicants to complete the second application process (Application Part 2). Submission to Application Part 2 will be considered on a rolling basis. Successful Part 2 applicants will then negotiate the specific terms of a financing arrangement with OSC.

BACKGROUND

OSC was established in late 2022 to facilitate funding opportunities to bring critical technologies to market in support of the United States’ national security needs. Similar to the Defense Advanced Research Projects Agency (DARPA) and the Defense Innovation Unit (DIU), OSC aims to develop technology for national security and military applications. However, unlike many prior and existing programs that focus on the use of grants, other-transaction authorities, and procurement contracts, OSC is using financing tools to help attract and scale private capital investments in companies that are developing critical technologies.

To that end, OSC published a Notice of Funding Availability (NOFA) on September 27, 2024 as the first of an expected series of funding vehicles intended to help companies successfully transit the “valley of death”—i.e., the time spent transitioning a technology prototype to a US government contract that often requires “a higher level of technology maturity than the science and technology community is willing to fund and develop.” [1]

ELIGIBLE PROJECTS

Loan proceeds must be used for the construction, modernization, or expansion of a Covered Technology Category (CTC) and the CTC must be in a dual-use area, meaning that it must have a commercial application.

FAQs published by OSC indicate that a company is operating in support of a CTC if the company’s final output

• is a stated CTC (e.g., a final product is a core component of a space launch vehicle); and/or
• enables the production and/or operation of at least one CTC (e.g., the final product is a core component of a CTC’s production, assembly, testing, or development, such as a specialty gas or a precision magnet).

There are 31 CTCs, ranging in topics from cybersecurity, battery storage, space launch and spacecraft, microelectronics, quantum computing, and more. A complete list of the CTCs is located here.

The NOFA and application provide that loans can be used to finance the purchase or rehabilitation of commercial equipment that will support any CTC as well as the following costs that are “directly” associated with financed equipment:

• Preinstallation costs such as planning, development, engineering analysis, financing, legal expenses, and associated fees (excepting application costs, which shall not be covered)
• Ancillary costs such as preparation of facility, permitting, utility upgrades, delivery, calibration, first-article testing and/or qualification, and integration with existing systems as well as associated modifications or software necessary for operational use
• Installation costs including cost of labor and materials required for installation
• Appraisal and inspection costs, appraisals required to determine value of asset, or appraisals or inspections required by law and industry regulations
• Refinancing costs on a case-by-case basis

Finally, at least 80% of total capital invested in a CTC-focused industry must come from nonfederal sources at the time of OSC’s investment, however, DoD has stated that it does not expect this restriction to prohibit the issuance of any financing under this program.

QUALIFYING ENTITIES

An “eligible entity” is broadly defined to include any individual, corporation, partnership (including public-private and limited partnerships), trust, state (or political subdivision or instrumentality thereof), a tribal government or consortium of tribal governments, any US governmental entity or public agency, or a multistate or multijurisdictional group of public entities, as well as a joint venture or strategic alliance.

To qualify as an eligible entity, the applicant must have at least three years of operating history, but note OSC has stated that it can decrease or increase this requirement based on particular circumstances. Eligible applicants will also be assessed for creditworthiness, alignment with the mission of OSC, and compliance with certain provisions of the Federal Credit Reform Act of 1990.

Throughout both Application Parts 1 and 2, OSC will also evaluate whether or to what extent each applicant—including as a borrower, sponsor, and/or guarantor—is subject to “Foreign Influence” or “Adversarial Capital.” Each of these terms is assigned a specific meaning under the NOFA:

• “Foreign Influence” means that a “Foreign Country of Concern” or a “Foreign Entity of Concern” has the power, direct or indirect, whether or not exercised, to (1) direct or decide matters affecting the management or operations of the company, (2) access material nonpublic information, or (3) access material intellectual property of the company.
• “Adversarial Capital” means an investment in an entity, via ownership or credit, from a person, whether legal or individual, in “Foreign Countries of Concern” or from “Foreign Entities of Concern” hostile to the interests of the United States, its allies, or partners.

“Foreign Country of Concern” means North Korea, China, the Russian Federation, or Iran while “Foreign Entity of Concern” refers to a group of persons (composed of both individuals and entities) against which a sanction or restriction has been applied under US law. As with other national security review programs, OSC reserves the right to mitigate any Foreign Influence or Adversarial Capital, including agreements or any other measure, including the denial of any funding application.

NOFA APPLICATIONS AND EVALUATION PROCESS

OSC is accepting Application Part 1 submissions from now until February 3, 2025. OSC will evaluate Part 1 Applications using a host of criteria, including whether the applicant has a demonstrated investment in one or more CTCs, whether the applicant is modernizing equipment in existing manufacturing facilities (e.g., non-Greenfield investments), how quickly a product can be brought to market, and the technical feasibility of the project.

Applicants may proceed to Part 2 only through submission of a Part 1 application and through an invitation to proceed from OSC. Part 2 submissions will be evaluated by OSC to assess the financial and legal soundness of the proposed protection/transaction based on a business, technical, and legal review. Following this evaluation, OSC may share a term sheet and conditional commitment letter with each successful applicant to finalize the terms of a loan ranging from $10 to $150 million.

Practically speaking, the terms of each loan will depend on the circumstances of the transaction and other market factors, although the NOFA and FAQs indicate that OSC will offer “cost-competitive pricing” with interest rates as low as the US treasury yield with a maturity comparable to the “tenor” of the requested loan. Additionally, the NOFA indicates that the OSC loan will not be subordinate to any other indebtedness, but notes that there may be some exceptions.

Of note, the FAQs clarify that OSC can fund up to 80% of the total project costs with the remaining balance provided by company capital, grants, equity, or funds supplied by debt providers.

NEXT STEPS

The OSC loan program reflects a potentially significant opportunity for companies supporting the national security of the United States (or holding technology that could be used for such purposes) by opening a door to financing during the “valley of death” or other important stages of technology development. While the availability of these loan funds may present companies with expanding opportunities, we do not expect them to come without increased compliance considerations, including potentially Davis-Bacon Act, Buy American Act, or cybersecurity requirements.

Additionally, loan applicants will need to register on the System for Award Management (SAM), which requires making a host of representations and certifications to the US government. As a result, the loan application and resulting funds also have the potential to expose recipients to False Claims Act liability if not managed properly.

Further, companies with existing credit facilities and other debt arrangements will need to navigate loan subordination considerations to satisfy the OSC guarantee obligations while remaining in compliance with covenants in their existing debt instruments. Finally, OSC has stated that National Environmental Policy Act (NEPA) compliance may be required for some loans, trigging potential environmental review processes pursuant to NEPA and other environmental laws.

Each of these considerations is of course manageable and could be outweighed by the benefit of accessing capital offered by this loan program and the accompanying relationships it could build within DoD. That said, companies pursuing this loan program would be well advised to plan for the unique compliance elements that accompany this loan. Morgan Lewis’s multidisciplinary team is able to assist companies in each of these areas as they navigate this new opportunity.