On September 30, the Department of Defense’s (DOD) Office of Strategic Capital (OSC) announced a notice of funding availability (NOFA) of up to $984 million in loans aiming to support the financing of certain covered technology equipment. For years, DOD has attempted to find new ways to encourage the development of certain key technologies and integrate them into the defense industrial base.
The direct loans will range from $10 million to $150 million and can be used to bolster the advancement of technologies across 31 covered technology categories. The announcement is the first such funding availability notice from OSC. Below we’ve outlined the eligibility criteria and the application process.
Office of Strategic Capital (OSC)
The DOD’s OSC, established in December 2022, acknowledges that the United States is in a global race for technological advantages with near peer competitors like China. While some technologies critical to U.S. national security interests receive private investment, others do not. OSC seeks to fill these gaps while leveraging the U.S.’ comparative advantage in capital markets to bolster capital investments in certain technologies’ supply chains critical to DOD priorities. OSC seeks to drive development in certain “Covered Technology Categories” (CTC) which include advanced manufacturing, battery storage, cybersecurity, edge computing, hydrogen generation and storage, mesh networks, microelectronics design, solar, space launch, spacecraft, quantum computing, and more.
In addition, OSC can offer loans with flexible financial terms. For example, while interest rates are determined on a case-by-case basis, OSC can offer comparable rates to the U.S. Treasury rate of a similar maturity. OSC can also offer repayment terms where debt service is tailored to the cash flow patterns of a project and longer repayment periods. Furthermore, payments may be deferred during a grace period per OSC discretion. These flexible terms can effectively meet the unique needs of a project and support the continued development of technology critical to U.S. national security efforts.
Eligibility
Who Can Apply?
The inaugural NOFA makes a broad swath of entities eligible including:
- Individuals
- Corporations
- Partnerships (including public-private and limited partnerships)
- Trusts
- State governments and their subdivisions
- Tribal governments or consortia
- Other governmental entities and public agencies in the United States
- Multi-State or multi-jurisdictional groups of public entities
To qualify, applicants must demonstrate a minimum of three years of operating history; however, OSC may waive or adjust this requirement based on the merits of the application.
What Projects are Eligible?
Eligible projects must align with the National Defense Authorization Act (NDAA) guidelines, specifically focusing on projects that:
- Are situated in a CTC
- Do not solely involve defense applications
Evaluating Applications: Section 8140 Eligibility Criteria
Applications will be evaluated based on existing federal involvement, guided by the Section 8140 Eligibility Criteria. Key questions for applicants include:
- Is the project primarily for a technology or service exclusively used by the federal government?
- Is the project’s repayment reliant on federal sources, such as grants or contracts?
The OSC aims to fund projects that enhance U.S. strategic capabilities while simultaneously ensuring the effective allocation of funding. Understanding these eligibility criteria is crucial for prospective applicants looking to leverage this funding opportunity. Be prepared to provide comprehensive responses that demonstrate how your project aligns with the NOFA’s objectives.
Application Process
Entities considering applying for direct loans under the NOFA must thoroughly understand the application process which consists of two main parts: 1) the initial submission which includes details about the proposed equipment purchase and information about the borrower; and 2) certain invited applicants will submit a more detailed application after their Part 1 application is reviewed. All Part 1 submissions must be received by 4:59 p.m. Eastern Time on February 3, 2025. Late submissions will not be considered. OSC will assess whether projects meet minimum eligibility requirements and loan proposal criteria. OSC may also reopen the NOFA for additional submissions as needed.
Pre-Application Consultation
Prior to submitting the first part of the application, applicants may request a pre-application consultation with OSC. This optional opportunity allows the prospective borrower to discuss the application process, learn more about OSC’s objectives, and ask any questions. While the topics discussed in the pre-application consultation may not be used to evaluate the Part 1 application, it may be useful for prospective borrowers with questions.
Evaluation of Foreign Influence
During the evaluation of both Parts 1 and 2 of the application, OSC will assess whether, or to what extent, the project is subject to potential foreign influence and adversarial capital. This includes reviewing the potential borrower’s ownership structure, management, customers, suppliers, and any relationships that pose risks to U.S. national security interests. In addition, OSC reserves the right to impose mitigation agreements during the application process.
Criteria for Application Part 1 Evaluation
OSC prioritizes applications based on several factors, including:
- Economic and National Security Objectives: Alignment with OSC’s mission to attract private investment in critical technologies.
- Adherence to Statutory Requirements: Compliance with eligible investment technologies.
- Readiness to Proceed: Ability to move forward with the project promptly.
- Speed to Commercialization: Projects that can quickly enter the market will be favored.
- Creditworthiness: OSC will evaluate the applicant’s repayment history and prospects.
- Technical Assessment: Projects may be assessed from a technical perspective.
- Other Factors: OSC may evaluate other factors as it deems applicable.
Invitation to Submit Application Part 2
After the initial review, successful applicants will be invited to complete Application Part 2. You cannot submit this part unsolicited. All related materials and submission instructions will be provided via email.
Evaluation Process
Once the Part 2 application is submitted, OSC will begin its comprehensive review. This includes environmental, credit, legal, and technical due diligence and ensuring compliance with Bank Secrecy Act requirements. OSC will analyze various elements of the proposed project including the capitalization structure, financial history, and condition of key participants; terms of project contracts; market strategy and management plans; financial projections and historical performance; and legal, regulatory, and tax considerations. OSC will also assess the integrity of the applicant’s, and, if applicable, the corporate parent’s, record “review[ing] and consider[ing] the non-publicly available information about that applicant in the designated integrity and performance system accessible through Responsibility/Qualification Records on SAM.gov.”
Once the application is reviewed, it will move through an internal approval process at OSC and the Office of Management and Budget (OMB) will conduct a subsidy cost evaluation. If approved by both OSC and OMB, the applicant will receive a final term sheet and conditional commitment letter.
Going Forward
The NOFA is an excellent opportunity for businesses in need of capital to secure direct loans. Given the limited size of the available funding, it appears the funding would be best used for smaller projects rather than ground-up developments; however, this is just the first funding request. OSC is expected to announce more opportunities in the future offering different funding levels and types of assistance, including loan guarantees. Those businesses interested in applying for funding should begin to organize their application as the February 3 deadline is quickly approaching.
