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The CHIPS Act: What We Know So Far

Litigation Alert

Last month, the Biden administration announced the inaugural leadership team of the CHIPS for America offices that will be responsible for implementing the recently enacted CHIPS Act (the Act). This move signals that the U.S. is making real progress towards bolstering the domestic semiconductor industry and prompts a key question: How will the government implement the CHIPS Act? 

The Act funds and extends provisions of the 2021 National Defense Authorization Act (NDAA) focused on the semiconductor industry. According to the administration, the Act "will strengthen American manufacturing, supply chains, and national security, and invest in research and development, science and technology, and the workforce of the future to keep the United States the leader in the industries of tomorrow, including nanotechnology, clean energy, quantum computing, and artificial intelligence." On September 6, 2022, the U.S. Department of Commerce (Commerce) released a guidance document describing its implementation strategy for the Act, titled "Strategy for the CHIPS for America Fund" (the Strategy). The Strategy is a must-read for any company looking to take advantage of the incentives created by the Act, including details about key initiatives, the application process, and government oversight of the CHIPS program. 

Below we provide an overview of the incentives created by the Act, the guidance released by Commerce to date, and some key takeaways for industry stakeholders.

Overview of the Act

The Act's Provisions

The Act provides $52.7 billion over five years in appropriations to spur American semiconductor research, development, and manufacturing. Specifically, it funds:

  • Domestic Manufacturing Incentives ($39 billion) to incentivize semiconductor facilities and equipment investment in the U.S. The funds will go towards the fabrication, assembly, testing, advanced packaging, production, or research and development (R&D) of semiconductors, materials used to manufacture semiconductors, or semiconductor manufacturing equipment.
  • Semiconductor R&D and Workforce Development ($11 billion) to implement semiconductor research and development programs, including the National Science and Technology Council and various initiatives at the National Institute of Standards and Technology (NIST). 
  • CHIPS for America Defense Fund ($2 billion) to establish a national network of microelectronics research and development.1
  • CHIPS for America International Technology Security and Innovation Fund ($500 million) to provide for international information and communications technology security and semiconductor supply chain activities.2
  • CHIPS for America Workforce and Education Fund ($200 million) to promote microelectronics workforce development.3

The Act's Guardrails

The Act undoubtedly provides robust opportunities for U.S. semiconductor manufacturers to receive funding in the coming years. However, the Act conditions the receipt of funds on various requirements and allows the government to claw back misused funds. In this regard, manufacturers must commit to worker and community investments and may only use funds for specific activities including investment in semiconductor facilities, to support workforce development, and to pay associated reasonable costs — not stock buybacks or shareholder dividends. Further, Commerce must deem funded projects to be in the economic interests of the U.S. 

To further the legislation's goal of ensuring "the United States maintains and advances its scientific and technological edge," the Act institutes certain guardrails aimed at preventing funds from benefiting foreign entities, namely China. To do so, the Act requires recipients4 enter into agreements with Commerce promising not to engage "in any significant transaction, as defined in the agreement, involving the material expansion of semiconductor manufacturing capacity in the People's Republic of China or any other foreign country of concern"5 for a period of 10 years after receiving funds.6 If a recipient violates the agreement, Commerce is authorized to claw back the full amount of financial assistance provided. Recipients are also required to notify Commerce of planned transactions that may violate the prohibition. From there, Commerce may choose to enter into a mitigation agreement with the recipient. Otherwise, the recipient has 45 days to provide proof to the Secretary of Commerce that the planned significant transaction has ceased or been abandoned, or the funds may be recaptured. Notably, the clawback provision does not apply to (1) existing facilities and equipment of a covered entity for manufacturing legacy semiconductors or (2) significant transactions involving the material expansion of semiconductor manufacturing capacity that produces legacy semiconductors and predominately serves the market of a foreign country of concern. 

The Act's Tax Credit

The Act also establishes a new federal income tax credit (the 48D Tax Credit), which was discussed previously in detail here. The credit is equal to 25 percent of a taxpayer's investment in certain qualifying property placed in service as part of a facility for the manufacturing of semiconductors or semiconductor manufacturing equipment. The tax credit only applies to qualified properties placed into service after December 31, 2022 and for properties that begin construction before 2027. Similar to the requirements imposed on fund recipients, the tax credit is conditioned on applicable taxpayers7 refraining from significant transactions8 involving the material expansion of semiconductor manufacturing capacity of such applicable taxpayer in the People's Republic of China or a foreign country of concern for a period of 10 years after the facility is established. If a credit recipient engages in such a transaction, the credit would be clawed back in full if the taxpayer cannot demonstrate the violating transaction is halted within 45 days of notice from the Department of Treasury. The claw back provision does not apply to transactions which primarily involve the expansion of manufacturing capacity for legacy semiconductors.

The Strategy

The Strategy contains Commerce's first comprehensive guidance on the implementation of the CHIPS Act and includes information on program administration, key initiatives, timelines for funding notices, and recommendations for successful applications for incentives. 

Program Administration

The CHIPS program will be administered by two new offices at NIST — the CHIPS Program Office (CPO) and the CHIPS R&D office. According to the Strategy, the CPO will implement section 99029 of the CHIPS program and "provide policy and stakeholder engagement support across CHIPS Programs." On September 20, 2022, Michael Schmidt was announced as the Director of the CPO. He most recently served as a Senior Advisor at the Treasury Department. The CHIPS R&D office will "incubate" the National Semiconductor Technology Center (NSTC) and manage the Industrial Advisory Committee, Advanced Packaging, Manufacturing USA, and R&D activities. According to Commerce, NIST was selected to house these new offices because of its "deep technical expertise, industry focus, experience with public-private partnerships, and strong administrative functions." Eric Lin has been named as the Interim Director of the R&D office.

Key Initiatives

The Strategy outlines three key initiatives for the CHIPS program:

  • Large-Scale Investments in Leading-Edge Manufacturing: In order to implement the Act's goal of establishing domestic production of leading-edge logic and memory chips, Commerce will seek proposals "for the construction or expansion of manufacturing facilities to fabricate, package, assemble, and test these critical components particularly focusing on projects that involve multiple high-cost production lines and associated supplier ecosystems." Commerce anticipates that funding for this initiative should be approximately $28 billion, which is around three quarters of the CHIPS incentive funding for Section 9902. The funding will be available for grants/cooperative agreements or to subsidize loans or loan guarantees and Commerce has set a goal to begin solicitating applications within six months of the enactment of the Act. There will be a preliminary phase where applicants will be able to get feedback from the CPO prior to submitting a complete application. The Strategy notes that Commerce is still analyzing the impact of the investment tax credit on capital expenditures, "which will generate significant additional project investment from participants and will reduce the required share of federal CHIPS incentive funding allocated for leading edge projects." 
  • Expanding Manufacturing for Mature and Current Chips, New and Specialty Technologies, and for Suppliers to the Industry: Commerce identifies the following types of proposals covered by this initiative:
    • Construction or expansion of facilities for the fabrication, packaging, assembly, and testing of legacy and current-generation semiconductors
    • Facilities to produce new or specialty technologies
    • Facilities that manufacture equipment and materials for semiconductor manufacturing, potentially co-located in regional clusters
    • Equipment upgrades that provide near-term efficiency improvements in semiconductor manufacturing facilities (fabs)
    According to Commerce, "funding will be provided only after a rigorous merit review" and may include a mix of funding vehicles, such as grants, loans, and loan guarantees. Applicants are encouraged to "craft creative proposals." For this initiative, Commerce anticipates dozens of awards totaling approximately $10 billion, which is around one quarter of the available CHIPS incentive funding under Section 9902. Like leading-edge manufacturing, the goal is to begin soliciting applications within six months of enactment of the Act and Commerce is still assessing the impact of the investment tax credit.
  • Strengthening and Advancing U.S. Leadership in R&D: The Strategy provides information about the functioning of the following R&D initiatives that will together receive $11 billion in funding under the Act:
    • NSTC: The NSTC is being built to "be a significant force for advancing innovation in semiconductors and microelectronics, with substantial financial and programmatic support from companies, universities, investors, and other government agencies, including those at the state and local levels." Commerce views the NSTC as a "center for excellence" for the domestic semiconductor industry that will respond to "long-term market needs." The NSTC will focus on "advancing semiconductor design, scaling new manufacturing processes, developing new tools and materials, and improving the lab-to-fab product flow." According to the Strategy, another "critical role" for the NSTC will be workforce development. 
    • National Advanced Packaging Manufacturing Program (NAPMP): The NAPMP will be used to expand U.S. capabilities in advanced packaging by forming a "network of entities to create a robust domestic advanced packaging capacity."
    • Manufacturing USA Institute: NIST will create up to three new Manufacturing USA Institutes, which are expected to emphasize "virtualization and automation." The institutes will also provide workforce training and development.
    • Metrology Research: The measurement of semiconductors throughout the fabrication process is an essential part of innovation. NIST will expand metrology research programs "to enable breakthroughs in measurement, standards, and process capabilities for the fabrication of next-generation semiconductors."

Implementing the CHIPS Program    

The Strategy emphasizes the importance of accountability, reporting, and oversight regarding the use of funds under the CHIPS incentives program. According to Commerce, there will be a "rigorous review of proposals" to ensure projects are economically viable and support the CHIPS strategy and the successful proposals will be "subject to a variety of performance, reporting, audit and oversight conditions established and overseen by the CPO." 

The application process "will verify the technical and financial merit of the project, rationale for public funding, and organizational structure and operational capabilities of the applicant" and will also include an economic impact assessment. Commerce may recover funds if recipients fail to meet project deadlines or certain commitments and projects will likely be funded "in increments over time as milestone are achieved." Applicants will be required to provide evidence of "significant worker and community investments" and commitments from educational institutions for worker training. The CPO will prioritize the proposals that include such investments and engagement, as well as proposals that include a plan for including economically disadvantaged individuals and businesses in a project. Commerce makes it clear that Davis-Bacon wage rates will apply to CHIPS-funded construction projects.

According to Commerce, the CPO will have a large role in the oversight of the use of CHIPS program funds and will, among other things: (1) "strictly monitor" the use of funds; (2) enforce many important guardrails; (3) develop other guardrails as necessary; and (4) "will not hesitate to claw back funds or pursue other remedies if recipients misuse taxpayer dollars."

Considerations for Applicants for CHIPS Incentives

Soon, the CPO will identify detailed eligibility, evaluation, and selection criteria for proposals under the CHIPS program. The Strategy, however, includes the following early guidance to potential applicants on evaluation factors that require long-term planning:

  • Increase Scale and Attract Private Capital: According to Commerce, economies of scale matter in the semiconductor industry and the CPO will encourage large-scale investment that "attract associated suppliers and workforce investments." CHIPS funding will be "calibrated to provide the minimum federal investment required to attract significant private investment," therefore Commerce encourages applicants to leverage private investment from fabrication companies and other sources. Commerce believes that infrastructure funds and asset managers may discover new investment opportunities in the semiconductor sector and encourages semiconductor manufacturers to "explore creative financing structures." Commerce plans on using loans and loan guarantees "to leverage the impact of government grants" and encourages applicants to consider these funding vehicles as part of their federal assistance application package.
  • Leverage Collaboration to Build Out Semiconductor Ecosystems: In order to "attract investors, foster innovation, reduce risk, increase transparency, and ensure that investments are consistent with future market demand," the CPO will encourage collaboration between "industry stakeholders, investors, customers, designers, and suppliers," as well as international firms. Such collaboration could include: (1) purchase commitments across the supply chain; (2) partnerships that enable fabless design firms; and (3) collaboration, including "consortium-like" proposals, by fabricators and their upstream suppliers, equipment providers, and downstream partners. 
  • Secure Additional Financial Incentives and Support to Build Regional and Local Industry Clusters: The 2021 NDAA requires applicants to secure incentives from state and local governments and Commerce expects to prioritize projects that include state and local incentive packages. In its Strategy, Commerce includes the following examples of encouraged incentives: (1) investments in industrial infrastructure that support the project as well as well as "broader development of a supplier ecosystem"; (2) workforce investment; and (3) long-term tax credits to ensure that firms continue to invest in improvements. 
  • Establish a Secure and Resilient Semiconductor Supply Chain: To achieve its goal of improving the semiconductor supply chain, Commerce will prioritize projects that adhere to standards on information security, data tracking and verification, and collaboration to further develop adoption of such standards. Additionally, Commerce intends to prioritize projects that address supply chain risks, such as poor demand visibility, single sourcing, transport and logistical issues, weather-related disruptions, counterfeiting and tampering, intellectual property (IP) theft, and cybersecurity issues. 
  • Expand the Workforce Pipeline to Match Increased Domestic Capacity Workforce Needs: Commerce will prioritize proposals with "effective and creative workforce development solutions at the scale required to meet demand" and projects that "connect workforce training dollars to quality jobs that exceed the local prevailing wage for an industry in the region." The Strategy recommends that proposals include "investments to scale proven models as well as ideas for pilot programs that are driven by the market needs." Commerce also encourages applicants to use recruitment strategies that target outreach to economically disadvantaged individuals and populations that have been historically underrepresented in the industry, including women, veterans, people of color, and workers living in rural areas. As part of this outreach, Commerce will encourage proposals that provide benefits and supports to workers, such as childcare, transportation, language education, high-speed internet, mentoring, and career counseling. 
  • Create Exclusive and Broadly Shared Opportunities for Businesses: Like many federal government programs, the CHIPS program places an emphasis on promoting and assisting small and underrepresented businesses. Commerce intends to prioritize projects that include such businesses in construction contracts, the production supply chain, R&D, and investment opportunities. 
  • Financial Considerations: Applicants will be required to provide detailed project-specific and company-level financial data. Proposed projects will vary, but Commerce has identified the following items that should be included in an applicants proposal: (1) an executable plan to maintain the facility throughout its useful life without the use of further CHIPS funding; (2) provisions for necessary investments and upgrades to ensure the facility stays competitive and viable for its useful life; (3) commercially reasonable assumptions for revenue, operating costs, cash flows, and other drivers of financial sustainability; and (4) an analysis of how the investment tax credit will impact the financial results of the project. The Strategy also explains that an applicant's plan should not result in an outsize rate of return compared to commercially reasonable expectations. 

Key Takeaways

There are several key takeaways from Commerce's recently published Strategy:

  • CHIPS Funding is a Small Piece of the Puzzle: The Strategy highlights the importance of other funding sources for semiconductor projects, including funding from state and local governments and private investments. Commerce is also still analyzing how the investment tax credit and other funding vehicles will work in conjunction with Section 9902 incentives. To be competitive for CHIPS funding, applicants will need to (1) look for other sources of funds, (2) develop a comprehensive financial plan, and (3) demonstrate that the proposed facility will remain competitive and commercially viable for its useful life. 
  • CHIPS Funding Comes with Strings Attached: As is the case with most federal funds received via grant and cooperative agreement, CHIPS program funding comes with government oversight. The Strategy outlines the rigorous nature of the application process and the reporting, audit, and general government oversight that will accompany the receipt of funds. Entities applying for CHIPS program incentives should make sure that they have the proper policies, procedures, and business systems in place to manage this government oversight.
  • CHIPS Funding Will Be Used to Support American Workers: Two of the stated goals of the Act is to create quality domestic jobs and support a diverse workforce. Commerce intends to prioritize proposals that have a creative plan to support these goals, so applicants should focus on putting together a plan that shows their commitment to creating a resilient and diverse workforce on their project. 
  • The Act Includes Opportunities for Small Businesses: The Strategy notes that Commerce will prioritize proposals that utilize small and underserved businesses. To take advantage of CHIPS incentives, small businesses should search for opportunities to partner, team, and/or subcontract with larger businesses in the semiconductor industry. Similarly, large businesses should look to form relationships with small businesses to put themselves in the best position to compete for CHIPS incentives.
  • The Act Creates Opportunities for Companies Not Directly Tied to the Semiconductor Industry: The Act and Strategy encourage the use of private investment and commitments. Companies not directly involved in the manufacture of semiconductors should look for opportunities to invest or provide their products or services to projects funded by the CHIPS program. In particular, construction companies and equipment and material suppliers should look for projects incentivized by the Act. 
  • Industry Will Need to Wait for Additional Guidance on the Act's Guardrails: Several key terms related to the guardrail provisions in the Act remain undefined. Specifically, the Act and Strategy do not define "semiconductor manufacturing" and "material expansion." Additionally, the Act does not describe what is meant by the phrase "predominately serves the market." Companies will need to wait for additional guidance on these definitions to fully understand how the guardrails will be applied. 

We will continue to monitor and report on the continued implementation of the CHIPS Act. In the meantime, if you have any questions about the Act, please contact one of the Miller & Chevalier attorneys listed below:

Richard A. Mojica,, 202-626-1571

Connor W. Farrell,, 202-626-5925

Elizabeth J. Cappiello*

This alert was republished in Law360.

*Former Miller & Chevalier attorney


1As required by the NDAA for Fiscal Year 2021 § 9903(b). 

2NDAA for Fiscal Year 2021 §§ 9202(a)(2), 9905.

3NDAA for Fiscal Year 2021 § 9906.

4The expansion clawback restrictions apply to the funding recipient's "affiliated group," as that term is defined in Section 1504(a) of the Internal Revenue Code (but excluding Section 1504(b)(3) of the Code). Therefore, foreign corporations are captured as part of a recipient's "affiliated group."

5"Foreign country of concern'' means the People's Republic of China, the Democratic People's Republic of Korea, the Russian Federation, the Islamic Republic of Iran, or any other country determined to be a country of concern by the U.S. Department of State. 

6Notably, the Act does not define "significant transaction," and therefore it is likely left to the parties to the agreement to decide on the meaning of the term. "Material expansion" and "semiconductor manufacturing" are also not defined in the Act. The Act indicates that the term "semiconductor manufacturing" will be defined by the Secretary of Commerce, in consultation with the Secretary of Defense and the Director of National Intelligence and will include front-end semiconductor fabrication.

7Unlike the expansion clawback discussed above, the clawback under the tax credit provision applies to "applicable taxpayer" which means affiliates of the applicable taxpayer may engage in manufacturing activities in China or a foreign country of concern without issue.

8Here it appears that the definition of "significant transactions" will be determined by the Secretary of the Treasury, Secretary of Commerce, and Secretary of Defense.

9Section 9902 of the 2021 NDAA gives Commerce the authority to provide funding to applications to incentivize investment in facilities and equipment in the U.S. for semiconductor manufacturing. Section 9906 gives Commerce the authority to establish the National Semiconductor Technology Center and National Advanced Packing Manufacturing Program. 

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