SBA Proposed Rule Would Enact Material Changes as well as Promote Regulatory Uniformity Across Size and Status Programs
Client Alert | 36 min read | 08.27.24
On August 23, 2024, the Small Business Administration (SBA) posted a proposed rule to update and clarify aspects of various SBA small business programs, including but not limited to the HUBZone Program and 8(a) Business Development Program. This proposed rule followed SBA’s July 22, 2024 notification of tribal consultation meeting and request for comments (which Crowell covered here).
A major theme of the proposed rule is promoting uniformity across the size and status certification programs. SBA has apparently taken seriously feedback from small business that “improvements are needed to make its socioeconomic contracting programs more uniform, in order to relieve burdens associated with compliance with multiple programs.”
Cross-Program Changes Related to Minority Shareholder Negative Control Rights
SBA proposes is to establish uniformity across the size, 8(a) Business Development (BD), Women-Owned Small Business (WOSB), and Service-Disabled Veteran Owned (SDVOSB) VetCert Programs as to the negative controls that minority investors can retain without giving rise to control and affiliation. As currently proposed, this change would be a notable change regarding minority blocking rights. SBA expects that by promoting uniformity and certainty as to the negative controls that would not give rise to affiliation or control that would be problematic for one or more statuses, investors may be more willing to invest in small businesses, thereby improving access to capital for these contractors.
State of the Current Regulations
Currently, SBA’s affiliation regulation (13 C.F.R. 121.103(a)(3)) provides that control—giving rise to affiliation for size purposes—can be negative. While this regulation does not contain any exceptions, SBA’s Office of Hearings and Appeals (OHA) developed a long line of caselaw distinguishing between ordinary and extraordinary actions: a minority investor’s ability to block extraordinary actions that protect the minority shareholder’s investment (e.g., adding new members, dissolution, bankruptcy, issuing additional capital stock, reclassifying interests, changing the size of the board, sale of all or substantially all of a concern’s assets, etc.) would not give rise to control and, therefore, affiliation, while the ability to block an ordinary action (e.g., setting employee compensation, hiring and firing of employees, setting a budget, borrowing money, purchasing equipment, paying dividends, etc.) would give rise to control and, therefore, affiliation.
At the same time, the regulations regarding SDVOSB status currently include five extraordinary actions over which a minority investor may have blocking rights. Specifically, 13 C.F.R. 128.208(j) provides:
SBA will not find that a lack of control exists where a qualifying veteran does not have the unilateral power and authority to make decisions regarding the following extraordinary circumstances: (1) Adding a new equity stakeholder; (2) Dissolution of the company; (3) Sale of the company or all assets of the company; (4) The merger of the company; and (5) Company declaring bankruptcy. |
The regulations governing the 8(a) and WOSB Programs do not currently specify the types of blocking power a minority shareholder may have, if any.
SBA’s Proposed Changes to the Regulation
In order to establish uniformity, SBA is proposing to add one additional “extraordinary circumstance” to the VetCert regulations (at 13 C.F.R. 128.203(j)), namely that a minority investor may be able to block amendments of the company’s corporate governance documents that would remove the shareholder’s authority to block any of the other extraordinary actions.
SBA is also proposing to amend the affiliation test on negative control (at 13 C.F.R. 121.103(a)(3)) and to add the same language to the regulations governing the 8(a) BD Program (at 13 C.F.R. 124.106(h)) and WOSB Program (13 C.F.R. 127.202(h)):
SBA will not find that a minority shareholder has negative control where such minority shareholder has the authority to block action by the board of directors or shareholders regarding the following extraordinary circumstances: (i) Adding a new equity stakeholder; (ii) Dissolution of the company; (iii) Sale of the company or all assets of the company; (iv) The merger of the company; (v) The company declaring bankruptcy; and (vi) Amendment of the company’s corporate governance documents to remove the shareholder’s authority to block any of (1) through (5). |
The proposed regulation would allow minority shareholders fewer control rights with respect to their investments in small businesses (that are not eligible for any status) than are currently available under OHA caselaw while at the same time providing for greater control rights for minority shareholders in 8(a) BD Participants and WOSBs that are akin to those currently available in SDVOSBs.
Request for Comments
SBA specifically requests comments as to whether the six identified exceptions are sufficient or whether one or more additional exceptions should be included in the regulations. Contractors should take this opportunity to also opine on the potential impact of scrapping decades-worth of OHA decisions on extraordinary versus ordinary actions in the size context—in the size context, is the greater certainty worth the trade-off of reducing the types of extraordinary actions that a minority investor may block?
Cross-Program Changes to Size and Status Recertifications
Another significant change is SBA’s proposal to delete the recertification requirements regarding size and status from the program-specific rules and add a new section (13 C.F.R. 125.12) that would impose uniformity around the impact of recertification. As is discussed below, SBA is proposing to write-out of its rules the longstanding exception regarding the impact of recertifications under GSA FSS contracts, overturn recent caselaw about the impact (or lack therefore) on eligibility for set-aside task orders after a recertification following merger, sale, or acquisition, and allow additional opportunities for protests related to orders.
State of the Current Regulations
The current regulations regarding the impact of recertification are contained in different places for size (13 C.F.R. 121.104), HUBZone (13 C.F.R. 126.619), WOSB (at 13 CFR 127.504(h)), and VetCert (at 13 C.F.R. 128.401(e)) Programs. While there are obvious differences between these regulations, SBA has indicated in its commentary that such differences are unintentional.
SBA’s Proposed Changes to 13 C.F.R. 121.404
SBA is proposing to clarify, in a significantly revised 13 C.F.R. 121.104, that there are “three, narrow exceptions to the general rule that the date on which size is determined for an order or agreement against a [multiple award contract (MAC)] is dependent on whether the underlying MAC was set aside for small business or unrestricted.”
First, when size recertification is triggered pursuant to any scenario outlined in the new proposed regulation 125.12, the date to determine size will either be the date of the triggering event or, if the CO has requested recertification with the offer, the date of initial offer for a particular order or agreement (per 13 C.F.R. 121.404(b)(4)(iii)).
Second, for set-aside orders or agreements placed against General Services Administration’s Federal Supply Schedule (FSS) contracts, an exception currently exists so that, broadly speaking, size status is determined as of the date of offer for the underlying FSS contract. Under the proposed rule, however, if a trigger for size recertification occurs under 13 C.F.R. 125.12 (including a contracting officer (CO) recertification request associated with a specific set-aside order or agreement against the FSS contract) size status would be determined either as of the date of the trigger or as of the offer date for a particular order, depending on the trigger involved. In its commentary, SBA states that it is clarifying that (1) when a CO requests recertification of size with respect to an order or agreement, the FSS exception does not apply, and (2) if there is a disqualifying size recertification in response to any event in 125.12 (including a merger, sale, or acquisition), the concern must notify the CO for the underlying contract, notify the CO for each existing order, and update its SAM.gov profile to reflect its current size status—which renders the concern no longer eligible for set-aside orders or agreements against the FSS contract.
Third, for 8(a) sole-source awards issued against MACs, regardless of whether the underlying MAC (1) is unrestricted, (2) set-aside (even if the underlying MAC itself was set-aside for 8(a) Participants), or (3) under the GSA’s FSS contracts, the concern must qualify as small for the size standard corresponding to the NAICS code assigned to the order or agreement as of the date of initial offer for and award of the order or agreement (per 13 C.F.R. 121.404(b)(4)(ii)).
SBA’s Proposed Roll-out of New 13 C.F.R. 125.12
Per SBA, “[s]ize and status recertification is a complex area of SBA’s regulations that requires simplification and clarity, especially in the context of exceptions to recertification and the impact of recertification” and as such SBA is proposing to simplify and place all relevant regulations in a newly created 13 C.F.R. 125.12. SBA also takes issue with recent decisions from the Government Accountability Office (GAO) and SBA’s OHA regarding recertifications and intends to correct (what SBA perceives as) the misinterpretation of its regulations arising out of those decisions—with the impact that recertification as other than small or other than a particular required status is, by and large, disqualifying for future awards.
The rule will continue to be that a concern recertifying as other than the size or status required under an award it is already performing may continue to perform for the existing period of performance. The issue of whether such a concern “can continue to receive future orders under an underlying contract or agreement after it submitted a disqualifying recertification depends upon whether the underlying contract or agreement is a single award or a multiple award vehicle.” To that end, SBA’s commentary and proposed new 13 C.F.R. 125.12(e) provide the following:
- For a single award small business contract or any unrestricted contract, a concern that recertified as other than small or other than the required small business program status:
- Remains eligible to receive options and
- May receive orders or agreements issued.
- Under both of these circumstances, the procuring agency cannot count the options or orders as an award to a small business or small business program participant for goaling purposes.
- For any multiple-award small business set-aside or reserve, a concern that recertified as other than small or other than the required small business program would:
- Be ineligible to receive options and
- Be ineligible for orders set aside for small businesses or set aside for a specific type of small business.
- If a disqualifying recertification event occurs “after an offer is submitted but prior to award,” recertification will be required for an award set aside or reserved for small business—a concern must recertify its size and, where appropriate, status, if a merger, sale or acquisition occurs after an offer is submitted but prior to award. Continued eligibility to receive the award will depend on when the sale, merger or acquisition occurred. If it was within 180 days of offer submission and before award, the concern is ineligible for the award. If it occurred after 180 days of its offer and before award, the concern would continue to be eligible for the award.
As noted above, SBA specifically takes issue with several recent decisions from GAO and OHA—both of which SBA believes adopted incorrect interpretations of SBA’s size recertification regulations. These cases include:
- OHA’s 2021 decision in Size Appeal of Odyssey Systems Consulting Group, Ltd., SBA No. SIZ-6135 (2021), where OHA ruled that, under a MAC (in this case OASIS) set aside for small businesses, even if a contract novation (or a merger or acquisition not requiring novation) renders the contractor other than small, the contractor remains eligible for award. In that decision, the only impact of the change in status was that the agency could not count any new orders toward its small business contracting goals. SBA had filed comments in the case, seeking to distinguish between size recertifications requested by a contracting officer and recertifications following a merger, sale, or acquisition—but only as that distinction relates to timeliness for size protests. SBA seemingly feels like too much weight was placed on its comments.
- OHA’s 2024 decision in Size Appeal of Saalex Corp. d/b/a Saalex Solutions, Inc., SBA No. SIZ-6274 (2024), in which OHA ruled that if a concern recertifies as other than small following a merger, sale, or acquisition, the concern may remain eligible for future set-aside orders under an unrestricted MAC, but not provide goaling credit.
- The 2023 GAO decision in Washington Business Dynamics, LLC, B-421953, B-421953.2 (Dec. 18, 2023), in which GAO extended the FSS exception to apply to size recertifications for orders placed under other MACs.
SBA’s Proposed Change to Size Protest Triggers in 13 C.F.R. 121.1001
SBA is also proposing to allow requests for size determinations following any size recertification made under 125.12(a) and (b) as well as those requested by a CO as set forth in 125.12(c). SBA is proposing to specifically authorize the contracting officer, the relevant SBA program manager, or the Associate General Counsel for Procurement Law to request a formal size determination. Additionally, the proposed rule would specify that, in connection with a size recertification relating to a MAC, any contract holder on that MAC could request a formal size determination concerning a recertifying concern’s status as a small business.
Request for Comments
Of all the proposed changes discussed above, SBA is only specifically requesting comments on whether to allow size protests in connection with the award of an order issued under a multi-agency MAC where the protest relates to the ostensible subcontractor rule. As many disappointed offerors have discovered, unless a CO requested a size recertification for a particular order, the disappointed offeror is not currently able to challenge a prime’s undue reliance on a subcontractor for an order—even though that information would not have been available for use in a size protest at the time of the underlying contract award.
Change to the Ostensible Subcontractor Rule – Which Materially Changes Use of MPJVs
State of the Current Regulations
In a May 2023 rulemaking, SBA had written what appeared to be exemptions to the ostensible subcontractor rule into its affiliation rule (13 C.F.R. 121.103(h)(3)). Specifically, the newly revised regulation provided:
A contractor and its ostensible subcontractor are treated as joint venturers for size determination purposes. An ostensible subcontractor is a subcontractor that is not a similarly situated entity, as that term is defined in § 125.1 of this chapter, and performs primary and vital requirements of a contract, or of an order, or is a subcontractor upon which the prime contractor is unusually reliant. As long as each concern is small under the size standard corresponding to the NAICS code assigned to the contract (or the prime contractor is small if the subcontractor is the SBA approved mentor to the prime contractor), the arrangement will qualify as a small business. |
(Crowell previously reported on SBA’s material change to the ostensible subcontractor rule here.)
In this new rulemaking, SBA recognizes that the language specifying that a teaming arrangement will not render the prime to be deemed other than small so long as the subcontractor is the prime’s SBA-approved mentor has “caused some confusion.” SBA states that “[i]n the context of a subcontractor that is an SBA-approved mentor of the prime contractor, in treating the relationship ’as a joint venture,’ SBA intended to allow the relationship to qualify as a small business only if all the joint venture requirements were met,” In other words, that the protégé and mentor have an underlying joint venture agreement that meets the requirements of 125.8(b), the protégé will direct and have ultimate responsibility for the contract, and the performance of work requirements set forth in 125.8(c) will be met.
SBA’s Proposed Changes to the Regulations
SBA indicated that in light of the confusion it is proposing to remove the above-quoted language related to the impact of SBA-approved mentor and protégé relationships on the ostensible subcontractor rule.
SBA is now proposing instead to add a section (v) to the ostensible subcontractor portion of the joint venture affiliation test (at 13 C.F.R. 121.103(h)(3)) that would, in essence, impose two new requirements on small business joint ventures – that the managing venturer perform the primary and vital requirements of the contract and not be unusually reliant on its joint venture partner:
A joint venture offeror is ineligible as a small business concern, an 8(a) small business concern, a certified HUBZone small business concern, a WOSB/EDWOSB concern, or a VO/SDVO small business concern where SBA determines that the managing joint venture partner will not perform 40% of the work to be performed by the joint venture, where a joint venture partner that is not similarly situated to the managing venturer performs primary and vital requirements of a contract, or of an order, or where the managing venturer is unusually reliant on such a joint venture partner. |
SBA has not requested comments on this proposed change but for those contractors in joint ventures formed pursuant to mentor and protégé relationships (hereinafter referred to as an MPJV), this would be a significant departure with respect to MPJV eligibility. The proposed language essentially imposes two new requirements on an MPJV (as well as providing two new bases for size or status protests of MPJVs): first, that the managing venturer perform the primary and vital requirements of the contract or order; and, second, that the managing venturer not be unusually reliant on its JV partner. (Note, this rule change is not limited to MPJVs but would also impact joint ventures formed by all small businesses – although one can imagine that challenges around unusual reliance on a JV partner will be most easily targeted at MPJVs.) Participants in the SBA Mentor-Protégé Program should seriously consider the impact that such a change would have on use of its MPJVs and whether to submit comments to SBA on this aspect of the proposed rule.
Other Changes to the SBA’s Mentor-Protégé Program and Small Business Joint Venture Regulations
In addition to the two most consequential changes to the use of MPJVs discussed above, SBA proposes the following—with some of these revisions clarifying changes that were made in SBA’s May 2023 rulemaking:
- Clarifying Evaluation Criteria for Small Business Joint Ventures Following COFC’s Decision in SH Synergy, LLC v. United States, 165 Fed. Cl. 745 (2023). Currently, SBA’s regulations on joint ventures provide that a procuring activity may not require a protégé firm to individually meet the same evaluation or responsibility criteria as that required of other offerors generally. But SBA recognizes that, in light of the requirement that a protégé perform 40% of the work to be performed by the joint venture, COs have been trying to find ways to require protégé joint venture partners to demonstrate some level of past performance as part of a joint venture’s offer (see the SH Synergy decision). SBA is now proposing to provide guidance for such situations, allowing a procuring activity to require some past performance at a dollar level below what would be required of joint venture mentor partners or of individual offerors.
- Clarifying Ability of Joint Ventures to Recertify. SBA is proposing to clarify (at 13 C.F.R. 125.12(f)) that, where a joint venture must provide a recertification, the joint venture can recertify as small where (1) all parties to the joint venture qualify as small at the time of recertification, or (2) the protégé small business in a still active mentor-protégé joint venture qualifies as small at the time of recertification. SBA is further clarifying that such recertification as small does not implicate the two-year cap on joint ventures (at 13 C.F.R. 121.103(h)).
- Clarifying Name in Which JV Awards Must be Made. SBA is proposing to amend the current small business joint venture regulation that allows a procuring activity to execute a contract in the name of the joint venture entity or a small business partner to the joint venture (at 13 C.F.R. 125.8(f)) to clarify that if there is a separate legal entity, the award to the JV must be made in the name of the JV. SBA had only intended to allow JV awards to be made in the name of the small business partner where the JV was not a separate legal entity.
- Clarifying that Non-Profits May Not Be Mentors. While SBA’s commentary on the roll-out of the All-Small Mentor-Protégé Program in 2016 made clear that only for-profit entities could be mentors, SBA is now proposing to make this clear in its regulations (at 13 C.F.R. 125.9).
- Clarifying an Entity May Only Be a Protégé for 12 Years. In May 2023, SBA revised the mentor-protégé program regulations to allow a protégé to elect to maintain its mentor-protégé relationship with the same mentor as opposed to having two separate mentors for 6 years each. Out of an abundance of caution, SBA is proposing to clarify its regulations (at 13 C.F.R. 125.9) to specify that a firm can only be a protégé for up to 12 years, regardless of whether the concern has a mentor-protégé relationship with two different mentors or the same mentor for a second six-year period.
- JV Purchase – Right of First Refusal to the Protégé. SBA is proposing to add a provision to its mentor-protégé program regulations (at 13 C.F.R. 125.9(d)) to specify that where a mentor seeks to sell its interest in a mentor-protégé joint venture, the protégé firm shall have a right of first refusal to purchase that interest.
- Providing Protégé Rights with Respect to the Mentor-Protégé Agreement (MPA) Where the Mentor Is Acquired. Currently, SBA’s regulations allow for the continuation of a mentor-protégé relationship when a mentor is acquired by another firm, so long as the purchasing firm commits to honoring the obligations under the seller’s MPA. SBA recognizes that, as drafted, the protégé does not have any rights where a sale of its mentor occurs, and there are certainly situations where the purchasing concern “may not be the best business concern to carry out the previous mentor’s commitments.” Per SBA, “[w]here the purchasing concern is not able to fulfill the requirements of the existing mentor-protégé agreements as written,” the protégé should be able to either negotiate a revised MPA with the purchasing concern or terminate the MPA if the protégé believes the new entity is not a good fit. As always, SBA would need to approve any revisions to an MPA. But should the protégé terminate the MPA post-acquisition, SBA is proposing that the protégé could seek another business concern to enter an MPA for a duration not to exceed six years minus the length of the mentor-protégé relationship with the former mentor.
- Clarifying the Impact of Pre-Mentor-Protégé Relationship Affiliation Between the Mentor and Protégé. The longstanding rule has been that SBA will not approve a mentor-protégé relationship between two firms that are already affiliated. While SBA did not address this proposed change in its commentary, SBA nonetheless is proposing to clarify (at 13 C.F.R. 125.9(b)(2)) that SBA will decline an application not only if the proposed mentor is otherwise affiliated with the proposed protégé but also if the mentor “employs or otherwise controls the managers or key employees of the protégé.” In the same vein, SBA is also proposing to update its regulations to provide for SBA termination of an MPA not only if the entities were affiliated at the time of application or become affiliated during the relationship for reasons other than assistance provided pursuant to the MPA but also if “[k]ey managers or personnel become employees of both the mentor and protégé firms at the same time.” It is not clear how key employees will be defined here—for example, whether we should be looking to the definition of key employee from the newly organized concern affiliation test (of 13 C.F.R. 121.103).
Then, coming out of SBA’s rule change in May 2023 authorizing a mentor to purchase another business entity that is also an SBA-approved mentor if the purchasing mentor commits to honoring the obligations under the seller's mentor-protégé agreement, SBA is now proposing the following material change to the regulations:
- Competition Amongst Joint Ventures Would Require Mentor Exit from a JV. SBA’s current regulations prohibit a mentor that has more than one protégé from submitting competing offers in response to a solicitation for a specific procurement through separate joint ventures with different protégés. SBA is now proposing that where a mentor purchases another business entity that is an SBA-approved mentor and a MAC holder as a joint venture with a protégé small business, and the purchasing mentor is a contract holder with a protégé small business on that same MAC, the mentor must exit one of those joint venture relationships. In light of the potential adverse impacts to one of the protégés, SBA is proposing to allow the protégé firm connected to the joint venture from which the mentor exits to seek to either acquire the new mentor’s interest in the underlying MAC or reserve and work with the CO to determine whether novation of such contract or reserve to itself only may be appropriate, or to allow the protégé to seek to replace the new mentor with another business in the joint venture such that the revised joint venture continues to qualify as small.
Changes to the 8(a) BD Program
SBA is also proposing a number of changes specific to the 8(a) BD Program, including but not limited to:
- Ownership Restrictions Relating to Non-Disadvantaged Individuals. Currently, a non-disadvantaged individual or another business concern in the same or similar line of business generally cannot own more than 10 percent of an 8(a) BD Participant that is in the developmental stage or more than a 20 percent interest in an 8(a) BD Participant in the transitional stage of the program. The proposed rule would increase (via 13 C.F.R. 124.105(h)(2)) those allowable ownership percentages from 10 and 20 percent to 20 and 30 percent.
- Change in Ownership. Currently, a Participant may generally change its ownership or business structure so long as one or more disadvantaged individuals own and control it after the change and SBA approves the transaction in writing prior to the change. There are certain limited exceptions (in 13 C.F.R. 124.105(i)(2)) where only notice to SBA is required (as opposed to receiving SBA consent pre-transaction), including where all the non-disadvantaged owners own no more than a 20 percent interest in the concern both before and after the transaction; the transfer results from the death or incapacity due to a serious, long-term illness or injury of a disadvantaged principal; or the disadvantaged individual or entity in control of the Participant will increase the percentage of its ownership interest. SBA is proposing to amend this regulation (at 13 C.F.R. 124.105(i)) in two ways: first, prior approval would only be required where a non-disadvantaged individual owns more than a 30 percent interest in the 8(a) Participant either before or after the transaction; and, second, if the 8(a) Participant has never received an 8(a) contract, approval would not be required.
- Loosening of Application Requirements Concerning Demonstration of 2 Years of Operating Revenue. Currently, an applicant’s income tax returns for each of the two previous tax years must show operating revenues in the primary industry in which the applicant is seeking 8(a) BD certification. SBA is proposing to revise the regulation (at 13 C.F.R. 124.107(a)) to merely require that an applicant’s income tax returns for each of the two previous tax years must show operating revenues. This is because revenue on an income tax return may not be aligned by industry or NAICS code and SBA has determined that entities should not be excluded from the 8(a) BD Program because of tax returns not appropriately capturing information.
- Loosening of Requirements – Good Moral Character. Currently, SBA only requires demonstration of good character with respect to participation in the 8(a) BD Program—SBA must determine that an applicant or Participant and all of its principals possess good character (per 13 C.F.R. 124.108). While SBA is not going so far as to remove the good character requirement, the proposed rule would limit the grounds that would serve as an automatic, mandatory bar from participation in the 8(a) BD Program based on good character (i.e., either an application denied or possible termination action commenced against a current Participant). Specifically, SBA is proposing to remove the automatic bar for “possible criminal conduct” and to change the lack of business integrity bar to lack of business integrity as demonstrated by conduct that could be grounds for suspension or debarment.
- Accepting a Requirement into the 8(a) BD Program. Currently, SBA’s regulations (at 13 C.F.R. 124.105) provide that SBA will not accept a particular requirement for award through the 8(a) BD Program where, among other reasons, the procuring activity issued a solicitation for or otherwise expressed publicly a clear intent to award a contract as a small business set-aside, or to use the HUBZone, VetCert, or WOSB programs prior to offering the requirement to SBA for award as an 8(a) contract. SBA is proposing to amend this provision to allow SBA to accept a requirement for the 8(a) Program where the Associate Administrator of the Office of Business Development (AA/BD) determines that there is a reasonable basis to cancel the initial solicitation or, if a solicitation had not yet been issued, a reasonable basis for the procuring agency to change its initial clear expression of intent to procure outside the 8(a) BD Program. For example, SBA could accept a requirement where the procuring agency’s needs have changed since the initial solicitation was issued such that the solicitation no longer represents its current need, or where appropriations are no longer available for the requirement as anticipated and the solicitation must be canceled until a following fiscal year where funds are available. On the other hand, a mere change in strategy (i.e., an agency seeks to solicit through the 8(a) BD Program instead of through another previously identified program) would not constitute a reasonable basis for SBA to accept the requirement into the 8(a) BD Program.
- Clarification on Exercising Options Post-Exit from 8(a) Program. Currently, under SBA regulations at 13 C.F.R. 124.514(a)(1), if an 8(a) Participant graduates or has been terminated or the entity is no longer small under the size standard corresponding to the NAICS code for the requirement, negotiations to price an option cannot be entered into and the option cannot be exercised. Apparently, SBA has received inquiries as to whether this provision equally applies to firms that have voluntarily exited the program. Since it was always SBA’s intent that 13 C.F.R. 124.514 apply to all firms that are no longer active Participants in the program, SBA is proposing to specify that the provision applies to all firms whose term of participation in the 8(a) BD Program has ended or who have otherwise exited the program through any means.
Changes to the HUBZone Program
SBA published a comprehensive rewrite of its regulations governing the HUBZone Program in 2019. The proposed rulemaking refines the HUBZone Program following some changes imposed by the FY2018 NDAA as well as in light of questions that SBA has received since the 2019 changes.
SBA’s proposed changes to the HUBZone Program regulations include but are not limited to the following:
- Requiring Eligibility at Time of Offer. Under the current rules, once a firm annually recertifies its HUBZone status, it generally can submit offers for HUBZone contracts for one year without being required to meet the 35% HUBZone residency and principal office requirements at the time of offer. Because SBA is concerned about abuses of the program, SBA is proposing to amend its regulations (at 13 C.F.R. 126.601) to require that a firm be both a certified HUBZone small business and one that continues to be eligible as of the date of its offer for a HUBZone contract. SBA is also proposing to clarify that as long as a firm is eligible as of the date of its offer for a competitively awarded HUBZone contract, it will be eligible for award. (SBA is proposing to amend its regulations to specify that eligibility means an approved application—unlike in the WOSB Program, a pending application is not sufficient.) The exception is for HUBZone sole source awards for which a firm’s HUBZone eligibility will be measured as of the date of award.
- Removal of Annual Certification in Lieu of Triannual Recertification. Currently, the HUBZone rules require firms to annually recertify their HUBZone status to SBA. SBA considered maintaining an annual recertification requirement but found that the annual recertification requirement does not fulfill the purposes of the HUBZone Program as effectively as requiring firms to be eligible at the time of offer for HUBZone contracts (discussed above). As such, SBA is proposing to amend its regulations (at 13 C.F.R. 126.500) to require triannual recertification. This brings the HUBZone Program in line with the WOSB and VetCert Programs.
- Clarifying Certification Timing for the “Attempting to Maintain” Requirement. SBA is proposing an amendment concerning the requirement for HUBZone firms to certify that they will attempt to maintain compliance with the 35% HUBZone residency requirement during the performance of a HUBZone contract (at 13 C.F.R. 126.200(e)). SBA would require firms to make this certification when they apply for HUBZone certification, at the time they complete their recertification, and at the time of offer for any HUBZone contract.
- Providing a Grace Period for the “Attempting to Maintain” Requirement. Currently, a HUBZone firm can have less than 35% HUBZone residents at the time of its annual recertification if the firm is performing a HUBZone contract. SBA is proposing to amend its regulations (at 13 C.F.R. 126.500) to instead provide for a “grace period” after award of a HUBZone contract during which time the firm can take the necessary steps to hire enough HUBZone residents to get back up to 35% HUBZone residency. SBA is proposing a 12-month grace period following award of a HUBZone contract. After such grace period, the firm would have to be back up to 35% HUBZone residency at the time of any recertification.
- Revising Definition of an “Employee” – Increasing the Minimum Hours Requirement. SBA is proposing to revise the applicable definition of employee (at 13 C.F.R. 126.103) to increase the number of hours that an individual must work to be considered an employee for HUBZone purposes from 40 to 80 hours per month. SBA believes that the minimum 40 hours per month is not sufficient to promote the purpose of the program. Moreover, SBA believes that a firm’s “principal office” should have a consistent presence of employees in the office. Allowing employees to work only 40 hours per month could result in all individuals working one week and being off the remaining three weeks. SBA has expressly stated that this change is meant to prevent abuse and strengthen the integrity of the HUBZone Program. SBA is requesting comments on (1) whether 80 hours per month is an appropriate threshold, (2) whether there should be a minimum number of hours per week, and (3) whether there should be an exception to the 80 hours per month threshold for a limited number (or percentage) of individuals where such individuals are working at least 40 hours per month.
- Revising Definition of an “Employee” – Requiring Performance of Work. SBA is also proposing to revise the applicable definition of employee (at 13 C.F.R. 126.103) to clarify the existing requirement that an individual must be performing work for the concern in order to be considered an employee for HUBZone purposes. This stems out of SBA’s 2021 discovery of firms having on their payroll HUBZone residents who did not perform work for those companies in order to claim them as employees and appear to qualify for the program. Per SBA, “[t]his has never been permitted under the HUBZone regulations because allowing this practice would undermine the purpose of the HUBZone program.”
- Revising Definition of an “Employee” – Removal of In-Kind Compensation Employees. SBA is proposing to revise the applicable definition of employee (at 13 C.F.R. 126.103) to delete the current ability for a company to count as an employee someone receiving in-kind compensation if the compensation is commensurate with the work performed by the individual and provides a demonstrable financial value to the individual, and if the arrangement is compliant with all relevant federal and state laws, such as federal tax laws. Per SBA, “little to no firms are able to meet these requirements.”
- Revising Definition of an “Principal Office” – Shared Working Spaces. SBA is proposing to revise the applicable definition of principal office (at 13 C.F.R. 126.103) for shared working spaces (or “coworking” spaces). Firms will need to provide evidence that they have dedicated space within any shared location and that such dedicated space contains sufficient work surface area, furniture, and equipment to accommodate the number of employees claimed to work from the location.
- Revising Definition of an “Principal Office” – Virtual Office. SBA is also proposing to revise the applicable definition of principal office (at 13 C.F.R. 126.103) to specify that a virtual office (or other location where a firm only receives mail and/or occasionally performs business) does not qualify as a principal office.
- Revising Definition of an “Principal Office” – Teleworking. SBA is proposing to revise the applicable definition of principal office (at 13 C.F.R. 126.103) to add a provision that allows 100% of a firm’s employees to telework (i.e., work the majority of the time from their homes) but, where that occurs, at least 51% of its employees must work from HUBZone locations and the firm’s principal office would be the location where its records are kept. In essence, the tradeoff for not infusing capital via establishment of a principal office is that the firm would have to have 51% of its employees reside in a HUBZone instead of the normal 35%. SBA is requesting comments on this teleworking proposal, including whether SBA should allow teleworking employees who reside and work within the same census tract as the firm’s claimed principal office (or an adjacent census tract) to be counted as working from the principal office.
- Decrease in Time of Proof of Residence. SBA is proposing to amend the definition of reside (at 13 C.F.R. 126.103) to change the number of days that an individual must have lived at a location immediately prior to the relevant date of review from 180 to merely 90 calendar days.
- Application of HUBZone Price Evaluation Preference (PEP). SBA is proposing to amend its regulations (at 13 C.F.R. 126.613) to clarify how the PEP is applied. SBA would specify that the PEP does not apply where the initial lowest responsive and responsible offeror is a small business concern. Only if the otherwise successful offeror is a large business would the CO add 10% to that large business’s offer and, if the HUBZone’s offer is lower than the large business’s after PEP application, the HUBZone must be deemed the lowest-priced offeror.
Miscellaneous Proposed Amendments to Achieve Uniformity Across Programs
In line with its uniformity push, SBA has also proposed a series of changes to the various program regulations to provide better alignment concerning:
- Eligibility for Certification into a Program. Currently, there is great variation between status certification programs as to when an entity must be eligible. SBA is proposing to amend the 8(a) BD Program (13 C.F.R. 124.204(d)), HUBZone Program (13 C.F.R. 126.306(d)), WOSB Program (13 C.F.R. 127.304(d)), and VetCert Program (13 C.F.R. 128.302) to require consistent wording that an applicant must be eligible as of the date SBA issues a decision. SBA notes that for all certification programs, “[a]fter submitting an application for any program, a concern must immediately notify SBA of any changes that could affect its eligibility and provide information and documents to verify the changes.”
- Qualifying Individual Responsible for Accuracy of Application. SBA is proposing to amend or add to the regulations governing the 8(a) BD Program (at 13 C.F.R. 124.203), HUBZone Program (at 13 C.F.R. 126.302 and 126.303), WOSB Program (at 13 C.F.R. 127.301 and 127.302), and VetCert Program (at 13 C.F.R. 128.301) to provide that the individuals upon whom eligibility is based take responsibility for the accuracy of all information submitted on behalf of the applicant.
- Determination of Small Business Status for Certification Programs. SBA is proposing to amend the regulations governing the HUBZone Program (at 13 C.F.R. 126.200(b)), WOSB Program (at 13 C.F.R. 127.200(e)), and VetCert Program (at 13 C.F.R. 128.204(e)) to provide that, with respect to the requirement that only concerns who together with their affiliates qualify as a small business concern, SBA will accept a concern’s size representation on SAM unless there is evidence to the contrary. SBA will request a formal size determination pursuant to 13 C.F.R. 121.1001(b)(8) where any information it possesses calls into question the concern’s SAM size representation.
- Ownership Requirements Related to Partnerships. SBA is proposing to harmonize the provisions regarding ownership requirements pertaining to partnerships in the 8(a) BD Program (at 13 C.F.R. 124.105(b)), the WOSB Program (at 13 C.F.R. 127.202(d)), and the VetCert Program (at 13 C.F.R. 128.202(c)) “so that a firm simultaneously applying to be certified in more than one program must meet the same requirements.”
- Right of First Refusal by Non-Qualifying Owners. SBA is proposing to harmonize across the different statuses by allowing a right of first refusal that grants a non-qualifying individual the contractual right to purchase the ownership interests of a qualifying individual without affecting the unconditional nature of ownership, if the terms follow normal commercial practices. Currently, the VetCert Program regulations address this (at 13 C.F.R. 128.202(b)(3)) but SBA is proposing to align the 8(a) BD Program ownership requirements (by adding a new 13 C.F.R. 124.105(k)) and WOSB Program requirements (by adding a new 13 C.F.R. 127.201(b)(3)).
- Distribution of Profits. Given a slight difference in wording as between the 8(a) BD and VetCert Program regulations on distribution of profits, SBA is proposing to align the language on distribution of profits across the 8(a) BD Program (at 13 C.F.R. 124.105(f)(1)), the WOSB Program (adding a new provision at 13 C.F.R. 127.201(g)), and the VetCert Program (at 13 C.F.R. 128.202(g)) to ensure the wording is consistent.
- Involvement of Non-Qualifying Individuals. While the 8(a) BD, WOSB, and VetCert Program regulations each limit involvement by non-qualifying individuals to the extent such involvement causes lack of control on the part of a qualifying individual, SBA is proposing to bring the language of each in line with the others by amending the regulations governing the 8(a) BD Program (at 13 C.F.R. 124.106(e)), WOSB Program (at 13 C.F.R. 127.202(g)), and VetCert Program (at 13 C.F.R. 127.203(h)). This would mean, for example, that just as the 8(a) BD and VetCert Programs require the qualifying individual to be the most highly compensated, now too will the WOSB Program require the qualifying woman to be the highest compensated individual in the business concern, unless the concern demonstrates that the compensation to be received by a nonqualifying woman is commercially reasonable or that the qualifying woman has elected to take lower compensation to benefit the concern.
- S. Residency Requirement. While the 8(a) BD Program currently requires the socially and economically disadvantaged individuals to reside in the United States (at 13 C.F.R. 124.101), there is no similar requirement for the WOSB or VetCert Programs. SBA is proposing to add a U.S. residency requirement for the qualifying individuals to the WOSB Program (at 13 C.F.R. 127.200) and VetCert Program (at 13 C.F.R. 128.200).
- Timeline for Appealing Denials to Various Programs. As part of the upgrade that SBA is currently doing to certify.sba.gov to create a uniform application processing system, SBA expects entities may simultaneously apply for multiple certifications for they might be eligible. As such, SBA is conforming the deadlines for when appeals would be due following a denial to the 8(a) BD Program and VetCert Program. SBA is therefore proposing to increase the VetCert deadline to appeal a denial from 10 to 45 days (via 13 C.F.R. 134.1104) to be consistent with the current 45 days that an applicant has to appeal an 8(a) BD denial (at 13 C.F.R. 124.206).
- Timeline for Reapplying Following Decertification. SBA is proposing to amend the regulations governing the HUBZone Program (at 13 C.F.R. 126.309 and 126.803), WOSB Program (at 13 C.F.R. 127.305), and SDVOSB Program (at 13 C.F.R. 128.305) to eliminate the wait period for firms that have been decertified.
- Ineligibility Based on Failure to Pay Federal Financial Obligations. SBA is proposing to add language to the WOSB Program (at 13 C.F.R. 127.200(h)) and HUBZone Program (at 13 C.F.R. 126.200(h)) to provide that a small business is ineligible for certification if the concern or any of its principals has failed to pay significant financial obligations owed to the federal government such that these regulations would be consistent with the 8(a) BD Program regulations (at 13 C.F.R. 124.108(e)) and VetCert Program regulations (at 13 C.F.R. 128.201(b)) which currently contain such a prohibition.
- Restrictions on Fees for Representatives of Applications to the Status Certification Programs. While the 8(a) BD Program currently restricts such fees, SBA is proposing to create a new 13 C.F.R. 125.13 to apply to all of SBA’s certification programs and impose the current 8(a) BD Program restrictions (at 13 C.F.R. 124.4).
Other Miscellaneous Proposed Amendments
Finally, SBA has also proposed a number of other amendments to regulations, largely clarifying various aspects of the programs:
- New Cross-Program Basis of Removal. As referenced above, SBA is currently undertaking creation of a uniform application processing system whereby SBA anticipates entities will be applying simultaneously for certification in multiple programs. SBA is proposing to add new provisions to each of the status certification programs to provide that a firm that is decertified or terminated from one SBA certification program due to the submission of false or misleading information may be removed from SBA’s other small business contracting programs (including the SBA’s Mentor-Protégé Program). In addition, the 8(a) BD Program (13 C.F.R. 124.303(c)), HUBZone Program (13 C.F.R. 126.503), WOSB Program (13 C.F.R. 127.405(f)), and VetCert Program (13 C.F.R. 128.310(g)) regulations would provide that SBA may require a firm to enter into an administrative agreement as a condition of admission or re-admission to any of the SBA’s status certification programs.
- Clarifying that COs Cannot Restrict Competition Based on Multiple Statuses. The various status certification programs each contain restrictions that an agency cannot restrict competition to only those entities that are certified both in the particular status as well as a second certification. SBA is proposing to clarify (at 13 C.F.R. 125.2) that a procuring activity cannot create a small business set-aside or reserve (for either a contract, order, or agreement) that requires one or more socioeconomic certifications in addition to a size certification or give evaluation preferences to concerns having one or more socioeconomic certifications.
- Clarifying Which Contracting Officer Monitors Limitations on Subcontracting Compliance for Orders. For multi-agency set-aside contracts under which more than one agency can issue orders, the ordering agency must use the period of performance for each order to determine compliance with limitations on subcontracting. SBA is proposing to clarify that the CO for the ordering agency is in the best position to monitor compliance and, therefore, should be the one to do so but, at the end of performance, the ordering CO also should inform the CO for the underlying MAC of any failure to meet the applicable limitations.
- Extension to Reporting against Small Business Subcontracting Plans. In recognition of increased burdens on prime contractors vis-à-vis order-level subcontracting reporting, SBA is proposing to extend due dates for subcontracting reports from 30 to 45 days (e.g., SF-294, Subcontracting Report for Individual Contracts would now be due November 14thas opposed to October 30th) as well as extend the time period for review from 60 to 75 days (in 13 C.F.R. 125.3).
Comments on this proposed rule are due to the SBA on or before October 7, 2024.
Crowell will be hosting a webinar series “Updates on Developments in Various Small Business Topics in Federal Procurement” in September and October 2024 and intends to cover the proposed changes to the mentor-protégé program and small business joint venturing regulations on Monday, September 9, 2024 from 12-1 pm ET and to the recertification rules on Wednesday, Octobe
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