Changes to the SBA Mentor Protege Program and Joint Venture Agreements

On February 5, 2015, the Small Business Administration (SBA) issued a proposed rules that would establish a mentor-protégé program for all small businesses, including HUBZone, Women-Owned Small Businesses and Service Disabled Veteran Owned Small Businesses.

1. Exemption from Affiliation

   Under the current, and as proposed, SBA regulations, two companies that form a joint venture are considered affiliates. This means that in determining their size, their assets are combined in the aggregate to determine if the joint venture entity is large or small by the applicable NAICS code size standard appropriate for the procurement. The new rule will make an exception to affiliation, just as found in the 8(a) Mentor Protege program that will exempt a mentor and protege from affiliation for activities conducted under the auspices of an approved mentor Protege Agreement. Remember, however, that they may still be found to be affiliated for other reasons.

2. Anticipated Participation

   Given the anticipated level of participation and confusion generated by this new rule, added competition and potential for misuse, there will be additional certifications and reports to be made by mentors and proteges. In all likelihood many of these certifications will carry the penalty of a finding of fraud or false claims which can even lead to criminal penalties being imposed so again, understanding the rule is critical.

3. Application Procedure

   It is anticipated the application procedure will be close in form to that currently used for 8(a) mentor Protege applications. The one caveat with respect to this approach is that the SBA has suggested in the proposed rule that 8(a) applications will continue to be approved by SBA's Associate Administrator for Business Development while non-8(a) applications will be approved by the SBA's Director of Government Contracting. Another suggestion by the SBA is that due to the anticipated desired participation in the program, SBA wishes to restrict the time for filing applications to "open" and "closed" periods during which SBA will accept and review applications or another suggestion is that SBA should limit the number of applications that it will review or approve during a year. We specifically commented on this avenue as we believe it might impede or at last raise the specter of "Due Process" if not managed very carefully. SBA has placed a limited duration of a mentor-protege agreement to three years in the proposed rule with annual recertifications.

4. Limitations on Participation

   The proposed rule limits the number of proteges a mentor can have to three. This total includes all mentor-protege programs. The new rule also relaxes the requirement a firm be less than half its primary NAICS code in order to qualify as a protege. Now it just has to meet the requirement of being a small business in its primary NAICS code

5. Special Requirements for Joint Ventures

   Joint ventures must all be unpopulated now with the exception of administrative employees. This will not affect many JVs as most were already being formed as unpopulated JVs. It also makes it clear the JV may take any legal form (partnership, LLC, etc.). The rule will continue to require the qualifying member of the JV to perform at least 40% of the JV. A change to the regulations will allow HUBZone protege's to JV with their mentor.