On September 29, 2023, Commerce announced a funding opportunity for smaller supply chain projects and businesses to access CHIPS Act funds.

Recent Biden administration actions create significant opportunities and challenges for companies that operate in the semiconductor space. The Creating Helpful Incentives to Produce Semiconductors and Science Act of 2022 (CHIPS Act) now offers two new funding options, while the U.S. Department of Commerce and the U.S. Department of the Treasury have issued new trade and investment restrictions on semiconductor-related products and technologies.  

New CHIPS Act Funding Opportunities

CHIPS for America Funding Opportunity to Strengthen Semiconductor Supply Chains

On September 29, 2023, Commerce announced a funding opportunity for smaller supply chain projects and businesses to access CHIPS Act funds. As discussed in our previous Alert, the funding opportunity is part of the Biden administration’s continued effort to implement and deploy funds provided by the CHIPS Act, which allocates $53 billion worth of funding, loan guarantees and other incentives for domestic chip making.

The new funding opportunity is open to projects with capital investment below $300 million involving the construction, expansion or modernization of commercial facilities in the United States for semiconductor materials and manufacturing equipment. These projects will produce the equipment, chemicals, gases and other materials that are critical to manufacturing semiconductors. This funding opportunity builds upon Commerce’s announcement in June expanding funding to larger supply chain projects and the Biden administration’s strategic vision to strengthen the semiconductor supply chainthrough CHIPS Act investments.

This new funding opportunity features an application process designed to be accessible for smaller businesses and projects. The application process includes two phases:

• Concept Plan: Applicants are asked to submit a concept plan describing how their proposed project addresses core strategic objectives, including U.S. economic and national security. Concept plans will be accepted between December 1, 2023, and February 1, 2024. 
• Full Application: Commerce will review submitted concept plans and invite the most promising applicants that demonstrate how they advance program priorities to submit a full application for CHIPS Act incentives. The full application submission dates will be communicated to applicants individually upon notification of their advancement. 

Since announcing the first CHIPS Act funding opportunity in February, Commerce has received over 500 statements of interest and over 100 preliminary and full applications from companies seeking to build semiconductor projects across 42 states. This most recent funding opportunity for smaller projects follows through on the CHIPS Act’s requirement that Commerce establish a program to incentivize investment in the construction, expansion or modernization of commercial facilities in the U.S. for the semiconductor supply chain, including materials and manufacturing equipment.

Tech Hubs Established Across America

In addition to the latest round of CHIPS Act semiconductor funding, on October 23, 2023, the Biden administration, through Commerce’s Economic Development Administration (EDA), announced the designation of 31 “Tech Hubs” in regions across the country, as well as recipients of 29 Tech Hubs Strategy Development Grants. The announcement is the first phase of the new Tech Hubs program, which is an economic development initiative authorized and funded by the CHIPS Act designed to drive regional innovation and job creation by strengthening a region’s capacity to manufacture, commercialize and deploy technology that will advance American competitiveness. The program invests directly in burgeoning, high-potential U.S. regions and aims to transform them into globally competitive innovation centers. The newly designated Tech Hubs focus on industries ranging from autonomous systems, quantum computing, biotechnology, precision medicine, clean energy advancement, semiconductor manufacturing and more.

Also on October 23, 2023, Commerce launched a second Tech Hubs notice of funding opportunity, through which only the 31 newly designated Tech Hubs can apply to receive between $40 million and $70 million each for implementation funding, totaling nearly $500 million. EDA will award the implementation grants for five to 10 designated Tech Hubs, with each one receiving the approximately $40 million to $70 million across approximately three to eight projects. Applications for this funding opportunity are due by February 29, 2024.

“Guardrails” on CHIPS Act Funding

Companies interested in the above funding opportunities should first take note of the “guardrails” on CHIPS Act funding announced in September 2023, which include limiting funding recipients from expanding semiconductor manufacturing in foreign countries of concern. On September 22, 2023, Commerce released the final rule implementing the national security guardrails of the CHIPS Act. The rule elaborates on two core provisions of the CHIPS Act: (1) prohibiting CHIPS funds recipients from expanding material semiconductor manufacturing capacity in foreign countries of concern for 10 years; and (2) restricting recipients from certain joint research or technology licensing efforts with foreign entities of concern. In particular, the guardrails final rule:

• Establishes standards to restrict expansion of advanced facilities in foreign countries of concern;
• Limits the expansion of legacy facilities in foreign countries of concern;
• Classifies semiconductors as critical to national security; and
• Details restrictions on joint research and technology licensing efforts with foreign entities of concern.

If these guardrails are violated, Commerce can claw back the entire federal financial assistance award. As such, companies interested in the above funding opportunities and future CHIPS Act funding opportunities should take careful note of the restrictions attached to the funds.

In addition to the guardrails, companies involved in the semiconductor industry that employ foreign nationals must always remain mindful of regulations regarding “deemed exports,” which are any release of technology or source code subject to the Export Administration Regulations (EAR) to a foreign national, and the recent expansion of the semiconductor-related export controls, discussed below.

Revised and Expanded Semiconductor-Related Export Controls

On October 17, 2023, Commerce’s Bureau of Industry and Security (BIS) announced three new rules imposing additional restrictions on exporting artificial intelligence-enabling chips to China. The new rules update the expansive semiconductor-related export controls that were introduced on October 7, 2022, to include more types of chips and semiconductor manufacturing equipment, and to prevent the routing of exports to China through third countries. See our previous Alert. These new rules expand the scope of items and end uses subject to the export control restrictions, while also expanding the territorial scope to encompass not only China and Macau but also additional countries that BIS has determined pose potential national security and diversion risks.

The new rules will take effect on November 17, 2023, except for the Entity List additions, which are effective immediately. BIS is seeking public comments on the new rules, as well as several related issues, by no later than December 18, 2023. We briefly summarize the three new rules below:

Entity List Additions

In this rule, BIS amends the EAR by adding 13 entities to the Entity List under the destination of China. All of the newly designated entities are involved in the development of advanced computing integrated circuits (ICs). For all of these entities, BIS imposes a license requirement for all items subject to the EAR, which will be reviewed under a presumption of denial.

Export Controls on Semiconductor Manufacturing Items

In this interim final rule, BIS addresses comments received in response to the interim final rule previously released on October 7, 2022, which amended the EAR to implement controls on ICs, computer commodities that contain such ICs and certain semiconductor manufacturing items. The new interim final rule amends the EAR to implement semiconductor manufacturing equipment (SME) controls more effectively and to address ongoing national security concerns.

Specifically, the new rule includes additional types of SMEs that will now be controlled under Export Control Classification Numbers (ECCNs) 3B001 and 3B002; expands the scope of the destination controls; creates a zero percent de minimis rule for certain lithography equipment; introduces a new temporary general license for U.S.-headquartered companies and companies headquartered in countries specified in country group A:5 or A:6; refines the controls that restricted the ability of U.S. persons to support the development or production of ICs in China; and reorganizes and revises “supercomputer” and semiconductor manufacturing end-use controls.

Implementation of Additional Export Controls: Certain Advanced Computing Items; Supercomputer and Semiconductor End Use; Updates and Corrections

In this interim final rule, BIS again addresses comments received in response to the interim final rule previously released on October 7, 2022. Specifically, the new rule expands and clarifies the types of ICs controlled under ECCN 3A090; revises existing ECCNs to identify the types of items that meet or exceed certain advanced computing parameters specified in ECCNs 3A090 and 4A090; expands the scope of the destination controls applicable to the advanced computing ECCNs; establishes a new license exception for notified advanced computing and updates eligibility for certain other license exceptions; clarifies the scope of certain U.S. person and end-use controls; introduces two additional advanced computing end-use controls; broadens the country scope of the advanced computing foreign direct product (FDP) rule; provides additional “red flag” guidance to assist with compliance; and establishes one temporary general license to allow for the establishment of new supply chains. This rule also adds new “performance density” parameters that are intended to prevent workarounds from the prior thresholds.

The new rules thus collectively:

1. Expand the range of advanced chips and SMEs that require a license;
2. Significantly expand beyond China the countries that require a license;
3. Expand the scope of foreign-made chips, and items incorporating such chips, that may be subject to U.S. jurisdiction pursuant to the FDP rule; and
4. Extend licensing requirements in certain instances to companies located anywhere in the world whose parent company is headquartered in Macau or a country subject to a U.S. arms embargo (a D:5 country).

The more than 40 countries affected by the new license requirements include, for example, Bahrain, Egypt, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates, all of which are important U.S. partners in the region.

Companies in the semiconductor space and related industries should assess the impact of the new rules on their business operations, particularly their broader supply chains. For instance, companies should examine whether the new rules impact the classification of their ICs and equipment incorporating the ICs, and the scope of the company’s current transactions involving countries and companies newly subject to a licensing requirement.

Executive Order Relating to Outbound Investment Involving Semiconductors

In addition to the new export controls rules discussed above, in August 2023, President Biden issued Executive Order 14105, which declared a national emergency to deal with the threat of advancement in military, intelligence, surveillance and cyber-enabled technologies and products of China. The executive order directs Treasury to begin a rulemaking process that will prohibit certain transactions and establish notification requirements for others in the following sectors:

1. Semiconductors and microelectronics;
2. Quantum information technologies; and
3. Artificial intelligence.

While the regulations are still under development, any U.S. entities currently investing or contemplating investing in the semiconductor sector in China, Hong Kong or Macau should take note. For more information, please see our previous Alert.

Nearshoring Opportunities Involving Mexico

As the U.S. expands its semiconductor-related export restrictions, imposes new license requirements on a number of countries, and contemplates restricting certain investments in China, it is simultaneously deepening its economic relationship with Mexico in this space. On September 29, 2023, senior government officials from the U.S. and Mexico met in Washington, D.C., for the third meeting of the U.S.-Mexico High-Level Economic Dialogue (HLED), which was relaunched in 2021. During this most recent HLED meeting, the U.S. and Mexico discussed how to seize emerging opportunities and how to promote manufacturing investment and generate employment and prosperity as the U.S. implements the CHIPS Act.

In particular, the U.S. and Mexico have established an action plan on semiconductor supply chains with the following objectives:

1. Supporting the integration of regional semiconductor supply chains;
2. Scaling existing activities in the region by improving the investment climate, and attracting new investments in assembly, testing and packaging;
3. Promoting the diversification of investment toward activities not yet present in the region or which could have an expanded presence;
4. Fostering state and local-level dialogues to promote investments in the semiconductor industry; and
5. Supporting workforce development efforts in the region’s semiconductor industry.

In addition, the U.S. and Mexico plan to convene a series of dialogues with Mexican states, municipalities and other local stakeholders as a mechanism to foster local partnerships with the private sector, academia and other organizations to promote development of semiconductor supply chains. Finally, the U.S. Department of State also intends to support a Mexican government technical delegation to visit semiconductor manufacturing facilities in the United States in late 2023 to discuss opportunities for semiconductor supply chain cooperation.

About Duane Morris

Attorneys in the firm’s International Group have considerable subject matter experience on issues involving regulatory compliance, export controls and international supply-chain related issues. Such work includes obtaining export licenses, advising on compliance-related matters, regulatory monitoring of the constantly evolving enforcement changes to merchandise classification, advising clients on pertinent duty mitigating strategies, performing risk assessments and assisting clients in developing and implementing cost-effective compliance policies and taking remedial actions when necessary. Duane Morris has offices in Singapore, Vietnam, Myanmar and China and maintains desks for other Indo-Pacific countries to facilitate alternate sourcing needs. Our professionals’ wide-ranging experience and the geographic location of our offices are situated to assist clients developing supply chain strategies to reduce disruption risks.

For More Information

If you have any questions or comments about this Alert, please contact Geoffrey M. Goodale, Hope P. Krebs, Eduardo Ramos-Gómez, Matthew S. Yungwirth, Raul Rangel Miguel, Lauren E. Wyszomierski, any of the attorneys in our International Practice Group, any of the attorneys in our Technology, Media and Telecom Industry Group or the attorney in the firm with whom you are regularly in contact.

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