On December 2, 2024, the Department of Commerce’s Bureau of Industry and Security (BIS) issued two new rulemakings in an ongoing effort to “further impair [China’s] capability to produce advanced-node semiconductors that can be used in the next generation of advanced weapon systems and in artificial intelligence (AI) and advanced computing, which have significant military applications.” These rules include: (i) new controls on 24 types of semiconductor manufacturing equipment and 3 types of software tools for developing or producing chips; (ii) new controls on high-bandwidth memory, which is a key component of advanced computing integrated circuits (ICs) and AI; (iii) two new Foreign Direct Product rules; (iv) new red flag guidance to address compliance and diversion concerns; and (v) 140 additions and 14 modifications to the BIS Entity List.

BIS has stated that these two new rulemakings build on the agency’s past efforts to restrict China’s ability to both purchase and manufacture certain high-end semiconductors critical for military applications. See past Thompson Hine Updates of October 2022, October 2023, and April 2024 for additional background on this issue.

Note: these new regulations are technically complex, and this blog post only provides an overview of their intent and scope. Their impact will require further detailed analysis by both U.S. and foreign companies in the advanced semiconductor and advanced computing industries.

New Controls on Semiconductor Manufacturing Equipment

The Interim Final Rule (IFR) issued by BIS changes the Export Administration Regulations (EAR) controls for certain advanced computing items, supercomputers, and semiconductor manufacturing equipment (SME). Specifically, the IFR updates Supplement No. 1 to part 774 of the EAR by revising eight existing Export Control Classification Numbers (ECCNs) that cover SME and related items and adds eight new ECCNs. As detailed in the IFR, these new export restrictions on SME and related items impact equipment needed to produce advanced-node ICs, including certain etch, deposition, lithography, ion implantation, annealing, metrology and inspection, and cleaning tools. 

New Controls on Software Tools for Developing or Producing Chips

The IFR also includes new controls on certain software tools used in the development and/or production of advanced-node ICs, including certain software that increases the productivity of advanced machines or allows less-advanced machines to produce advanced chips. 

Importantly, the IFR clarifies, existing controls on “software keys,” which are used to activate or verify a software program, will now also apply to the export, reexport, or transfer (in-country) of software keys that allow access to the use of specific hardware or software or renewal of existing software and hardware use licenses. This may encompass certain software structured as Software as a Service (SaaS).

The new controls on certain software tools add restrictions under 15 C.F.R. § 744.23 (supercomputer, advanced-node ICs, semiconductor equipment end use controls) onElectronic Computer Aided Design (ECAD) and Technology Computer Aided Design (TCAD) software and technology when there is “knowledge” that such items will be used for the design of advanced-node ICs to be produced in Macau or a destination in Country Group D:5 of the EAR.

New Controls on High-Bandwidth Memory and New License Exception HBM

The IFR also places new controls on high-bandwidth memory (HBM), which is critical to both AI training and inference at scale and is a critical component of advanced computing ICs. These new controls apply to U.S.-origin HBM and foreign-produced HBM subject to the EAR under the new advanced computing Foreign Direct Product rule detailed below. The IFR, however, exempts certain HBM from the EAR’s licensing regime via the new License Exception HBM. This license exception authorizes certain exports, reexports, and transfers (in-country) for some of the new HBM commodities that this IFR adds to ECCN 3A090.c when involving U.S. or certain allied owned companies located in destinations of concern.

Two New Foreign-Direct Product Rules for Advanced Computing and Semiconductor Manufacturing Items

The IFR establishes two new Foreign Direct Product (FDP) rules to impair the capability to produce “advanced-node” ICs in certain destinations or by certain entities of concern.

Semiconductor Manufacturing Equipment (SME) FDP Rule – extends jurisdiction over specified foreign-produced SME and related items if there is “knowledge” that the foreign-produced commodity is destined to Macau or a destination listed in Country Group D:5 of the EAR, including China. 

Footnote 5 (FN5) FDP Rule – extends jurisdiction over specified foreign-produced SME and related items if there is “knowledge” of certain involvement by an entity on or added to the BIS Entity List with a FN5 designation (see “Addition of 140 Entities to BIS Entity List” section below). 

There are revisions to the de minimis requirements that correlate to the new SME FDP and FN5 FDP Rules that extends jurisdiction over specified foreign-produced SME and related items containing any amount of U.S.-origin ICs if it is destined to Macau or a destination listed in Country Group D:5 of the EAR, including China, or the end-user is a FN5 entity

New Red Flag Guidance

BIS has long had “Know Your Customer” guidance and “red flag” indicators for compliance assistance under 15 C.F.R. Part 732, Supplement No. 3. This IFR, however, introduces eight new red flag indicators (see new Red Flag indicators 20 to 27) to assist parties in identifying certain scenarios or conditions that warrant additional diligence. The new red flag guidance also helps parties determine whether their products fall within the scope of certain provisions under 15 C.F.R. § 734.9(e)(3) pertaining to the two new FDP rules described above.

Addition of 140 Entities to BIS Entity List

Concurrently, BIS issued a Final Rule that adds 140 entities to the Entity List. These entities are located in China, Japan, South Korea, and Singapore and have been determined by the U.S. Government to be acting contrary to the national security and foreign policy interests of the United States. These entities include semiconductor fabrication facilities, tool companies, and investment companies that BIS claims “are acting at the behest of Beijing to further [China’s] advanced chip goals which pose a risk to U.S. and allied national security.” 

According to the BIS, all 140 entities are involved with the development and production of advanced-node ICs and/or semiconductor manufacturing items, and/or have supported the Chinese government’s Military-Civil Fusion Development Strategy. The full list of these 140 entities and identifying information is available in the text of the Final Rule.

This Final Rule also modifies 14 existing entries on the Entity List under the destination of China. It adds Footnote 5 (referenced above) to 9 of the 140 entities too, thereby extending the BIS Entity List license requirements to the foreign direct products subject to the EAR produced by those entities.

Effective Dates of the IFR and Final Rule

The IFR took effect December 2, 2024. However, exporters, reexporters, and transferors are not required to comply with the changes made to various ECCNs under Category 3 of the Commerce Commodity List (CCL) under December 31, 2024. Likewise, exporters, reexporters, and transferors do not have to comply with the two new FDP rules until December 31, 2024.

This Final Rule also took effect December 2, 2024. However, for the newly listed entities, shipments of items removed from eligibility for a License Exception or export, reexport, or transfer (in-country) without a license (NLR) as a result of this regulatory action and that were en route aboard a carrier to a port of export, reexport, or transfer (in-country), on December 2, 2024, pursuant to actual orders for export, reexport, or transfer (in-country) to or within a foreign destination, may proceed to that destination under the previous eligibility for a License Exception or export, reexport, or transfer (in-country) without a license (NLR), provided the export, reexport, or transfer (in-country) is completed no later than on January 2, 2025. Additionally, BIS Entity List license requirements and other Entity List-related requirements linked to Footnote 5 designations have a delayed compliance date of December 31, 2024.

Public Comments Regarding the IFR

Although the IFR largely takes effect immediately upon publication, BIS will accept public comments regarding the IFR until January 31, 2025. BIS is actively seeking detailed comments on any inadvertent errors or potentially unintended oversights in the details of this highly complex rulemaking. Comments must be submitted to the Federal rulemaking portal at: www.regulations.gov. The regulations.gov ID for this IFR is BIS-2024-0028, and submissions should refer to RIN 0694-AJ74 in all comments.