Department of Defense Announces New Loan Program for Critical Technology Projects

The U.S. Department of Defense's (DOD) Office of Strategic Capital (OSC) on Sept. 27, 2024, published a Notice of Funding Availability (NOFA) that would make up to $984 million in loans available for a range of projects that fall under 31 covered technology categories (CTCs). Funding will be available to facilitate the acquisition and installation of equipment, construction, expansion or modernization of CTC projects.

The OSC was established by Secretary of Defense Lloyd Austin in December 2022 and authorized by Congress under Section 903 of the National Defense Authorization Act (NDAA) for fiscal year 2024.

The primary purpose of the OSC is to source and scale private investment in critical supply chain technologies essential for national security. While existing DOD offices rely on grants and contracts to deploy capital, the OSC is providing financial products using credit programs through loans or loan guarantees.

The OSC is seeking to connect companies developing critical technologies vital to national security with capital to support projects that align with the OSC's strategic priorities in an effort to enhance the economic and national security of the U.S., its allies and partners. Critical technologies such as advanced materials, next-generation biotechnology and quantum science often require long-term financing to bridge the gap between the laboratory and full-scale production, often referred to as the "Valley of Death" in industry.

New Funding Available

The OSC will provide direct loans in the amount of $10 million to $150 million under this NOFA for eligible products and projects, such as but not limited to, construction of manufacturing plants, discrete equipment purchases, modification projects and a range of activities in between.

The eligibility and selection criteria for investments include compliance with statute, the extent to which an investment supports U.S. national security or economic interests, the impact that direct loans would have on the project or transaction, and the creditworthiness of the investment, among other factors.

The NOFA will finance companies' needs to help them scale production in the 31 CTCs identified as promising critical technologies.

Application and Timing

There is a two-part application window under the NOFA (Application Part 1 and Application Part 2). The window for submitting Application Part 1 is between Jan. 2, 2025, and Feb. 3, 2025. Following Application Part 1 review, the OSC will invite certain applicants to complete Application Part 2, which will be accepted on a rolling basis. Before preparing an application, potential applicants may participate in a consultation with the OSC. This step is designed to informally address issues and materials needed for an acceptable application. It serves to advise potential applicants about eligibility and viability criteria, program parameters and the application process itself.

Applicants' projects will be evaluated based on economic and national security objectives, alignment with the OSC funding objectives (such as demonstrated investment in one or more CTCs), speed to commercialization, readiness to proceed (execution on purchase of equipment will be prioritized in evaluation), availability of government financial support, creditworthiness, technical assessment, anticipated results or benefits of resulting capability, current associated financing for past purchases and other factors.

Projects will be evaluated based on their end-market applications and the sources of repayment for the proposed financing. This includes examining commercial or government offtake agreements, customer base and market projections to ensure the project's viability and alignment with the OSC's strategic priorities.

The OSC considers factors such as transaction size, risk and strategic priorities, along with the availability of appropriated funds, when selecting applicants to proceed to Application Part 2. This ensures that projects align with the OSC's strategic objectives and funding capabilities.

Additional Insights

The OSC will use the information collected during the application process for "know your customer" purposes. This will ensure that transaction parties do not have ownership, control or influence from or by foreign parties adverse to the United States, aligning projects with national security interests.

Subject to additional appropriations, the OSC expects to publish opportunities in the future for additional CTCs and types of assistance, including loan guarantees.

Because of the limited funding available per project, funding appears best suited for modification projects and not greenfield builds during this first round of financing.

To ensure the effective allocation of direct loans, the OSC will require that borrowing entities demonstrate a minimum of three years of operating history. Parent companies with subsidiaries applying for funding based on the parent's audited financials can be the proposed guarantor for only one application for funding under this notice. If multiple subsidiaries apply based on the same parent audited financial statement, only one application for one subsidiary can be funded, chosen at the OSC's discretion.

Finally, although statute does not require consideration of "Buy American," environmental or labor considerations, the OSC may require a description of whether and how applicants intent to utilize some domestically sourced materials and how they plan to meet any requirements of the Build America, Buy America Act (BABA). In addition, applicants may be required to provide environmental studies necessary to verify compliance with the National Environmental Policy Act (NEPA), and the OSC expects applicants to design their projects to avoid, minimize and mitigate the potential for significant environmental effects. Finally, as is the case for other infrastructure, manufacturing and clean energy projects that the Biden Administration is pursuing, applicants may also be required to comply with the Davis-Bacon Act.

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem, and it should not be substituted for legal advice, which relies on a specific factual analysis. Moreover, the laws of each jurisdiction are different and are constantly changing. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. If you have specific questions regarding a particular fact situation, we urge you to consult the authors of this publication, your Holland & Knight representative or other competent legal counsel.