Commerce Finalizes Chips Act Guardrails

The Commerce Department last week released the final version of its guardrails for recipients of Chips Act funding, measures it said will prevent its semiconductor industry grants from being used to benefit certain “foreign countries of concern,” including China.

The rule finalizes and elaborates on a range of topics outlined in the proposed rule (see 2303210026), including definitions for key terms, the conditions that will apply to facility expansion and technology licensing activities, the agency’s due-diligence expectations for identifying firms that may qualify as a foreign entity of concern and a process for notifying Commerce about “potentially impermissible activities.” The agency also made several notable revisions that make the final version different from the proposed rule, including nixing its proposed definition for “significant transaction” and changing the definition for “existing facility.”

Commerce Secretary Gina Raimondo said the Chips Act is “fundamentally a national security initiative,” adding that the guardrails “will help ensure companies receiving U.S. Government funds do not undermine our national security as we continue to coordinate with our allies and partners to strengthen global supply chains and enhance our collective security.”

The 68-page final rule will prevent recipients of Chips Act funding from using the money to invest in “most” semiconductor manufacturing in foreign countries of concern for 10 years after the date of award, place limits on funding recipients conducting certain joint research or technology licensing efforts with a foreign entity of concern and more.

The agency isn’t changing its definition for foreign entities of concern -- which includes parties on the Entity List and other denied party lists -- despite some commenters calling the term too broad. Commerce said it expects funding recipients will be able to “exercise appropriate diligence to identify entities that fall within the criteria.” But it also noted that preventing “all activities,” including joint research and technology licensing, with companies operating in foreign countries of concern would “conflict with the current business practices of the semiconductor industry in a manner that is inconsistent with the goals” of the Chips Act.

Instead of revising the definition for foreign entities of concern, Commerce said it’s including exceptions in its definitions for “joint research” and “technology licensing” to exempt employees of the covered entity and any “related entities” from the scope of the technology clawback provision that would allow the agency to claw back the entire funding award if there are violations. Commerce noted the technology clawback doesn’t apply to joint research or technology licensing that is ongoing prior to the agency “communicating to the covered entity the technologies or products that raise national security concerns, which is being done through this final rule.”

Commerce also said it’s rescinding its proposed definition for “significant transaction,” which the agency had floated to help provide guidance for funding recipients prohibited from participating in “significant transactions involving the material expansion” of certain chip manufacturing facilities in foreign countries of concern. Commerce had proposed defining “significant transactions” as those worth at least $100,000.

One commenter told Commerce that the $100,000 threshold -- which would apply over the entire term of a Chips Act funding agreement -- was too low because of the “high capital costs associated with semiconductor manufacturing.” The agency will instead define “significant transactions” for each funding recipient in their agreements with Commerce. Commerce said it “acknowledges that different thresholds for significant transactions may be appropriate for different applicants” and “anticipates issuing further guidance on this issue.”

If the funding recipient or any of its affiliates participates in an “impermissible significant transaction,” Commerce may impose a “mitigation agreement” on that entity or “recoup the full amount” of the funding it received, the rule said. The agency believes recouping the entire amount of the funding, including from members of the covered entity’s “affiliated group,” would “adequately avoid circumvention of the Clawback and meet the national security goals of the Act.”

The agency also said it wanted to offer “additional clarity” for its proposed definition of “existing facility,” which had excluded facilities that undergo “significant renovations” after the required agreement between the funding recipient and Commerce. Commerce said some commenters pointed out there may be a “significant gap” between the planned capacity of a facility and its actual output at the time the funding agreement is signed, and production may fluctuate from one quarter to another based on market conditions and demand.

The final rule clarifies that certain facilities undergoing construction, expansion or modernization may still be considered existing facilities under “specified conditions.” It also said the “baseline manufacturing capacity of the existing facilities at the date of the award will be addressed in the covered entity’s required agreement.

To monitor compliance, Commerce said it will require funding recipients, for 10 years, to submit notifications to the agency for “any planned significant transactions” that “may involve the material expansion of semiconductor manufacturing capacity in a foreign country of concern.” Recipients must notify Commerce “regardless” of whether it “believes the transaction falls within an exception.”

Other notable provisions in the rule establish standards to restrict expansions of “advanced facilities” in foreign countries of concern. Commerce said the rule “ties expanded semiconductor manufacturing capacity to the addition of cleanroom or other physical space and defines material expansion as increasing a facility’s production capacity by more than five percent.” This threshold is meant to “capture even modest transactions to expand manufacturing capacity but allows funding recipients to maintain their existing facilities through normal course-of-business equipment upgrades and efficiency improvements.”

The rule also classifies a list of semiconductors as “critical to national security,” subjecting them to “tighter” restrictions. These are chips that have “unique properties that are critical to U.S. national security needs,” including current-generation and mature-node chips used for quantum computing, in radiation-intensive environments and other “specialized military capabilities,” Commerce said.

The rule outlines a host of other aspects of its guardrails and responds to commenter concerns about other portions of the regulations, including those relating to legacy semiconductors, the definition for “person,” semiconductor manufacturing capacity, prohibitions on expansion-related transactions, and record retention.