Frequently Asked Questions: Preventing the Improper Use of CHIPS Act Funding

The CHIPS Act defines covered entity as a nonprofit entity, a private entity, a consortium of private entities, or a consortium of nonprofit, public, and private entities with a demonstrated ability to substantially finance, construct, expand, or modernize a facility relating to fabrication, assembly, testing, advanced packaging, production, or research and development of semiconductors, materials used to manufacture semiconductors, or semiconductor manufacturing equipment.   

The Guardrails Rule applies only to covered entities who have a CHIPS agreement with the Department. 

The CHIPS Act defines a “foreign country of concern” as a country that is a covered nation under 10 U.S.C. § 4872(d) and any other country that the Secretary of Commerce, in consultation with the Secretary of Defense, the Secretary of State, and the Director of National Intelligence, determines to be engaged in conduct that is detrimental to the national security or foreign policy of the United States.  

The CHIPS Act defines “foreign entity of concern” as any foreign entity that is (a) designated as a foreign terrorist organization by the Secretary of State; (b) included on the specially designated nationals and blocked persons list maintained by the U.S. Department of the Treasury’s Office of Foreign Assets Control; (c) owned by, controlled by, or subject to the jurisdiction or direction of a government of a foreign country listed in section 10 U.S.C. § 4872(d); (d) convicted for activities in violation of various laws, including activities related to espionage, foreign agents, arms export control, or the International Economic Emergency Powers Act (50 U.S.C. § 1701 et seq); or (e) determined by the Secretary of Commerce, in consultation with the Secretary of Defense and the Director of National Intelligence, to be engaged in unauthorized conduct that is detrimental to U.S. national security or foreign policy.  15 U.S.C. § 4651(8).    

Pursuant to 15 U.S.C. § 4651(8)(E), the Secretary added the following categories to the definition of foreign entity of concern in the Guardrails Rule:  

• Entities that are included on the Bureau of Industry and Security’s Entity List (15 C.F.R. part 744, supplement no. 4); and   

• Entities included on the Department of the Treasury’s list of Non-SDN Chinese Military-Industrial Complex Companies (NS–CMIC List), or for which one or more individuals or entities included on the NS–CMIC list, individually or in the aggregate, directly or indirectly, hold at least 50 percent of the outstanding voting interest. 

The Guardrails Rule further elaborates on what it means to be “owned by, controlled by, or subject to the jurisdiction or direction of a government of a foreign country that is a covered nation as defined by 10 U.S.C. 4872(d)”—i.e., the People’s Republic of China (“China”), the Islamic Republic of Iran (“Iran”), the Democratic People’s Republic of North Korea (“North Korea”), and the Russian Federation (“Russia”).  See 15 C.F.R. § 231.104.  A person is owned by, controlled by, or subject to the jurisdiction or direction of a government of China, Iran, North Korea, and Russia if:   

1. the person is (a) a citizen, national, or resident of a foreign country listed in 10 U.S.C. § 4872(d), and (b) located in a foreign country that is listed in 10 U.S.C. § 4872(d);    

2. the person is organized under the laws of or has its principal place of business in a foreign country listed in 10 U.S.C. § 4872(d);    

3. 25 percent or more of the person’s outstanding voting interest, board seats, or equity interest is held directly or indirectly by the government of a foreign country listed in 10 U.S.C. § 4872(d); or    

4. 25 percent or more of the person’s outstanding voting interest, board seats, or equity interest is held directly or indirectly by any combinations of the persons who fall within subsections (i)-(iii).    

Both new and existing facilities are subject to the Expansion Clawback.  CPO recently amended the Guardrails Rule to provide greater clarity on this point. See Preventing the Improper Use of CHIPS Act Funding; Revised Definition of “Material Expansion,” 88 Fed. Reg. 89,572 (codified at 15 C.F.R. § 231).  Material Expansion is now defined as:  

1. with respect to an existing facility, the increase of the semiconductor manufacturing capacity of that facility by more than five percent of the capacity memorialized in the required agreement due to the addition of a cleanroom, production line or other physical space, or a series of such additions; or  
2. any construction of a new facility for semiconductor manufacturing. 

CPO may consider proposed extensions or suspensions of the timelines applicable to actions by covered entities under Section 231.305.  Any such extension or suspension must be reached by mutual written agreement between the Secretary and the covered entity. 

There will not be exemptions from or special licenses for the Guardrails Rule.  However, CPO will consider mitigation agreements, as outlined in the Guardrails Rule, where feasible. 

For existing facilities, material expansion means the increase of the semiconductor manufacturing capacity of an existing facility by more than five percent of the capacity memorialized in the required agreement due to the addition of a cleanroom, production line or other physical space, or a series of such additions.  Any new construction of a facility for semiconductor manufacturing would also be a material expansion.  

Capacity will be measured by: 

• Wafers per year for Wafer Production Facilities;  

• Wafer starts per year for Semiconductor Fabrication Facilities; 

• Stacked wafers per year for fabrication facilities designed for wafer-to-wafer bonding; and 

• Packages per year for Packaging Facilities. 

Increase in manufacturing capacity is measured over the ten-year period post award.  The Guardrails Rule allows an existing facility—including legacy, current and mature, and leading-edge—to expand its semiconductor manufacturing capacity by five percent over ten years following the date of the award.  In addition, existing facilities that manufacture legacy semiconductors are permitted to increase capacity by ten percent over ten years from the award date.   

15 U.S.C. § 4657 prohibits CHIPS funds from being provided to a foreign entity of concern.  This prohibition applies to both the Department’s disbursement of the CHIPS funds and a covered entity’s use of the CHIPS funds.  CHIPS funds may not be used by a covered entity to purchase goods or services from a foreign entity of concern.  

The CHIPS Act defines a foreign entity of concern and the Guardrails Rule further elaborates on that definition, including what it means to be owned by, controlled by, or subject to the jurisdiction of a foreign entity of concern. 

All covered entities who have a CHIPS agreement with the Department are subject to the Expansion and Technology Clawbacks.  With few exceptions, the Expansion Clawback prohibits the material expansion of semiconductor manufacturing capacity in a foreign country of concern.  However, the manufacture of semiconductor materials or equipment is not included in the definition of semiconductor manufacturing in the Guardrails Rule.  Consequently, such activities are not within the scope of the Expansion Clawback.  If such companies were to engage in semiconductor manufacturing, then the Expansion Clawback would apply.   

The Technology Clawback prohibits engaging in joint research or technology licensing with a foreign entity of concern relating to a technology or product that raises national security concerns, with some exceptions.  The Technology Clawback applies to all covered entities who have a CHIPS agreement with the Department.    

No.  As a condition of receiving a CHIPS award, the Guardrails Rule places broad restrictions on joint research and technology licensing with foreign entities of concern related to technology or products that raise national security concerns.  These restrictions are potentially more restrictive than a BIS export controls license. 

A semiconductor facility is any facility identified in the required agreement entered into between the covered entity and the Secretary pursuant to 15 U.S.C. § 4652(a)(6)(C).  Such facilities should be identified to CPO and will be memorialized, along with their historical capacity measurements, in the required agreement. 

The September 25, 2023 publication of the final rule served as the Secretary’s communication of the categories of technologies and products that raise national security concerns.