Written by attorney David Allen Rose

Summary of Changes to the 8(a) Business Development Small Business Size Regulations

On February 11, 2011, the U.S. Small Business Administration published a final rule to the regulations governing the section 8(a) Business Development Program, the size regulations, and the regulations affecting Small Disadvantaged Businesses. The Federal Register publication covered more than 40 pages and was the most comprehensive revision in more than ten (10) years. The changes will take effect on March 14, 2011.

The first major clarification was to make clear that the exemption found at 13 CFR 121.103(b)(6) for mentor/protege's to affiliation is intended to apply to SBA's 8(a) Business Development Program (BD) solely and not to be extended to other agencies mentor protege programs unless they are specifically authorized in that agency's authorizing statute. It is not, nor was it ever intended that the exemption to affiliation granted to mentor proteges under the SBA regulations was to extend to other Agency's mentor protege programs. The rule does clarify; however, that if another agency does authorize, by statute, an exception to affiliation, for a mentor protege relationship, in their program, SBA will recognize it.

The joint venture rule was changed to allow a specific joint venture to be awarded three contracts over a two-year period.. It further clarified, in writing, that the joint venture partners could then form a second joint venture and a successive third joint venture but that at some point, such a longstanding relationship, would be a basis for a finding of general affiliation. The SBA also clarified that the date for the beginning of the two year period begins as of the date the concern certifies that it is small as part of its initial offer including price.

Another clarification concerned the determination of whether to populate or not to populate a joint venture. The SBA said in summary that if a joint venture was forms as a legal entity, such as a Limited Liability Company or Partnership, it would need to be populated, and that if it was formed by a simple written agreement with no formal legal entity attached, it would not have to be populated. However, the primary enforcement of this requirement will be that if a legal entity is formed the 8(a) participant must own 51% and must receive profits commensurate with their ownership interest in the JV. They further clarified that work done by the 8(a) must be more than administrative or ministerial in order for the 8(a) partner to gain substantive experience and that in an unpopulated JV, the 8(a) must perform at least 40% of the work of the JV.

A new basis for affiliation between a mentor and protege may be found if the JV violates the 40% rule in non-8(a) procurements. This means that even though SBA does not approve JV agreements in non 8(a) small business competitive set aside procurements, the JV must comply with the new 13 CFR 124.513(c) and (d) requirements on work done by the protege in either populated or unpopulated joint ventures.

The SBA added the Office of Inspector General as another entity that can now request a size determination. Formerly the OIG could not request a formal size determination. This has been codified at 13 CFR 1001(b).

The requirement for "regularly maintains an office" for construction has been clarified to not require a construction license to meet the requirements for certifying a bonafide office in a particular geographic region.

Persons claiming social and economic disadvantage must reside in the United States.

A new rule 13 CFR 124.104(c)(3) provides that an person is presumed to not qualify as economically disadvantaged if he or she has an adjusted gross income averaging over $250,000 over the past three years for initial BD eligibility and cannot have an adjusted gross income averaging over $350,000 over the past three years for continued eligibility once in the program.

SBA clarified the family control rule by stating that an individual may not use his or her disadvantaged status if an immediate family member is using their status to qualify another concern for the 8(a) BD program. The clear fracture rule is still viable here. The rule is at 13 CFR 124.105.

The SBA added a provision to allow 8(a) participants who were activated reservists to suspend the running of their 9 Year term in the program while fulfilling their commitment to the military.

The set aside threshold at 13 CFR 124.506 was generally raised from $3.5 million to $4.0 Million for Services and from $5.5 to $6.5 Million in Manufacturing.

Finally, with regard to Mentor Proteges, there were several major changes: 1) A mentor may have up to three proteges. A protege may have a second mentor if in a different non-competing NAICS code. 2) Non-profit organizations can now be mentors. 3) 8(a) firms cannot be a mentor unless they give up their status as 8(a)s. 4) The mentor protege can now JV for the purpose of performing federal subcontracts as small at 13 CFR 124.520(d)(1). 5) A clarification requires that the JV agreement must include and comply with the requirements of 13 CFR 124.513(a) in order to benefit from the exclusion from affiliation. (40% rule).

This article does not cover all the myriad of changes but seeks to highlight several of the major impacts of the law. Please contact us if you have further questions.

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