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Exiger Regulatory Roundup, Episode 14: CHIPS Act Guardrails and Clawbacks

December 13, 2023

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Mary Kopczynski, CEO of RegAlytics, breaks down hot regulatory topics, exclusively for Exiger. This episode focuses on safety guardrails and clawbacks for Creating Helpful Incentives to Produce Semiconductors and Science Act of 2022 (CHIPS Act).

The CHIPS Act established a $52 billion CHIPS for America Fund to invest in the development of semiconductor technology in the United States.

A Matter of National Security

Semiconductor chips are a critical component of any artificial intelligence capability as well as our micro-electronics, like our phones, which we so love and now rely on. While semiconductors were invented in the United States, only 10% of the production is happening here. And given the global climate, it is in our national security interest to strengthen our supply chain domestically. For this reason, CHIPS proposals are being heavily vetted to ensure none of the funds make it to “countries of concern.”

The Department of Commerce is tasked with reviewing and approving applications, but Secretary Gina Raimondo made it clear that “no application will be approved or money sent out the door until the guardrails are finalized.” The final safety guardrails are effective as of November 24, 2023.

Guardrails Demystified

There are two major components to the guardrails: (1) the Expansion Clawback, and (2) the Technology Clawback. The Expansion Clawback controls where in the world you expand your operations; the Technology Clawback controls who you share your technology know-how with.

If you don’t follow the rules, the government has the right to take back up to the full amount of the federal financial assistance. Some commentators balked, saying this was likely to put the company in financial jeopardy. Commerce was clear: CHIPS funding was specially designed to create a competitive advantage for the United States, and recipients are expected to follow the rules or pay the price.

What you need to know is this: If you apply and receive CHIPS Act funding, you will sign agreements between your company and the U.S. government that, in some cases, will last long after the funding is received (in some cases 10 years or more!). For example, you would have to notify the government of any significant transaction or expansion into a foreign country of concern — even if you think that the transaction would be allowed.

The Devil’s in the Definitions

The saying goes — the Devil is in the details — but in this case, it’s the definitions. What is a “foreign country of concern?” What is a “material expansion?” What does “ownership and control” mean? Commerce responded to comments from 27 letters and explained where they were changing the rule, where they were keeping it as written and, most importantly, why. Here are some important final definitions simplified, but be sure to work with legal counsel to vet the rules against your exact situation.

Who? A company is largely defined by its ownership. Under the rule, any person who is holding 25% or more of voting interest in foreign entities of concern is considered a foreign entity of concern itself. So if you have owners in the company, it is not only how much they own of the CHIPS recipient’s stock — it is also how much stock they own in other companies.

What? You are not allowed to expand semiconductor production either in locations of a foreign country of concern OR with a foreign entity of concern. You are also not allowed to do joint research or technology licensing with a foreign country or entity of concern. But there are exceptions. For example, you may “expand” your ability to package the chips with a foreign country or entity of concern — even if it means sending sizing specifications — because packaging is not sensitive semiconductor technology. The revised rule specifies which items are considered semiconductor “technology.”

When? Originally, the rule was to apply for 10 years after the funding was awarded. But, after commentary, Commerce decided that in some cases, 10 years was too long and in other cases, 10 years wouldn’t not be long enough, so the official timeframe will be set in each individual award contract.

Where? There was much debate and discussion about the definition of a “foreign entity of concern,” but it’s currently limited to countries that are listed in 10 USC § 4872(d) (currently North Korea, China, Russia, and Iran), and applies to citizens, nationals, or residents of those countries while they are in any of those countries. Commerce also illustrated, for example, “the term would include an Iranian national working in Russia, but would not include a Chinese national lawfully working in the United States or the Republic of Korea.”

How? Commerce will expect you to notify it with a formal letter, signed by executives at the company, outlining any material expansion into or with foreign entities or countries of concern — regardless of whether you think it is allowed or not. Commerce will then respond — allowing it, denying it or asking more questions about it. There is an appeals process outlined, and, while Commerce has not built out the formal plan for adjudicating disputes, it indicated it may do so with input from Treasury.

How to Protect Yourself from Clawbacks

While having appropriate counsel is important to ensuring CHIPS Act Funding makes sense for your business, understanding your full supply chain will be critical for long term success. You will need to monitor and track your full production cycle, down to the secondary and tertiary suppliers, to ensure that no part of the CHIPS Act Funding lands in a place that would put your funding and your entire business at risk.