Sweeping changes to Small Business Administration (“SBA”) regulations will go into effect on March 14, 2011.  The new rules affect SBA’s 8(a) Business Development (“BD”) program, SBA’s mentor/protégé program, and its joint venture regulations.  The final rule can be found here.  As a whole, the amendments suggest that SBA intends to eliminate manipulation and abuse of the 8(a) BD and mentor/protégé programs by small and large businesses alike. 

Here is a summary of the key changes:

Changes to the 8(a) BD program

  • Funds invested in certain retirement accounts will now be excluded from the SBA’s calculation of an individual’s net worth for purposes of qualification for the 8(a) BD program;
  • A participant may now be terminated from the 8(a) BD program if an individual owner exceeds any of the applicable economic thresholds or if the participant violates the rule against excessive withdrawals;
  • Individuals claiming social and economic disadvantage will now be required to reside in the United States;
  • In evaluating economic disadvantage, SBA will consider property that is legally in the name of one spouse to be wholly that spouse’s property, even if the couple resides in a community property state.  Further, SBA will consider a spouse’s financial condition only if he or she plays a role in the business or has provided financial or other support;
  • The personal income threshold will now be $250,000 for purposes of initial qualification for the 8(a) BD program, and $350,000 for continued eligibility; 
  • An individual will not be considered economically disadvantaged if the fair market value of their assets exceeds $4 million at the time of the 8(a) BD application ($6 million for continued eligibility); and
  • When an 8(a) BD program participant’s eligibility relies upon a disadvantaged individual who is subsequently called to active duty in the U.S. military, the individual is now allowed to appoint one or more people to control the daily business operations of the 8(a) participant in their absence. 

Changes to SBA’s 8(a) BD Mentor/Protégé Program

  • The exception to affiliation for joint ventures under the SBA’s mentor/protégé program now extends to federal subcontracts;
  • Mentors will now be allowed to have three protégés at the same time;
  • Mentors will be subject to harsh consequences for failing to provide the required assistance under a Mentor/Protégé Agreement:
    • SBA can recommend that the procuring agency issue a stop work order when the mentor and protégé are performing as a joint venture.  If the protégé is independently able to continue performance, SBA may authorize substitution of the protégé in place of the joint venture;
    • SBA can terminate the Mentor/Protégé Agreement and render the mentor firm ineligible to act as a mentor for 2 years;
    • If SBA determines that a mentor entered the program solely for the purpose of obtaining contracts as a joint venture partner, SBA may initiate debarment proceedings; and
    • If SBA determines that a protégé entered the program only to obtain contract awards knowing it would bring little or no value to the joint venture, SBA may initiate debarment proceedings or terminate the firm from 8(a) participation.  

Amended Regulations for Joint Ventures

  • A joint venture is now eligible to receive three contract awards over a two-year period.  Under the previous rule, joint ventures were limited to submission of three offers over the same two-year period;
  • After receiving three contract awards, the joint venture partners are now allowed to form a subsequent second (and third…) joint venture to pursue and be awarded three additional contracts.  At some point, however, the new regulations recognize that such a longstanding relationship will lead to a finding of general affiliation between the joint venture partners (even in the 8(a) mentor/protégé context!);
  • The joint venture partners are permitted to decide whether or not to form a separate legal entity.  In the event they decide to form a separate legal entity, the SBA recognizes that it is the partners’ decision whether or not the entity should be populated (i.e. hire its own employees);
  • In the 8(a) mentor/protégé context, the new regulations also recognize that certain requirements will be different for populated and unpopulated joint ventures:
    • For populated joint ventures:
      • The 8(a) participant must “control” the joint venture, be responsible for books and records, own at least 50% of the joint venture, and receive profits commensurate with its ownership interest;
      • The 8(a) participant must demonstrate what it will gain from performance and show how performance will assist in its business development; and
      • The joint venture will now be prohibited from subcontracting with the non-8(a) joint venture partner or any of its affiliates;
    • Unpopulated joint ventures (or joint ventures populated with only administrative personnel) must show:
      • The 8(a) participant is performing at least 40% of the work done by the joint venture; and
      • Project manager is an employee of the 8(a) participant;
  • For joint ventures opting not to form a separate legal entity, the 8(a) participant should receive profits commensurate with the work it performs.