Commerce Department's First Equity Stake Under CHIPS Act Expands Government Industrial Policy Into Uncharted Territory

The Commerce Department announced last week it's taking an 8-16% equity stake in USA Rare Earth, marking the first time the government has acquired direct ownership in a company under the CHIPS and Science Act (P.L. 117-167). The $1.6 billion Letter of Intent pairs a $277 million grant and $1.3 billion loan with 16.1 million common shares and 17.6 million warrants. It's also the first CHIPS Act funding awarded to critical minerals rather than semiconductor manufacturing. Senator Todd Young, who authored the CHIPS Act, immediately pushed back: "I don't know of anyone who thought this was allowed under the law." For companies in the CHIPS Act pipeline, defense supply chain, or critical minerals sector, this deal creates precedent with profound implications for future government funding structures, shareholder rights, and compliance obligations.

What Happened (And What Hasn't Happened Yet)

On January 26, 2026, Commerce Secretary Howard Lutnick and CHIPS Program Director Bill Frauenhofer announced a Letter of Intent with USA Rare Earth totaling $1.6 billion to develop domestic rare earth processing and magnet manufacturing. The funding breaks down into three components: a $277 million direct grant, a $1.3 billion senior secured loan with a 15-year term, and direct equity in the form of 16.1 million common shares at $17.17 per share plus 17.6 million warrants with a strike price to be determined.

Important context on what a Letter of Intent means: A Letter of Intent, or LOI, is not the final deal. Think of it as a formal handshake that says "we intend to do business together on these general terms." It's not legally binding in the way a signed contract is. The parties still need to negotiate and sign a definitive agreement, which is the actual binding contract that spells out every detail: exact milestones, precise payment schedules, what happens if things go wrong, and all the legal protections both sides need. LOIs typically include language explicitly stating they are non-binding, which means either party could technically walk away before the final agreement is signed. The definitive agreement is expected in Q1 2026, so while this announcement signals strong intent, the deal isn't done until both parties sign that final contract.

The government's base ownership sits at 8% from the common shares, expanding to as much as 16% if all warrants are exercised. (A warrant is essentially a right to buy more shares at a set price in the future. If USA Rare Earth's stock price rises above the warrant's strike price, the government can exercise these warrants to buy additional shares at a discount, increasing its ownership stake.) The funding targets two facilities: the Round Top heavy rare earth mine in Sierra Blanca, Texas, scheduled for late 2028 production at 8,000 tons per annum processing capacity, and the Stillwater, Oklahoma magnet manufacturing plant, which is commissioning in Q1 2026 with 10,000 TPA NdFeB magnet capacity.

Concurrent with the CHIPS funding, USA Rare Earth closed a $1.5 billion private placement led by Inflection Point, issuing 69.8 million shares at $21.50. The combined $3.1 billion capital raise represents a significant government-backed critical minerals investment. USA Rare Earth's stock surged 7.87% on the announcement, hitting an intraday high of 17% with volume 796% above average.

This is the first CHIPS Act funding extended to critical minerals rather than semiconductor fabrication. Every prior CHIPS award focused on chip manufacturing: Intel received $8.9 billion, TSMC received funding, Samsung received funding, Micron received funding. Those deals included grants, loans, and in Intel's case, equity converted from existing grants rather than new share issuance. USA Rare Earth is different. The government is buying newly issued shares, making it a direct equity investor from inception.

The Legal Innovation (and Why Senator Young's Pushback Matters)

The CHIPS Act authorizes Commerce to use "other transaction authority" to award funding for semiconductor projects. OTA is a flexible procurement mechanism originally created for defense programs, allowing agencies to structure deals outside traditional contracting rules. The statute doesn't explicitly mention equity stakes. Commerce interprets OTA as permitting equity investments as one form of "other transaction." Senator Todd Young disagrees.

Young, who shepherded the CHIPS Act through Congress, told reporters he doesn't know of anyone who contemplated equity stakes when drafting the bill. The language authorized grants and loans to incentivize domestic semiconductor production and strengthen supply chains. Taking ownership stakes in private companies wasn't part of the conversation.

Why does Senator Young's objection matter? His pushback isn't just political commentary. It carries real legal and practical weight for several reasons:

First, courts often look at "legislative intent" when interpreting what a law means. When the actual author of a statute says the agency is doing something the law never intended, that's powerful evidence in any lawsuit challenging Commerce's authority. A federal judge deciding whether Commerce overstepped would likely consider Young's statements as evidence that Congress never authorized equity stakes.

Second, Congress controls the purse strings. If key legislators believe Commerce is exceeding its authority, they could respond by amending the CHIPS Act to explicitly prohibit equity stakes, or they could reduce CHIPS Program funding in future appropriations bills. The Appropriations Committee, which oversees how agencies spend money, could launch oversight hearings to scrutinize the deal.

Third, this creates uncertainty for future deals. Companies considering CHIPS Act funding now face a new question: will an equity stake requirement survive legal challenge? If a court eventually rules that Commerce lacked authority, deals structured with equity could be unwound or renegotiated. That uncertainty affects how companies value government funding and how investors price risk.

Fourth, Young isn't alone. His objection signals potential bipartisan concern about executive branch agencies expanding their power without explicit congressional authorization. Other legislators may join his criticism, especially those who believe federal agencies should stick to what Congress clearly authorized.

The comparison to Intel's deal doesn't help Commerce's case. In December 2024, Commerce converted $2 billion of Intel's $8.9 billion grant into equity, giving the government a 10% ownership stake. But that was a conversion of existing grant funding, not new equity purchased with taxpayer dollars. Intel had already received the grant commitment. Converting part of it to equity involved swapping one form of value for another. USA Rare Earth is different: the government is writing a check to purchase newly issued shares, making it an investor alongside private capital.

TSMC and Samsung received substantial CHIPS Act funding without equity components. Samsung initially explored equity but dropped it. Micron's deal included no equity discussion. That pattern suggests equity stakes weren't standard until Commerce decided to make them standard. The Intel conversion set a precedent that Commerce could hold equity. USA Rare Earth extends that precedent to direct equity purchases in the initial funding agreement.

The legal question turns on whether OTA permits equity investments or merely allows flexible contract structures. The Government Corporation Control Act generally requires congressional authorization for agencies to acquire corporate stock. Commerce hasn't cited specific statutory authority beyond OTA's general flexibility. If challenged, courts would examine the text, legislative history, and comparable agency actions. Young's contemporaneous statements that equity wasn't contemplated would weigh against Commerce's interpretation.

This matters for companies in the CHIPS pipeline. If Commerce is now using equity stakes as standard deal structure, applicants need to prepare for shareholder negotiations they didn't anticipate. Private equity firms, sovereign wealth funds, and strategic investors will need to assess government co-investment terms. Board fiduciary duties become complicated when one shareholder is a federal agency with policy objectives beyond profit maximization.

The Deal Mechanics That Matter

The $277 million grant isn't a lump sum. It's phase-gated with disbursements tied to construction milestones, technology deployment benchmarks, and production targets. USA Rare Earth needs to document each milestone completion to trigger the next tranche. That creates administrative burden: project management offices tracking government-specified deliverables, compliance teams ensuring milestone evidence meets agency requirements, and legal teams managing communications with CHIPS Program Office reviewers.

Clawback provisions create downside risk. If USA Rare Earth fails to meet milestones, violates technology restrictions, or expands operations in "foreign countries of concern" (read: China), Commerce can demand repayment of grant funds. The loan carries standard security provisions, but the grant clawback is more aggressive. It operates like a contingent liability on the balance sheet, creating uncertainty for financial planning.

The upside sharing mechanism works like this: if the project generates returns exceeding Commerce's projections, the government shares in the excess, with its take capped at 75% of the original $277 million grant. This is venture capital economics applied to industrial policy. The government takes equity downside by funding grants and loans at below-market rates, but caps upside at 75% recovery of grant capital. It's asymmetric risk-sharing designed to protect taxpayers from total loss while preserving most profit potential for private investors.

Five-year restrictions govern corporate actions. USA Rare Earth can't declare special dividends, buy back shares, or expand operations in China. These are standard tech transfer restrictions in government contracts, but applied to a publicly traded company they constrain investor relations options. If the stock drops and shareholders want buybacks, management has to explain why government restrictions prevent it. If Chinese customers offer lucrative contracts for rare earth products, USA Rare Earth has to decline.

Government shareholder rights remain under negotiation in the definitive agreement expected Q1 2026. Will Commerce get board observer seats? Veto rights on major transactions? Information rights beyond public company disclosure? Access to technical data? The Letter of Intent doesn't specify. That's the next negotiation, and it will set precedent for every subsequent CHIPS deal with equity.

Compare this to traditional venture capital terms. VCs get board seats, protective provisions, information rights, and liquidation preferences. They negotiate drag-along rights, anti-dilution provisions, and co-sale agreements. USA Rare Earth's board will negotiate similar terms with a federal agency that has statutory authority, policy objectives, and political accountability. That's not a typical shareholder. It's a partner with sovereign power.

For boards evaluating CHIPS Act funding, these mechanics create diligence questions:

• Can we meet phase-gated milestones with existing project management infrastructure?
• What internal controls do we need for clawback risk management?
• How do we value the business with a government shareholder whose exit timeline is uncertain?
• What happens to government equity if we're acquired?

Strategic Context: Why Rare Earths Matter for National Security

China controls 99.9% of global heavy rare earth separation capacity. Let that sink in. The United States depends on a strategic adversary for nearly all the specialized rare earth elements used in defense applications. Neodymium and dysprosium go into the permanent magnets that power F-35 fighter jets, Virginia-class submarines, Tomahawk missiles, radar systems, and Predator UAVs. Without rare earth magnets, modern defense systems don't function.

In October 2025, China announced stricter rare earth export controls (the most expansive to date), including an extraterritorial Foreign Direct Product Rule similar to U.S. semiconductor controls. Earlier April 2025 controls on seven rare earth elements remain in effect. In November 2025, China suspended enforcement of the October controls for one year as diplomatic negotiations continued. That suspension expires November 10, 2026.

USA Rare Earth's Round Top mine won't reach production until late 2028. That's two years after China's export control suspension expires. If China reinstates full controls in November 2026, the United States faces a two-year gap with no domestic heavy rare earth supply. Defense contractors will need to stockpile materials, identify alternative sources, or redesign systems to eliminate rare earth dependence. None of those options can be implemented quickly.

The timeline problem exposes the fundamental tension in government industrial policy. Building mining and processing infrastructure takes years. Permitting alone can consume 7-10 years for environmental review under NEPA, endangered species consultation under ESA, and cultural resource surveys under NHPA. Round Top sits on Texas General Land Office property, which reduces federal NEPA requirements, but the processing plant and magnet manufacturing still face environmental compliance. By the time domestic supply comes online, the geopolitical crisis has usually evolved.

Understanding Export Controls: ITAR and EAR Explained

The defense applications of rare earth magnets raise important questions about export controls. Two acronyms you'll hear in this context are ITAR and EAR. Here's what they mean and why they matter:

ITAR (International Traffic in Arms Regulations) is administered by the State Department. It controls the export of defense articles, defense services, and related technical data. If something is on the U.S. Munitions List, which includes things like missiles, military aircraft components, and certain specialized materials used exclusively in weapons systems, you need State Department approval to sell it to anyone outside the United States. ITAR is strict: even sharing technical drawings with a foreign national working at your U.S. facility can trigger violations. Penalties include criminal prosecution and being barred from government contracts.

EAR (Export Administration Regulations) is administered by the Commerce Department (the same agency doing this CHIPS deal). It covers "dual-use" items, meaning things that have both civilian and military applications. Most commercial technology falls under EAR. The rules are generally less restrictive than ITAR, but certain items require export licenses depending on the destination country and end user. China is subject to significant EAR restrictions, especially for advanced technology.

Why this matters for USA Rare Earth: If the company produces magnets specifically designed for F-35s or submarines, those products could be classified as defense articles under ITAR, requiring State Department licenses for any foreign sale. Even if the magnets are classified as dual-use under EAR, sales to China would face heavy restrictions. This limits commercial market access, making the business more dependent on U.S. defense procurement. Government equity ownership adds another wrinkle: a company partially owned by the federal government selling to the Defense Department raises conflict of interest questions under the Federal Acquisition Regulation (FAR).

For defense contractors, this deal signals a domestic magnet supply chain is emerging but won't be operational until 2028. Procurement planning needs to account for continued Chinese dependence through 2027. Alternative sourcing arrangements, stockpiling strategies, and design modifications to reduce rare earth intensity all become risk management priorities. Boards should be asking supply chain teams whether critical systems have rare earth dependencies and what the mitigation plan is for the November 2026 deadline.

For manufacturing companies and critical minerals suppliers, this deal sets a precedent that government will co-invest in mining and processing projects with national security implications. Lithium, cobalt, graphite, and manganese all face similar Chinese dominance. Companies developing domestic capacity for battery materials, solar panel inputs, or defense-critical minerals now have a roadmap: demonstrate strategic importance, show technical feasibility, accept government equity and milestone oversight. It's a new model for industrial policy.

What This Means For Your Business

Board and Investor Diligence: If your company is in the CHIPS Act pipeline, prepare for equity stake discussions. The LOI doesn't mean you're getting equity terms, but it means equity is on the table. Your board should understand the governance implications: federal shareholders have policy objectives, political accountability, and statutory constraints private investors don't face. Fiduciary duties become more complicated when one shareholder's interests diverge from profit maximization.

Institutional investors considering co-investment with government need to assess exit liquidity. When does the government exit its stake? Under what terms? Can private investors trigger liquidity events if the government wants to hold long-term? The USA Rare Earth deal doesn't answer these questions because the definitive agreement isn't final. But those terms will set the market standard, and private capital will price government co-investment risk accordingly.

Critical minerals suppliers should evaluate whether their projects meet the national security significance threshold that attracted government investment to USA Rare Earth. Defense applications, export control vulnerability, and Chinese supply chain dominance created the strategic case. If your mineral has similar characteristics, government funding becomes a viable option. If not, this deal doesn't change your capital formation strategy.

Implementation Burden: Companies receiving CHIPS funding will need project management infrastructure to track and document milestone compliance. That means dedicated staff, project management systems, and regular reporting to Commerce reviewers. For startups and mid-size companies, this overhead can consume management attention and dilute focus on technical execution.

Building a regulatory compliance infrastructure for government shareholders represents a new operating cost. Government equity comes with information rights, which means systems to provide data, legal review of disclosures, and coordination with agency officials. Public companies already manage SEC disclosure obligations; this adds a shareholder with policy interests in what gets disclosed and when.

Export control classification becomes critical for rare earth products with defense applications. Companies need to determine whether their output triggers ITAR or EAR controls, obtain appropriate licenses, and implement compliance programs. For USA Rare Earth, this means technology control plans, employee training, and physical security for classified information if defense contractors share technical specifications.

Defense contractors sourcing rare earth magnets should assess their supply chain exposure. If your systems depend on Chinese rare earth supply, the November 2026 deadline requires contingency planning. Can you stockpile two years of inventory? Can you redesign to reduce rare earth content? Can you qualify alternative suppliers? These aren't 2028 questions. They're Q1 2026 questions because November 2026 is ten months away.

Practical Takeaways

• CHIPS applicants: Engage securities counsel early to model government equity terms. Understand board governance with a federal shareholder and how it affects M&A optionality.
• Critical minerals companies: If your mineral has defense applications and Chinese supply chain dominance, you now have a precedent for government co-investment. Build the strategic case before approaching Commerce.
• Defense contractors: Audit rare earth magnet dependencies in major platforms. Develop stockpiling or redesign strategies for the November 2026 China export control deadline.
• Private equity: Price government co-investment risk in CHIPS deals. The unknown exit timeline and governance rights create valuation uncertainty.
• Project management teams: Build milestone tracking infrastructure before CHIPS funding closes. Commerce's phase-gated disbursement means you need real-time compliance visibility.
• Boards: Add government equity scenarios to strategic planning. If you're pursuing CHIPS funding, war-game the shareholder dynamics before you're negotiating definitive terms.
• Supply chain officers: Map rare earth exposure across your product portfolio. The 2028 USA Rare Earth timeline doesn't solve your 2026 China problem.
• Export control compliance: If you're producing defense-critical materials, classify your products now under ITAR or EAR before customers demand it.
• Financial planning: Model clawback provisions as contingent liabilities. Grant funding with milestone risk isn't the same as unrestricted capital.

What We're Watching

Looking Ahead

The USA Rare Earth deal transforms the CHIPS Act from a grant program into a government venture fund. Commerce isn't just subsidizing domestic manufacturing; it's taking equity stakes in strategic industries. That's a policy shift with legal, governance, and market implications that extend far beyond rare earth processing.

For companies seeking government funding, the rules have changed. Prepare for shareholder negotiations with a partner that has policy objectives, political accountability, and sovereign authority. Build compliance infrastructure before you need it. And understand that government capital comes with constraints private capital doesn't impose.

The November 2026 China deadline looms while domestic supply remains two years away. That gap will define how serious policymakers are about supply chain resilience and what price they're willing to pay for strategic independence.

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Sources:

• CHIPS Program Office, USA Rare Earth Letter of Intent
• USA Rare Earth, Letter of Intent Announcement
• The Hill, Senator Young Pushback on Intel Deal
• CSIS Analysis, China's Rare Earth Restrictions
• GAO Report GAO-26-107882

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This article does not constitute legal advice. Companies should consult counsel regarding specific CHIPS Act funding applications and government co-investment structures.