More Updates from Commerce for the Semiconductor Industry

On the heels of President Biden signing into law the CHIPS and Science Act of 2022 (the “CHIPS Act”), the Department of Commerce (“Commerce”) recently launched a new website at CHIPS.gov to publish information relating to the CHIPS Act. Shortly after launch of the new website, Commerce published on the site a high-level strategy outlining how it will implement the CHIPS Act, which includes approximately $50 billion in funding to revitalize domestic manufacturing of cutting-edge semiconductors. A summary of Commerce’s strategy for potential funding applicants is provided below. 

In other news, Commerce recently acted under the Export Administration Regulations (“EAR”) to control critical semiconductor technologies involving certain substrates and certain electronic computer-aided design (“ECAD”) software for designing integrated circuits. These new controls will have implications not only for export compliance but also for national security reviews conducted by the Committee on Foreign Investment in the United States (“CFIUS”).

NEWLY CREATED CHIPS.GOV

On August 25, Commerce announced the creation of CHIPS.gov, a new website dedicated to the CHIPS Act. According to the announcement, “CHIPS.gov will be a central resource for all information related to the implementation of the Commerce Department’s CHIPS and Science Act initiatives, and will provide information about Departmental priorities, funding opportunities, timelines, requirements and more as the information becomes available.”

HIGHLIGHTS OF INITIAL COMMERCE GUIDANCE FOR POTENTIAL FUNDING APPLICANTS

On September 6, Commerce released a strategy paper detailing the guiding principles, plans, and important considerations for applicants for funding under the Commerce-controlled CHIPS for America Fund (the “Strategy Paper”). Important top-line items for potential applicants include that (i) Commerce intends to begin soliciting applications by February 2023; (ii) Commerce will provide would-be applicants with a way to submit and receive preapplication feedback; and (iii) the lion’s share (75%) of available funds will go toward “establish[ing] domestic production of leading-edge logic and memory chips that require the most sophisticated manufacturing processes available today.” Part IV of the Strategy Paper (“Considerations for Applicants for Chips Incentives”) builds upon the basic framework for awards to “covered entities” established under the 2021 National Defense Authorization Act (the “2021 NDAA”) by providing additional insight on how Commerce envisions making awards:

• Creative Finance Structures Welcome: Commerce encourages proposals that incorporate investments from non-fab company sources, including international investors, that incorporate “creative financing structures” that “reduce the overall cost of capital.” Commerce specifically encourages securing “purchase commitments and collaborations across the supply chain.”
• CHIPS Loans and Loan Guarantees: Commerce will provide up to $6 billion in loans and loan guarantees to proposed projects that will “extend CHIPS benefits to a wider set of small manufacturers, and attract other lenders to step in with private debt financing.”
• Not Only About Building Fabs: Commerce’s goal is to build an entire U.S. leading-edge semiconductor ecosystem and will therefore look for projects “that provide better access to design tools and IP, more flexible access to fab resources, and better portability of designs between fabs.” Both pre-fab suppliers (e.g., of substrates or specialty chemicals) and post-fab suppliers (e.g., of assembly, test, and packaging) are encouraged to join consortium-like proposals with semiconductor fabricators.
• “Covered Incentives” Described More Fully: The 2021 NDAA requires applicants to have been offered a “covered incentive” (e.g., a local or state government-provided tax incentive or concession with respect to real property). The Strategy Paper provides further granularity beyond the statutory definition, emphasizing examples such as demonstrating in an application how a project will create broad economic development effects within communities, be eligible for long-term local tax credits, and receive expedited local permitting and regulatory procedures.
• Supply Chain Security and Resiliency: Commerce will prioritize projects that
  (i) “adhere to standards and guidelines on information security, data tracking, and verification”; (ii)“collaborate on further development and adoption of such standards”; and (iii) address “poor demand visibility, single sourcing and geographic chokepoints, transport and logistical bottlenecks, weather-related disruptions, counterfeiting and tampering, IP theft, and cybersecurity vulnerability.”
• A Strong Worker and Community Investment Program: The Strategy Paper highlights Commerce’s interest in receiving projects “that enable employers, training providers, workforce development organizations, labor unions, and other key stakeholders to work in partnership to create more paid training and experiential apprenticeship programs, and to hire based on skills, not just degrees,” particularly from populations underrepresented in the industry.
• Small and Underrepresented Businesses: Commerce will “prioritize” projects that include small, minority-owned, veteran-owned, and women-owned businesses to the greatest extent possible.
• Long-Term, Reasonable Financial Plans Required: Commerce will assess the commercial viability of projects to stay funded for their useful life without further government funding, including whether projected revenue, operating costs, cash flows, and other financials are commercially reasonable. The Strategy Paper notes the financial plan should clarify how the CHIPS Act’s advanced manufacturing investment tax credit for construction projects starting from 2023 through 2026 will impact the project’s financial results.

The Strategy Paper is available here, and an executive summary is available here. Absent from the Strategy Paper were any meaningful new details on the CFIUS-like outbound investment review process for “significant transactions” by CHIPS Act funding recipients in China, Russia, Iran, and North Korea, which we recently wrote about here.

BUREAU OF INDUSTRY AND SECURITY RESTRICTS EXPORTS OF SECTION 1758 SEMICONDUCTOR SUBSTRATES AND ECAD SOFTWARE

In addition, Commerce’s Bureau of Industry and Security (“BIS”) released new export controls on August 15 on two semiconductor substrate materials – Gallium Oxide and diamond – along with ECAD software specially designed for the development of integrated circuits with any Gate-All-Around Field-Effect Transistor (“GAAFET”) structure (hereafter, “ECAD for GAAFET software”). BIS labeled all three items (along with a fourth item—pressure gain combustion technology for the production and development of gas turbine engine components or systems) as emerging and/or foundational technologies under section 1758 of the Export Control Reform Act. Therefore, any U.S. business that produces, designs, tests, manufactures, fabricates, or develops these items or software will be a “TID U.S. business” for CFIUS purposes. 

The controls on Gallium Oxide and diamond substrates took effect immediately on August 15, 2022, but the new control on ECAD for GAAFET software will not take effect until October 14, 2022. The interim final rule includes a saving clause for items en route to a port of export on or before August 30, 2022, and actually exported, reexported, or transferred in-country by midnight on September 14, 2022. However, ECAD for GAAFET software is subject to a saving clause requiring that it be en route by October 14, 2022, and actually exported, reexported, or transferred in-country by midnight on November 14, 2022. The Federal Register notice is available here.

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WINSTON’S SEMICONDUCTOR INDUSTRY EXPERIENCE

Winston & Strawn boasts a cross-disciplined team of attorneys with significant experience assisting clients in the semiconductors and materials science industry. Our semiconductors group helps our clients to navigate various intellectual property, securities, international trade, CFIUS, and antitrust issues, including those involving alleged conspiracies to unreasonably restrain trade, illegal imports, alleged anticompetitive licensing schemes, FRAND violations, and monopolization claims. We have worked to get punitive consumer class actions dismissed, section 337 investigations settled, and high-profile claims by competitors and licensees dismissed. In his prior role as the Deputy Assistant Secretary for Investment Security at Treasury, one of our key international trade partners oversaw several CFIUS reviews of high-profile semiconductor company transactions. Our firm includes over 20 attorneys with technical degrees in life sciences and high-tech (including industrial and systems engineering, electrical engineering, and computer engineering) sectors, and attorneys with experience working for leading semiconductor companies, allowing us to truly understand the technology involved in this field. We also have extensive experience overseas, with a particularly strong presence in Asia, often allowing us to pursue a comprehensive legal strategy across jurisdictions to help our clients achieve their business goals.

THE CHIPS ACT—HOW WE CAN HELP

With the passing of the CHIPS Act, our firm can further assist semiconductor industry clients with their regulatory obligations. Our highly skilled team can guide clients on ways to structure transactions to stay compliant within the guidelines of the CHIPS Act. Utilizing our significant experience engaging with Commerce, we can respond to Commerce’s requests for notice and comment on proposed regulations, communicate with Commerce about proposed transactions, and submit filings. Finally, if mitigation is required, our team can negotiate mitigation agreements that minimize the risk to our clients’ company operations.