Department of Defense Establishes Office of Strategic Capital to Enhance Investment in National Security Critical Technology

On December 1, 2022, Department of Defense (DoD) Secretary Lloyd J. Austin III announced the establishment of the DoD Office of Strategic Capital (OSC).  The mission statement of the OSC is to build an “enduring technical advantage” for the United States by helping partner contractors with private investment to develop national security critical technologies, including those related to advanced materials, next-generation biotechnology, and quantum science.  OSC will coordinate with existing organizations such as the Defense Advanced Research Projects Agency (DARPA) and the Defense Innovation Unit (DIU), which promotes acceleration of the military use of commercial technologies.

The OSC intends to offer what it characterizes as “patient” extended-term capital to help contractors obtain financing between the early laboratory-testing and prototyping phases and the full-scale development of products that can be used by the DoD warfighter.  In addition to traditional vehicles like contracts and grants, this investment will likely take the form of loans and loan guarantees.

The OSC will provide a program-management and oversight function, including: (1) identifying and prioritizing promising critical-technology areas in industry and academia; (2) funding investments in critical-technology areas that the private sector has not, in DoD’s view, sufficiently supported; (3) informing and encouraging private-sector investment in DoD critical technology areas; and (4) contributing to the development of policies, policy implementation, and actions to protect industrial and technical capabilities in the private sector.   DoD component heads are instructed to coordinate with the OSC Director on matters under their purview, and the DoD General Counsel will provide guidance to OSC on legal and ethics standards to apply to the Office.

Within 90 days, DoD will also establish a Strategic Capital Advisory Council (SCAC) that will include DoD Undersecretaries, the DoD General Counsel, the Director of Cost Assessment and Program Evaluation, and others.  Within a second 90 days, the OSC Director will prepare a prospectus of initial-investment priorities for review by the Council and Secretary.

Key Takeaways:

From a contractor’s perspective, it remains to be seen exactly what form(s) this assistance will take—and with what strings attached.  Among other things, industry should be on the lookout for intellectual-property (IP) provisions connected to loans, loan guarantees, contracts, grants, and other assistance stemming from OSC-directed investment, to determine whether IP will be governed by the standard FAR and DFARS approach to technical data, computer software, and subject inventions, or if OSC will look to more flexible terms, as are available (though not always used) in “other transaction” (OT) agreements.  It also is likely that there will be limitations regarding foreign ownership, control, or influence of those receiving the funding and/or domestic preferences to ensure investment is used to promote domestic (and partner-country) capabilities.