[Federal Register Volume 77, Number 94 (Tuesday, May 15, 2012)]
[Proposed Rules]
[Pages 28520-28530]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-11586]


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SMALL BUSINESS ADMINISTRATION

13 CFR Part 121

RIN 3245-AG46


Small Business Size Regulations, Small Business Innovation 
Research (SBIR) Program and Small Business Technology Transfer (STTR) 
Program

AGENCY: Small Business Administration.

ACTION: Proposed rule.

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SUMMARY: The U.S. Small Business Administration (SBA) proposes to amend 
its regulations governing size and eligibility for the Small Business 
Innovation Research (SBIR) and Small Business Technology Transfer 
(STTR) Programs. This proposed rule would implement provisions of the 
National Defense Authorization Act for Fiscal Year 2012. The proposed 
rule addresses ownership, control and affiliation for participants in 
the SBIR and STTR Programs. This includes participants that are 
majority owned by multiple venture capital operating companies, private 
equity firms or hedge funds.

DATES: You must submit your comments on or before July 16, 2012.

ADDRESSES: You may submit comments, identified by RIN: 3245-AG46, by 
any of the following methods:
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
     Mail, Hand Delivery/Courier: Carl Jordan, Office of Size 
Standards, or Edsel Brown, Assistant Director, Office of Technology, 
U.S. Small Business Administration, 409 Third Street SW., Washington, 
DC 20416.
    SBA will post all comments to this proposed rule on 
www.regulations.gov. If you wish to submit confidential business 
information (CBI) as defined in the User Notice at www.regulations.gov, 
you must submit such information to Carl Jordan or Edsel Brown, or send 
an email to sizestandards@sba.gov. Highlight the information that you 
consider to be CBI and explain why you believe SBA should hold this 
information as confidential. SBA will review your information and 
determine whether it will make the information public.

FOR FURTHER INFORMATION CONTACT: Carl Jordan, Office of Size Standards, 
at (202) 205-6618, or Edsel Brown, Assistant Director, Office of 
Technology, at (202) 401-6365. You may also email questions to 
sizestandards@SBA.gov.

SUPPLEMENTARY INFORMATION:

I. Background

    On July 22, 1982, Congress enacted and the President signed into 
law the Small Business Innovation Development Act of 1982, Public Law 
97-219 (codified at 15 U.S.C. 638), which established the Small 
Business Innovation Research (SBIR) Program. The statutory purpose of 
the SBIR Program is to stimulate technological innovation by 
strengthening the role of innovative small business concerns in 
Federally-funded research and research and development (R/R&D).
    In 1992, Congress enacted the Small Business Technology Transfer 
Act of 1992 (STTR Act), Public Law 102-564 (codified at 15 U.S.C. 638). 
The STTR Act initially established the Small Business Technology 
Transfer (STTR) program as a pilot program that requires Federal 
agencies with extramural budgets for R/R&D in excess of $1 billion per 
fiscal year to enter into funding agreements with small business 
concerns that engage in a collaborative relationship with a research 
institution. The purpose of the STTR program is to stimulate a 
partnership of ideas and technologies between innovative small business 
concerns and research institutions. Congress amended the Small Business 
Act (Act) in 2001 and

[[Page 28521]]

changed the status of the STTR program from a pilot program to a 
permanent one.
    On December 31, 2011, the President signed into law the National 
Defense Authorization Act for Fiscal Year 2012 (Defense Reauthorization 
Act), Public Law 112-81. Section 5001, Division E of the Defense 
Reauthorization Act contains the SBIR/STTR Reauthorization Act of 2011 
(SBIR/STTR Reauthorization Act), which extends both the SBIR and STTR 
programs through September 30, 2017, increases the percentage of each 
participating agency's extramural budget allocated for the programs, 
and increases the SBIR and STTR Phase I and Phase II award levels. In 
addition to the above, the SBIR/STTR Reauthorization Act contains 
several provisions relating to businesses majority-owned by venture 
capital operating companies (VCOCs), hedge funds or private equity 
firms. Specifically, the SBIR/STTR Reauthorization Act provides that 
businesses majority-owned by VCOCs, hedge funds or private equity firms 
may participate in the SBIR Program, under certain conditions.
    At the present time, SBA's size regulations, which address 
ownership and affiliation of SBIR participants, do not permit business 
concerns majority-owned by multiple venture operating companies, hedge 
funds or private equity firms to participate in the program. 
Consequently, the SBIR/STTR Reauthorization Act requires that SBA issue 
a proposed rule, within 120 days of enactment of the Act, amending 13 
CFR 121.103 (relating to determinations of affiliation applicable to 
the SBIR Program) and 13 CFR 121.702 (relating to ownership and control 
and size for the SBIR Program) to address ownership, control, and 
affiliation for businesses that are owned in majority part by VCOCs, 
private equity firms or hedge funds. According to the statute, the 
regulations must also address domestic ownership of program 
participants.
    As a result of the abbreviated time frame set forth in the SBIR/
STTR Reauthorization Act by which SBA must issue a proposed rule, the 
Agency was unable to conduct public outreach prior to drafting and 
issuing this proposed rule. However, in addition to soliciting public 
comments on the proposed rule, SBA plans to conduct public outreach 
sessions following publication of the rule, such as town hall meetings 
and webinars, to gather additional input on these statutory provisions 
and SBA's proposed implementation. SBA will release more information 
about these public sessions later. The information will be available at 
www.SBIR.gov and www.sba.gov.

II. Proposed Amendments

    SBA is proposing to amend its regulations to address affiliation, 
ownership, and control of participants in the SBIR and STTR programs. 
Because these issues affect various parts of SBA's size regulations, 
SBA must propose amendments to several sections. In drafting these 
regulations, the SBA took into consideration recent Executive Orders 
issued by the President, including Executive Order 13563, issued on 
January 18, 2011. Executive Order 13563 explains that when drafting 
regulations, agencies must consider approaches that reduce burdens, 
maximize benefits and maintain flexibility; promote coordination, 
simplification, and harmonization; identify and assess available 
alternatives; and consider the costs of the regulations on the public.
    SBA believes this proposed rule simplifies and streamlines the 
current ownership and affiliation criteria for the SBIR and STTR 
programs, while also ensuring that only domestic small businesses 
receive the benefits of these programs. Specifically, SBA's proposed 
rules provide a clear set of guidelines for small businesses to 
understand and a bright-line test by which small businesses can easily 
determine whether they meet the ownership, size and affiliation 
requirements of the programs.
    When drafting the regulations, SBA considered the fact that the 
statutory provisions relating to majority ownership by VCOCs, hedge 
funds or private equity firms specifically apply to the SBIR Program. 
However, Sec.  5104 of the SBIR/STTR Reauthorization Act permits a 
small business concern that received a Phase I award under the SBIR or 
STTR program to receive a Phase II award in either the SBIR or STTR 
program. Therefore, an SBIR Phase I awardee may be able to receive an 
STTR Phase II award. If that is the case, the eligibility rules of both 
programs should be the same and consistent. As a result, SBA's proposed 
amendments apply to both the SBIR and STTR programs.
    The proposed amendments are set forth in a section-by-section 
analysis below. In each section, SBA has requested comments on specific 
issues. However, SBA welcomes comments on all issues arising from this 
proposed rule, including whether there are additional ways to simplify 
the current requirements, maximize benefits and increase flexibility 
for small businesses.

A. Section 121.701--Definitions and Programs Subject to Size 
Determinations

    SBA is proposing to amend Sec.  121.701, which states that the SBIR 
Programs of the agencies are subject to SBA's size determinations, to 
make it clear that the regulations apply to both the SBIR and STTR 
programs. In addition, SBA has added definitions applicable to the 
programs and set forth in statute to this section.
    Section 5107(c)(3)(A) of the SBIR/STTR Reauthorization Act states 
that SBA's regulations addressing the participation of applicants 
majority-owned by multiple VCOCs, hedge funds, or private equity firms 
in the SBIR Program should address whether the applicant is owned by 
domestic business concerns. SBA therefore has proposed to define the 
term ``domestic business concern.'' In defining the term, SBA looked 
first at its regulations, which define the term ``business concern or 
concern.'' A ``business concern or concern'' eligible for SBA's 
programs is one that is for profit, has a place of business located in 
the United States, and which operates primarily within the United 
States or which makes a significant contribution to the U.S. economy 
through payment of taxes or use of American products, materials or 
labor. SBA proposes that a domestic business concern meet this 
definition.
    However, SBA has proposed additional criteria that a ``domestic 
business concern'' must meet. SBA has proposed that for purposes of the 
SBIR and STTR programs, the domestic business concern must also be 
created or organized in the United States, or under the law of the 
United States or of any State. SBA believes that this proposed 
definition not only meets statutory requirements set forth in the Act 
but is straightforward and easy to understand.
    When drafting the proposed definition of domestic business concern, 
SBA reviewed other regulations, such as those implementing the Buy 
American Act and Berry Amendment, to determine whether they define the 
term. We note that the Department of Defense Federal Acquisition 
Regulations Supplement (DFARS) defines the term ``domestic concern'' to 
mean a concern incorporated in the United States (including a 
subsidiary that is incorporated in the United States, even if the 
parent corporation is a foreign concern) or an unincorporated concern 
having its principal place of business in the United States. See 48 CFR 
225.003. SBA did not propose this definition for the SBIR and STTR 
programs because

[[Page 28522]]

we do not believe it is sufficiently restrictive--the DFARs definition 
does not appear to require an incorporated concern to have a place of 
business in the United States.
    In addition, SBA also considered whether it should include a 
requirement that to be considered a domestic business concern, more 
than 50% of the business must either directly or indirectly be owned by 
U.S. citizens, permanent resident aliens, or domestic corporations, 
partnerships or limited liability companies (LLCs). SBA did not propose 
this requirement in the definition of domestic business concern because 
we believe it adds an extra burden on the small business and an added 
complexity that is not necessary.
    The definition proposed for the term ``domestic business concern'' 
has generally been utilized for SBA's programs for many years, and has 
ensured that domestic small business concerns receive the benefits of 
SBA's programs. However, SBA welcomes comments on whether the proposed 
definition of domestic business concern should include additional 
criteria to ensure that the business is truly a domestic concern. SBA 
also welcomes comments on whether it should adopt the more simplified 
definition of domestic concern used in the DFARS, which is discussed 
above.
    In addition, the SBIR/STTR Reauthorization Act defines the terms 
VCOC, hedge fund and private equity firm. SBA has proposed 
incorporating those statutory definitions into the regulations.
    SBA has also proposed to define the term ``portfolio company'' 
because the SBIR/STTR Reauthorization Act uses that term when referring 
to VCOCs, hedge funds and private equity firms, but does not define it. 
SBA is proposing to define the term ``portfolio company'' to mean any 
company owned by the VCOC, hedge fund or private equity fund. SBA 
reviewed the U.S. Department of Labor's definition for venture capital 
investment set forth in 29 CFR 2510.3-101(d)(3)(i), which defines the 
term as an investment in an operating company as to which the investor 
has or obtains management rights. However, SBA believes that the 
definition it has proposed is a simpler and easier definition to 
understand.
    SBA welcomes comments on these proposed amendments.

B. Section 121.702--Ownership and Control

    SBA is proposing to amend 13 CFR 121.702 to address many of the 
amendments to the Small Business Act set forth in the SBIR/STTR 
Reauthorization Act of 2011. Specifically, SBA is proposing amendments 
to address ownership and control of SBIR and STTR participants.
    The SBIR/STTR Reauthorization Act specifically permits, in certain 
instances, SBIR and STTR applicants that are majority-owned by multiple 
VCOCs, hedge funds or private equity firms to participate in the SBIR 
Program. Therefore, SBA has proposed amending its regulations to 
address this new statutory requirement.
    In addition, when drafting the proposed rule, SBA reviewed its 
current regulations regarding eligibility for the programs. The current 
regulations state that an SBIR awardee must be a business concern that 
is at least 51% owned and controlled by U.S. citizens or permanent 
resident aliens or at least 51% owned and controlled by another 
business that is at least 51% owned and controlled by U.S. citizens or 
permanent resident aliens. SBA considered retaining this ownership and 
eligibility criterion since it clearly ensures that there is domestic 
ownership and control of SBIR and STTR participants. However, SBA 
believes this eligibility criterion may be too restrictive and fails to 
provide sufficient flexibility to small businesses when creating their 
ownership structure.
    As a result, SBA has proposed that an SBIR and STTR applicant must 
be:
     More than 50% owned and controlled by U.S. citizens, 
permanent resident aliens, or domestic business concerns (the proposed 
definition of domestic business concern is explained above); or
     Majority-owned by multiple domestic VCOCs, hedge funds or 
private equity firms.
    As set forth in the SBIR/STTR Reauthorization Act, no one domestic 
business concern that is a VCOC, hedge fund or private equity firm may 
own more than 50% of the SBIR or STTR participant. Further, if the SBIR 
or STTR participant is majority-owned by multiple VCOCs, hedge funds or 
private equity firms, then it would trigger certain statutory 
requirements.
    The SBIR/STTR Reauthorization Act also requires SBA to consider 
whether an applicant should be a domestic entity itself as well as a 
direct or indirect subsidiary of a domestic entity. In other words, 
this statutory provision requires SBA to consider that while an 
applicant could be organized and located in the United States and 
therefore be domestic, it might be necessary to ensure that the 
applicant is also owned by U.S. citizens or domestic companies.
    SBA believes that the ownership requirements proposed in this 
rule--that the SBIR and STTR participant must be more than 50% owned by 
U.S. citizens, permanent resident aliens or domestic business 
concerns--addresses the statutory recommendation concerning domestic-
owned applicants. SBA also believes that its proposed definition of 
domestic business concern, discussed in the section above, addresses 
these statutory recommendations.
    In sum, when determining eligibility for the program, the proposed 
rule would require the applicant to consider the following (in addition 
to the requirements relating to size and affiliation, etc.):
    1. Is the concern more than 50% owned by a single domestic business 
concern that is a VCOC, hedge fund or private equity firm? If yes, then 
it is not eligible for the SBIR or STTR program.

    Example:  SBIR Applicant is owned 80% by VCOC A, 10% by VCOC B 
and 10% by an individual. SBIR Applicant would not meet the 
ownership requirement.

    2. Is the concern more than 50% owned by one or more U.S. citizens, 
permanent resident aliens, or domestic business concerns? If yes, then 
it may be eligible for the SBIR or STTR program, unless it answered yes 
to Question No. 1.

    Example 1:  SBIR Applicant is owned 40% by U.S citizens, 30% by 
domestic corporations, and 30% by a non-domestic corporation. The 
SBIR applicant would be more than 50% owned by U.S. citizens and 
domestic business concerns. SBIR Applicant meets the ownership 
criteria for the program.
    Example 2:  STTR Applicant is owned 49% by a domestic VCOC, 2% 
by an individual who is a U.S. citizen and 49% by a non-domestic 
corporation. STTR Applicant would be more than 50% owned by U.S. 
citizens and a domestic business concern that is a VCOC. The 
domestic business concern that is a VCOC does not own more than 50% 
of the applicant. STTR Applicant meets the ownership criteria for 
the program.

    3. Is the concern more than 50% owned by multiple domestic business 
concerns that are VCOCs, hedge funds, or private equity firms? If yes, 
then it may be eligible for the SBIR or STTR program unless answered 
yes to Question No. 1.
    SBA believes that this proposed rule satisfies the requirements for 
ownership set forth in statute and, at the same time, provides a 
straight-forward and simplified method for determining eligibility. It 
also provides small business with the flexibility needed in structuring 
their business and obtaining capital and will ensure that innovation in 
the United States continues to grow and flourish.
    However, SBA understands that there may be alternatives to the 
proposal and

[[Page 28523]]

seeks comments, including the following: (1) Whether the eligibility 
criteria meets the statutory purpose of the programs with respect to 
domestic ownership of the applicant; (2) whether the eligibility 
criteria meets the statutory purpose of the programs with respect to 
ownership by other-than-small businesses; and (3) whether the proposed 
rule should address other issues besides the above with respect to 
ownership.
    Moreover, Sec.  5107(c)(3)(B) of SBIR/STTR Reauthorization Act 
requires that under the already existing authority for SBA to establish 
size standards, 15 U.S.C. 632(a), SBA shall establish size standards 
for applicants that are majority-owned by VCOCs, hedge funds or private 
equity firms. The current size standard for SBIR and STTR applicants is 
500 employees. This means that an applicant, including its affiliates, 
cannot have more than 500 individual employees on a full-time, part-
time or other basis, and includes employees obtained from a temporary 
employee agency, professional employer organization and leasing 
concern. SBA uses the average number of the business concern's 
employees based upon the number of employees for each of the pay 
periods for the preceding completed 12 calendar months (see 13 CFR 
121.106(b)(1)).
    SBA has reviewed the 500-employee size standard and is not 
proposing any changes. The 500 employee size standard is the current 
size standard for all R&D North American Industry Classification System 
(NAICS) codes, including SBIR and STTR. For example, both NAICS 541711, 
Research and Development in Biotechnology, and NAICS 541712, Research 
and Development in the Physical, Engineering and Life Sciences (except 
Biotechnology) have 500 employee size standards.
    SBA welcomes comments on these proposed amendments to the ownership 
and control regulations in Sec.  121.701.

C. Section 121.702--Affiliation

    SBA's regulations, at Sec.  121.103, address the principles of 
affiliation. Generally, affiliation exists when one business controls 
or has the power to control another or when a third party (or parties) 
controls or has the power to control both businesses. Control may arise 
through ownership, management, or other relationships or interactions 
between the parties. Affiliation is an important issue when determining 
size because SBA counts the receipts, employees, or other measure of 
the business, and includes those of all its domestic and foreign 
affiliates, regardless of whether the affiliates are organized for 
profit (13 CFR 121.103(a)(6)).
    SBA's affiliation rules generally apply to all Federal programs for 
which a business must qualify as small, including SBA's Government 
Contracting or Business Development programs, small business loan 
programs and grant programs. Therefore, for purposes of the SBIR and 
STTR programs, an applicant for a Phase I and Phase II award must meet 
the 500 employee size standard, taking into consideration the employees 
of the applicant and all of the applicant's affiliates.
    Section 5107(c)(3)(D) of the SBIR/STTR Reauthorization Act sets 
forth an outline for affiliation with respect to those applicants that 
are majority owned by VCOCs, hedge funds, or private equity firms, as 
well as any other business that the VCOC, hedge fund, or private equity 
firm has financed. After reviewing these statutory provisions, the 
purpose of the amendments to the SBIR and STTR programs, the purpose of 
the SBIR and STTR programs, and the overall goal of simplification and 
maximization of benefits for small businesses, SBA has proposed certain 
amendments to the current affiliation rules, solely with respect to 
these programs. As a result, SBA has proposed to address size and 
affiliation for the SBIR and STTR programs in Sec.  121.702, and not in 
Sec.  121.103, to avoid any confusion.
    SBA believes that, in general, the principles of affiliation set 
forth in Sec.  121.103 apply to the SBIR and STTR program. However, SBA 
believes that certain affiliation principles--such as those concerning 
minority stock holdings--are not necessarily applicable to SBIR or STTR 
applicants as a result of the general business structure and purpose of 
such business concerns. In addition, SBA sought to create a simple, 
bright-line test for SBIR and STTR applicants to apply when determining 
eligibility with respect to size and affiliation.
    SBA's current principles of affiliation explain that if a business 
concern's stock is widely held and no single block of stock is large as 
compared to others, then the board of directors and President or Chief 
Executive Officer are deemed to control the business concern, unless 
they can present evidence showing otherwise. In addition, SBA's general 
principles of affiliation explain that if two or more persons own, 
control or have the power to control less than 50% of the concern's 
voting stock, but the blocks of stock are equal or approximately equal 
in size, then SBA presumes each person to control the business concern.
    In this proposed rule, SBA has amended those principles solely for 
purposes of the SBIR and STTR program. Consequently, SBA's proposed 
rule explains that where an SBIR or STTR applicant's voting stock is 
widely held or two or more persons hold large blocks of voting stock 
but no one person owns more than 50% of the stock, then the board of 
directors controls the applicant. SBA believes that in these two 
instances (minority holdings are equal in size and voting stock is 
widely held), the investments are diffused. As a result, we believe 
that for purposes of the SBIR and STTR programs, control would rest 
with the board of directors since it is that body that is truly running 
the business.
    SBA welcomes comments on this proposed rule as it relates to SBIR 
and STTR applicants where no one stockholder owns a majority of the 
applicant. For example, SBA welcomes comments on whether it should: (1) 
Retain the current affiliation rule with respect to minority stock 
holdings and if so, whether it should set forth a specific threshold by 
which it will find control and therefore affiliation (e.g., if a person 
owns 33% or more of the company) in order to create a bright-line test 
for applicants; (2) find affiliation if two or three persons or 
businesses collectively own more than 50% of the applicant, and the 
same two or three persons or businesses collectively own more than 50% 
of any other company or entity; or (3) implement a rule setting forth 
both options (1) and (2) above.
    SBA has also proposed to amend the current affiliation rules 
relating to identity of interest, for purposes of the SBIR and STTR 
programs only. Specifically, the proposed rule explains that SBA will 
presume affiliation based on an identity of interest between family 
members with identical or substantially identical business or economic 
interests.
    SBA may also presume affiliation based on an identity of interest 
between business concerns that are economically dependent through 
contractual or other arrangements. For example, affiliation based on an 
identity of interest may arise if a business earns 70% of its revenues 
as a result of doing business with one other business concern. 
Affiliation based on an identity of interest may also arise where one 
business concern is dependent on loans supplied by another business, 
and the loans are made outside of arm's length transactions. Because it 
is not clear how often these types of situations arise for SBIR and 
STTR applicants, SBA requests comments on whether the

[[Page 28524]]

identity of interest rule relating to economic dependency should be 
retained for purposes of the SBIR and STTR programs.
    We note that Sec.  5107(c)(3)(D) of the SBIR/STTR Reauthorization 
Act states that SBA may not determine that a portfolio company of the 
VCOC, hedge fund, or private equity firm is affiliated with an SBIR or 
STTR applicant based solely on one or more shared investors. Therefore, 
SBA has proposed that it will not find affiliation for an SBIR or STTR 
applicant with a portfolio company solely because of shared investors.
    Consequently, SBA's proposed rule explains that it may find 
affiliation for SBIR or STTR applicants in one or more of the following 
situations:
    1. Control of more than 50% of voting stock. A person (individual, 
entity, or business concern) is an affiliate of the SBIR or STTR 
applicant if the person owns or controls, or has the power to control, 
more than 50% of the concern's voting stock.

    Example: Individual A is the majority owner of SBIR Applicant B, 
Company C and Company D (54.5%, 81%, and 60%, respectively). 
Individual A has the power to control SBIR Applicant B, Company C 
and Company D. The companies are all affiliated. The number of 
employees of all will be aggregated in determining the size of the 
SBIR applicant.

    2. Control of less than 50% of voting stock. If two or more persons 
(including any individual, concern or other entity) each owns, 
controls, or has the power to control less than 50% of an SBIR or STTR 
applicant's voting stock, the board of directors controls the SBIR/STTR 
applicant.

    Example: Domestic Business Concern A owns 20%, domestic VCOC B 
owns 20% and domestic VCOC C owns 20% of SBIR Application, Inc. The 
rest of the stock is widely held. The Board of Directors of the 
company controls the company for affiliation purposes.

    3. Stock options, convertible securities, and agreements to merge. 
SBA treats stock options, convertible securities, and agreements to 
merge as though the rights granted have been actually exercised. SBA 
gives present effect to an agreement to merge (including an agreement 
in principle) or to sell stock. If these rights have been granted and 
they confer the power to control, affiliation exists.

    Example: If VCOC A holds an option to purchase a controlling 
interest in Company B at the time it submits an offer for the SBIR 
Program, the situation is treated as though VCOC A had exercised its 
rights and had become owner of the controlling interests in Company 
B when it obtained the option.

    4. Common management. If one or more officers, managing members, 
general partners, or the board of directors of an SBIR or STTR 
applicant also controls the management of another business concern, the 
concerns are affiliates.

    Example: The managing member of SBIR Applicant LLC is the 
managing member of Company B. The two concerns are affiliated based 
on common management.

    5. Identity of interest between individuals or businesses, 
including family members, except for common investments. Individuals or 
firms that have identical (or substantially identical) family or 
economic interest may be treated as one party unless they can 
demonstrate otherwise. Family members or firms that are economically 
dependent through contractual or financial relationships, are among 
those treated this way.

    Example 1: SBIR Applicant A performs subcontracts for Company B, 
and Company B accounts for 90% of SBIR Applicant A's revenues. SBA 
may presume there is an identity of interest as a result of the 
economic dependence of the SBIR applicant on Company B and find 
affiliation between the two.
    Example 2: SBIR Applicant A is dependent on loans provided by 
Company B for survival. The loans were not supplied from Company B 
to Applicant through arm's length transactions. Instead, the loans 
were poorly documented and did not follow normal business practices. 
SBA may presume an identity of interest between Applicant A and 
Company B.

    6. Newly Organized Concern. SBA may find that an SBIR or STTR 
applicant is affiliated with another business concern when: (1) The 
former officers, directors, principal stockholders, managing members, 
or key employees of one concern organize a new concern; (2) the new 
concern is in the same or related industry or field of operation; (3) 
the persons who organized the new concern serve as the new concern's 
officers, directors, principal stockholders, managing members, or key 
employees; and (4) the one concern is furnishing or will furnish the 
new concern with contracts financial or technical assistance, 
indemnification on bid or performance bonds and/or other facilities, 
whether for a fee or otherwise. This could include SBIR ``spin-offs'' 
or ``spin-outs.''
    7. Joint Ventures. Business concerns submitting offers for an SBIR 
or STTR award as joint venturers are affiliated with each other with 
regard to that award, unless an exception to affiliation applies for 
the joint venture.
    8. Ostensible Subcontractor. An applicant and its subcontractor are 
treated as joint venturers and therefore affiliates if the ostensible 
subcontractor will perform primary and vital requirements of the 
funding agreement or the applicant is unusually reliant upon the 
subcontractor. To determine whether a subcontractor performs primary 
and vital requirements of a funding agreement, SBA will consider 
whether the applicant is meeting the statutorily required percentages 
of work for the funding agreement.
    9. License Agreements. There must be a license agreement concerning 
a ``critical operation'' of the licensee. SBA will look at this license 
agreement to see if the licensee possesses the right to profit or bear 
the risk of loss.
    If SBA does find affiliation based upon one of the above with a 
VCOC, hedge fund, or private equity firm that owns a minority interest 
in the SBIR or STTR applicant, then Sec.  5107(c) of the SBIR/STTR 
Reauthorization Act provides that the portfolio companies of the VCOC, 
hedge fund, or private equity firm will not be affiliated with the SBIR 
or STTR applicant unless: (1) the VCOC, hedge fund, or private equity 
firm owns a majority of the portfolio company; or (2) the VCOC, hedge 
fund, or private equity firm holds a majority of the seats on the board 
of directors of the portfolio company. SBA's proposed regulations set 
forth this statutory exception to affiliation for portfolio companies.
    SBA specifically requests comments on these proposals for 
determining affiliation, including whether the proposed rules 
sufficiently prevent other-than-small businesses from controlling SBIR 
and STTR applicants and any other issues relating to affiliation not 
addressed by the proposed rule.

D. Section 121.704--When SBA Determines Size and Eligibility

    SBA's current regulations for the SBIR Program state that size and 
eligibility are determined at the time of award for both Phase I and 
Phase II awards. In drafting the proposed rule, SBA considered whether 
it should retain this current requirement or require the SBIR or STTR 
applicant to meet the size and eligibility requirements at the time of 
submission of the application, or at both time of application and 
award. SBA notes that for its government contracting programs, size is 
determined at the time of submission of an offer (which is equivalent 
to the time of application for the SBIR and STTR programs). SBA uses 
that date because it is a date certain--the small business knows when 
it will submit an offer and can therefore determine with some accuracy 
whether it will be small at that time.

[[Page 28525]]

    SBA has proposed that for its SBIR and STTR programs it will 
determine size and eligibility of the concern at the time it submits an 
application in response to the SBIR or STTR solicitation or 
announcement and at the time of award. SBA believes that this would 
ensure that only eligible small businesses are considered for award and 
actually receive the award and it will help prevent fraud, waste and 
abuse of the program. SBA welcomes comments on the timing of size and 
eligibility determinations, and specifically on the requirement that 
SBA determine size and eligibility of a small business concern at the 
time it submits an application in response to the SBIR or STTR 
solicitation or announcement and at the time of award.
    SBA welcomes comments on any impact the proposed change may have on 
the SBIR and STTR programs.

E. Section 121.705--Certification of size and eligibility

    Section 5107 of the SBIR/STTR Reauthorization Act requires that all 
small business concerns that are majority-owned by multiple VCOCs, 
hedge funds, or private equity firms and qualified for participation 
must register with SBA prior to or on the date that it submits an 
application in response to an SBIR solicitation or announcement. In 
addition, the new statutory provisions require that such small 
businesses indicate in any SBIR proposal that they have completed this 
registration. SBA has proposed to amend this section of the regulations 
to address these new requirements.
    SBA notes that, at this time, it is considering at least two 
options with respect to the registration requirement. SBA will need to 
either maintain a separate registration for purposes of the SBIR and 
STTR programs only, or it will amend its current Dynamic Small Business 
Search (DSBS) system to see whether it can use DSBS as its registry. 
SBA is studying the anticipated costs and timelines for completion of 
this registry, but welcomes comments on these and other possible 
options.
    Section 5107 (a) of the SBIR/STTR Reauthorization Act states that 
certain ``covered small business concerns'' are eligible to receive 
SBIR awards, without regard to whether the covered small business 
concern meets the requirements for receiving an award under the SBIR 
Program at the time of award if an agency took longer than 9 months 
from the date applications were due to issue an award. A covered small 
business concern is one that was not majority-owned by a VCOC, hedge 
fund, or private equity firm at the time of submission of a Phase I or 
Phase II application (and therefore did not register), but that was 
majority-owned on the date of award.
    The proposed regulations address covered small business concerns 
and explain that if a small business concern did not register as 
majority-owned by VCOCs, hedge funds or private equity firms at the 
time of application, it must notify the funding agreement officer if, 
on the date of award, the concern is more than 50% owned by multiple 
VCOCs, hedge funds, or private equity firms.
    The SBA notes that the funding agency needs this information 
because the statute states that if the agency made its award on or 
after the date that is 9 months from the end of the period for 
submitting applications under the SBIR or STTR solicitation, that small 
business concern would be eligible to receive the award without regard 
to the fact that it is more than 50% owned by multiple VCOCs, hedge 
funds, or private equity firms at the time of award.
    In addition to registration requirements, Sec.  5143 of the SBIR/
STTR Reauthorization Act requires each applicant that receives SBIR or 
STTR funding to certify that it is in compliance with the laws relating 
to the program. SBA's Administrator is required to develop, in 
consultation with the Council of Inspectors General on Integrity and 
Efficiency, the procedures and requirements for this certification 
after providing notice of and an opportunity for public comment on such 
procedures and requirements. SBA is therefore requesting public input 
on whether the current self-certification requirement set forth in 
Sec.  121.705 is sufficient, i.e.,--that the business merely self-
certify it meets the requirements of the program.
    Further, as discussed above, SBA has proposed that the 
certification on eligibility (size and ownership) will occur at the 
time of submission of the offer or application and at the time of 
award. However, some have argued that these representations are 
necessary throughout the life of the SBIR or STTR award. As a result, 
SBA requests specific comment on whether the small business should also 
be required to represent its status at certain points in time after 
award, including at the time of final payment or final award allotment.
    For example, with respect to small business status for government 
contracting (other than the SBIR Program), a small business represents 
its status at the time of offer only and size is determined at that 
time. The small business is permitted to grow to be other than small 
during the life of the contract and there is no need for it to re-
represent its status on a particular contract. There are two exceptions 
to this general rule: (1) A small business must recertify its status if 
it has been acquired by or merged with another business concern; or (2) 
the contract is greater than five years. At those times, the small 
business must recertify its status and if it is no longer small, the 
contracting officer cannot count any options exercised or orders issued 
against the contract as an award to a small business. SBA requests 
comments on whether this policy and the procedures should be extended 
to the SBIR Program.

F. Section 121.1001(a)(4)--Initiating a Protest or Request for Formal 
Size Determination

    Section 121.1001(a)(4) sets forth who may initiate a size protest 
or request a formal size determination. For purposes of the SBIR 
Program and STTR Program, the regulations state that a prospective 
offeror, the funding agreement officer, the responsible SBA Government 
Contracting Area Director or the Division Chief, Office of Innovation 
may file a protest. SBA has proposed amending this section to state 
that a current offeror and the Associate Administrator, Investment 
Division may file a protest. These proposed changes correspond to the 
proposed change for when an applicant must be eligible for an award (at 
the time of submission of offer or application and at time of award) 
and the move of SBA's Office of Innovation to its Investment Division. 
SBA welcomes comments on these proposed changes.

G. Section 121.1004--Time Limits That Apply to Size Protests

    SBA is proposing to amend this section to address when a protest 
may be filed by the contracting officer/funding agreement officer or 
SBA with respect to an SBIR or STTR award. The current regulations 
state that the contracting officer or SBA may file a protest in 
anticipation of an award. SBA proposes to amend this regulation to 
state that SBA or the contracting officer/funding agreement officer may 
file a protest at any time, as long as it is not premature. This means 
that SBA will not accept a size protest until the awardee has been 
selected and notified of the award, which is consistent with current 
practice for its contracting programs. SBA welcomes comments on this 
proposed change.

[[Page 28526]]

III. Request for Comments

    The SBIR/STTR Reauthorization Act has set forth specific provisions 
relating to affiliation, ownership and control of SBIR and STTR 
participants. These provisions open the door for more small businesses 
by providing them access to these programs. SBA has proposed amendments 
to its current regulations to implement these provisions (some 
amendments will have to be made to the policy directive, and not 
necessarily SBA's regulations). As such, SBA requests comments on each 
proposed amendment to the rule. We have noted above specific issues on 
which the agency would like to receive comments. However, SBA seeks 
comments on all aspects of this proposed rule.

Compliance With Executive Orders 12866, 12988, 13132, 13563, the 
Paperwork Reduction Act (44 U.S.C., Chapter 35) and the Regulatory 
Flexibility Act (5 U.S.C. 601-612)

Executive Order 12866

    OMB has determined that this rule is a significant regulatory 
action under Executive Order 12866; however this is not a major rule 
under the Congressional Review Act (CRA). The Regulatory Impact 
Analysis is set forth below.

Regulatory Impact Analysis

1. Necessity of Regulation
    This regulatory action implements the SBIR/STTR Reauthorization 
Act. Specifically, it implements Sec.  5107 of the SBIR/STTR 
Reauthorization Act of 2011, which requires SBA to issue proposed 
regulations to amend 13 CFR 121.103 (relating to determinations of 
affiliation applicable to the SBIR Program) and 13 CFR 121.702 
(relating to ownership and control and size for the SBIR Program) 
within 120 days of passage of the Reauthorization Act.
    SBA's current regulations address affiliation, ownership and 
control for participants in the SBIR Program. However, the regulations 
do not provide specific guidance for the STTR program. In addition, the 
regulations must be amended to address the new statutory provisions 
relating to majority ownership by VCOCs, hedge funds or private equity 
firms; otherwise, the regulations and statute would conflict. Moreover, 
the SBIR/STTR Reauthorization Act requires that SBA issue a proposed, 
and then a final or interim final rule.
2. Alternative Approaches to Proposed Rule
    SBA considered numerous alternatives when drafting this regulation. 
SBA considered an alternative approach with respect to ownership by 
U.S. citizens. For example, SBA's current regulations state that to be 
eligible for the SBIR Program, the business must be 51% owned and 
controlled by U.S. citizens or permanent resident aliens, or 51% owned 
and controlled by another business that is 51% owned and controlled by 
U.S. citizens. The SBIR/STTR Reauthorization Act requires that SBA 
consider whether participants to the program are at least 51% owned and 
controlled by U.S. citizens, domestic VCOCs, hedge funds or private 
equity firms. SBA considered retaining its current regulation but 
believes the current regulation may be too restrictive. SBA's proposed 
regulation permits ownership and control by U.S. citizens, permanent 
resident aliens and domestic business concerns, including domestic 
VCOCs, hedge funds or private equity firms.
    In addition, SBA considered whether the statutory provisions 
relating to majority ownership by VCOCs, hedge funds, or private equity 
firms should also apply to STTR participants and not just SBIR 
participants. The SBIR/STTR Reauthorization Act is not clear on this 
point. However, the SBIR/STTR Reauthorization Act does permit 
participants in the STTR program to receive SBIR awards, and vice 
versa. As a result, it would seem necessary to apply the same rules for 
the SBIR Program to the STTR program.
    Other examples of alternatives considered are discussed in the 
preamble above (e.g., affiliation, definitions).
3. What are the potential benefits and costs of this regulatory action?
    One potential benefit of the rule is to increase participation in 
the SBIR and STTR program by providing more businesses access to these 
programs. SBA believes this will increase competition, which will 
ultimately increase the quality of proposals and spur innovation. For 
example, in Fiscal Year (FY) 2010, agencies awarded 6,931 SBIR and STTR 
Phase I and Phase II awards for a total of over $2 billion. In FY 2003, 
however, agencies funded 7,419 awards for a total of over $1.8 billion. 
If you adjust the dollar figures for inflation, it would seem that 
there has been a decrease in SBIR and STTR Phase I and Phase II awards 
and funding. Likewise, in FY 2010, agencies awarded 4,777 Phase I SBIR 
and STTR awards for a total of over $596 million. In FY 2003, however, 
agencies funded 5,561 awards for a total of over $508 million. If you 
adjust the dollar figures for inflation, it would seem that there has 
been a decrease in Phase I SBIR and STTR awards and funding. Again, SBA 
anticipates that increasing competition will increase the number of 
awards and funding, as a result of higher quality proposals submitted.
    There are a few anticipated costs with this proposed rule. The 
statute requires SBA to maintain a registry of businesses that are 
majority-owned by VCOCs, hedge funds or private equity firms. SBA will 
need to either maintain a separate system or will amend its current 
DSBS system and use it as its registry. This will result in a cost to 
SBA. Further, as a result of the anticipated increase in proposals for 
the SBIR/STTR program, we believe the agencies will have a need for 
additional staff. In addition, we anticipate there may be an increase 
in size protests, which will increase SBA's size specialists' current 
workload.

Executive Order 13563

    The SBIR/STTR Reauthorization Act of 2011 imposes a specific 
statutory deadline by which SBA must issue a proposed and a final 
regulation. Specifically, SBA is required to issue a proposed rule by 
April 29, 2012. Given the time needed to comply with various 
administrative rulemaking requirements, it was not practicable for SBA 
to hold public forums prior to issuing a proposed rule, as the 
executive order recommends, and still be able to meet the April 29th 
statutory deadline. However, SBA is considering holding such public 
forums (e.g., town hall meetings, webinars) once it issues the proposed 
rule to afford the public an opportunity to participate in the 
rulemaking process as envisioned by this executive order. SBA has also 
provided for a 60-day comment period and has requested comments on not 
just the entire rule, but specific parts of the rule where SBA 
considered several alternatives or options for implementation. As 
indicated above in the ADDRESSES section of this rule, the public is 
provided with the link to the online rulemaking Web site and is 
encouraged to use this medium to submit comments and view the comments 
of others. Where applicable, the outcome of all of these efforts will 
be addressed when this rule is finalized.

Executive Order 12988

    This action meets applicable standards set forth in Sections 3(a) 
and 3(b)(2) of Executive Order 12988, Civil Justice Reform, to minimize 
litigation, eliminates ambiguity, and reduce burden. The action does 
not have retroactive or preemptive effect.

[[Page 28527]]

Executive Order 13132

    For the purposes of Executive Order 13132, SBA has determined that 
this proposed rule will not have substantial direct effects on the 
States, on the relationship between the national government and the 
States, or on the distribution of power and responsibilities among the 
various levels of government. Therefore, SBA has determined that this 
proposed rule has no federalism implications warranting preparation of 
a federal assessment.

Paperwork Reduction Act, 44 U.S.C., Ch. 35

    For purposes of the Paperwork Reduction Act (PRA), 44 U.S.C. 
Chapter 35, SBA has determined that this proposed rule will impose new 
reporting or recordkeeping requirements. Specifically, business 
concerns that are majority-owned by VCOCs, hedge funds or private 
equity firms must register their status in a database, as required by 
statute. However, because the detailed procedures for meeting this 
requirement will be outlined in the SBIR Policy Directive, and not the 
rule, SBA believes it would be more meaningful and less confusing for 
the small business community if SBA submits the information collection 
to OMB when the Policy Directives are submitted for review.

Regulatory Flexibility Act, 5 U.S.C., 601-612

    SBA has determined that this proposed rule may have a significant 
economic impact on a substantial number of small entities within the 
meaning of the Regulatory Flexibility Act (RFA), 5 U.S.C. 601, et seq. 
Accordingly, SBA has prepared an Initial Regulatory Flexibility 
Analysis (IRFA) addressing the impact of this Rule. The IRFA examines 
the objectives and legal basis for this proposed rule; the kind and 
number of small entities that may be affected; the projected 
recordkeeping, reporting, and other requirements; whether there are any 
Federal rules that may duplicate, overlap, or conflict with this 
proposed rule; and whether there are any significant alternatives to 
this proposed rule.
1. What are the reasons for, and objectives of, this proposed rule?
    This regulatory action implements several sections of the SBIR/STTR 
Reauthorization Act. These sections of the SBIR/STTR Reauthorization 
Act address affiliation, ownership and control of SBIR and STTR program 
participants.
    The objective of the rule is to implement these statutory changes 
by further defining terms and expanding on the concepts set forth in 
the SBIR/STTR Reauthorization Act.
2. What is the legal basis for this proposed rule?
    The legal basis for this rule is the National Defense Authorization 
Act for Fiscal Year 2012, Section 5001, Division E (cited as the SBIR/
STTR Reauthorization Act of 2011 or Reauthorization Act), Public Law 
112-81.
3. What is SBA's description and estimate of the number of small 
entities to which the rule will apply?
    In FY 2009, for the SBIR Program, agencies received 22,444 Phase I 
proposals and 3,352 Phase II proposals. In FY 2009, for the STTR 
program, agencies received 2,804 Phase I proposals and 467 Phase II 
proposals. Some of the proposals submitted were by the same small 
business. However, using these numbers, SBA estimates that 
approximately 24,000 businesses could be impacted by this proposed 
rule. This includes those businesses that are currently not eligible 
under SBA's existing regulations and will become eligible as a result 
of implementation of the SBIR/STTR Reauthorization Act, if this rule is 
adopted as proposed.
4. What are the projected reporting, recordkeeping, Paperwork Reduction 
Act and other compliance requirements?
    The proposed rule does provide that businesses will need to 
represent their size status at the time of initial offer and award. If 
there is a size protest, the small business will need to ensure it has 
business records that verify their small business status. These are the 
same documents that a business would keep in the normal course of its 
activities (stock certificates, by-laws etc.). The SBA has explained 
that there is a new reporting requirement for those businesses that are 
majority-owned by VCOCs, hedge funds or private equity firms. However, 
the SBA intends to address this reporting requirement and the database 
used for the reporting, when it amends the SBIR policy directive.
5. What relevant federal rules may duplicate, overlap, or conflict with 
this rule?
    This proposed rule will conflict with current provisions in SBA's 
SBIR and STTR Policy Directives. As a result, those directives will 
need to be amended.
6. What significant alternatives did SBA consider that accomplish the 
stated objectives and minimize any significant economic impact on small 
entities?
    SBA discussed several alternatives in the preamble as well as the 
Regulatory Impact Analysis.

List of Subjects in 13 CFR Part 121

    Administrative practice and procedure, Government procurement, 
Government property, Loan programs--business, Small businesses.

    For the reasons stated in the preamble, SBA proposes to amend 13 
CFR part 121 as follows:

PART 121--SMALL BUSINESS SIZE REGULATIONS

    1. The authority citation for 13 CFR part 121 is revised to read as 
follows:

    Authority:  15 U.S.C. 632, 634(b)(6), 638, 662, and 694a(9).

    2. Amend Sec.  121.103 as follows:
    a. Add a new paragraph (a)(7); and
    b. Add a new paragraph (b)(8).


Sec.  121.103  How does SBA determine affiliation?

    (a) * * *
    (7) For SBA's Small Business Innovation Research (SBIR) and Small 
Business Technology Transfer (STTR) Programs, the bases for affiliation 
are set forth in Sec.  121.702.
* * * * *
    (b) * * *
    (8) These exceptions to affiliation and any others set forth in 
Sec.  121.702 apply for purposes of SBA's Small Business Innovation 
Research (SBIR) and Small Business Technology Transfer (STTR) Programs.
* * * * *
    3. Amend Sec.  121.201 by revising paragraph (b) of footnote 11 at 
the end of the table ``Small Business Size Standards by NAICS 
Industry,'' to read as follows:


Sec.  121.201  What size standards has SBA identified by North American 
Industry Classification System codes?

* * * * *

Small Business Size Standards by NAICS Industry

* * * * *

Footnotes

* * * * *
    11. * * *
    (a) * * *
    (b) For purposes of the Small Business Innovation Research (SBIR) 
and the

[[Page 28528]]

Small Business Technology Transfer (STTR) programs only, a different 
definition has been established by law. See Sec.  121.702 of these 
regulations.
* * * * *
    4. Revise the undesignated center heading immediately preceding 
Sec.  121.701 to read as follows:

Size and Eligibility Requirements for the Small Business Innovation 
Research (SBIR) and Small Business Technology Transfer (STTR) Programs

    5. Amend Sec.  121.701 as follows:
    a. Revise the section heading;
    b. Revise paragraphs (a) and (b); and
    c. Remove paragraph (c).


Sec.  121.701  What SBIR and STTR programs are subject to size and 
eligibility determinations and what definitions are important?

    (a) These sections apply to SBA's SBIR and STTR programs, 15 U.S.C. 
Sec.  638.
    (b) Definitions.
    (i) Domestic business concern means a business entity (including a 
venture capital operating company, hedge fund, or private equity firm) 
organized for profit; with a place of business located in the United 
States; which operates primarily within the United States or which 
makes a significant contribution to the U.S. economy through payment of 
taxes or use of American products, materials or labor; and created or 
organized in the United States, or under the law of the United States 
or of any State.
    (ii) Funding agreement officer means a contracting officer, a 
grants officer, or a cooperative agreement officer.
    (iii) Funding agreement means any contract, grant or cooperative 
agreement entered into between any Federal agency and any small 
business for the purposes of the SBIR or STTR program.
    (iv) Hedge fund has the meaning given that term in section 13(h)(2) 
of the Bank Holding Company Act of 1956 (12 U.S.C. 1851(h)(2)).
    (v) Portfolio company means any company that is owned in whole or 
part by a venture capital operating company, hedge fund, or private 
equity firm.
    (vi) Private equity firm has the meaning given the term ``private 
equity fund'' in section 13(h)(2) of the Bank Holding Company Act of 
1956 (12 U.S.C. 1851(h)(2)).
    (vii) Venture capital operating company means an entity described 
in clause (i), (v), or (vi) of Sec.  121.103(b)(5).
    6. Revise Sec.  121.702 to read as follows:


Sec.  121.702  What size and eligibility standards are applicable to 
the SBIR and STTR programs?

    To be eligible for award of funding agreements in SBA's SBIR and 
STTR programs, a business concern must meet the requirements below at 
the time of submission of its initial proposal (or other formal 
response) to a Phase I or Phase II SBIR or STTR announcement or 
solicitation and at the time of award:
    (a) Ownership and control.
    (1) An SBIR or STTR applicant must:
    (i) Be a concern which is more than 50% directly owned and 
controlled by one or more individuals who are citizens of the United 
States or permanent resident aliens in the United States, or by 
domestic business concerns; or
    (ii) Be a concern which is more than 50% owned by multiple domestic 
business concerns that are venture capital operating companies, hedge 
funds, private equity firms, or any combination of these domestic 
business concerns.
    (2) No single venture capital operating company, hedge fund, or 
private equity firm may own more than 50% of the SBIR or STTR 
applicant.
    (3) If an Employee Stock Ownership Plan owns all or part of the 
concern, SBA considers each stock trustee and plan member to be an 
owner.
    (4) If a trust owns all or part of the concern, SBA considers each 
trustee and trust beneficiary to be an owner.
    (b) Joint Ventures. If the SBIR or STTR applicant is a joint 
venture, each entity to the joint venture must meet the requirements 
set forth in paragraph (a) of this section. A joint venture that 
includes one or more concerns that are majority-owned by multiple 
domestic business concerns that are venture capital operating 
companies, hedge funds, or private equity firms must comply with Sec.  
121.705(b), concerning registration and proposal requirements.
    (c) Size and affiliation. An SBIR or STTR applicant, together with 
its affiliates, must not have more than 500 employees. Concerns and 
entities are affiliates of each other when one controls or has the 
power to control the other, or a third party or parties controls or has 
the power to control both. It does not matter whether control is 
exercised, so long as the power to control exists. For the purposes of 
the SBIR and STTR programs, the following bases of affiliation apply:
    (1) Affiliation based on stock ownership. For determining 
affiliation based on stock ownership, a concern (including an SBIR and 
STTR applicant) is an affiliate of a person (including any individual, 
concern or other entity) that owns, or has the power to control, more 
than 50 percent of the concern's voting stock. If no person owns or has 
the power to control more than 50 percent of the concern's voting 
stock, SBA will deem the Board of Directors to be in control of the 
concern.
    (2) Affiliation arising under stock options, convertible 
securities, and agreements to merge. In determining size, SBA considers 
stock options, convertible securities, and agreements to merge 
(including agreements in principle) to have a present effect on the 
power to control a concern. SBA treats such options, convertible 
securities, and agreements as though the rights granted have been 
exercised.
    (i) Agreements to open or continue negotiations towards the 
possibility of a merger or a sale of stock at some later date are not 
considered ``agreements in principle'' and are thus not given present 
effect.
    (ii) Options, convertible securities, and agreements that are 
subject to conditions precedent which are incapable of fulfillment, 
speculative, conjectural, or unenforceable under state or Federal law, 
or where the probability of the transaction (or exercise of the rights) 
occurring is shown to be extremely remote, are not given present 
effect.
    (iii) An individual, concern or other entity that controls one or 
more other concerns cannot use options, convertible securities, or 
agreements to appear to terminate such control before actually doing 
so. SBA will not give present effect to individuals', concerns' or 
other entities' ability to divest all or part of their ownership 
interest in order to avoid a finding of affiliation.
    (3) Affiliation based on common management. Affiliation arises 
where the CEO or President of a concern (or other officers, managing 
members, or partners who control the management of the concern) also 
controls the management of one or more other concerns. Affiliation also 
arises where a single person or entity that controls the board of 
directors of one concern also controls the board of directors or 
management of one or more other concerns.
    (4) Affiliation based on identity of interest. Affiliation may 
arise among two or more persons with an identity of interest. An 
individual or firm may rebut a determination of identity of interest 
with evidence showing that the interests deemed to be one are in fact 
separate.
    (i) SBA may presume an identity of interest between family members 
with identical or substantially identical business or economic 
interests (such as

[[Page 28529]]

where the family members operate concerns in the same or similar 
industry in the same geographic area).
    (ii) An SBIR or STTR applicant is not affiliated with a portfolio 
company of a venture capital operating company, hedge fund, or private 
equity firm, solely on the basis of one or more shared investors, 
though affiliation may be found for other reasons.
    (5) Affiliation based on the newly organized concern rule. 
Affiliation may arise where former officers, directors, principal 
stockholders, managing members, or key employees of one concern 
organize a new concern in the same or related industry or field of 
operation, and serve as the new concern's officers, directors, 
principal stockholders, managing members, or key employees, and the one 
concern is furnishing or will furnish the new concern with contracts, 
financial or technical assistance, indemnification on bid or 
performance bonds, and/or other facilities, whether for a fee or 
otherwise. A concern may rebut such an affiliation determination by 
demonstrating a clear line of fracture between the two concerns. A 
``key employee'' is an employee who, because of his/her position in the 
concern, has a critical influence in or substantive control over the 
operations or management of the concern.
    (6) Affiliation based on joint ventures. Concerns submitting an 
application as a joint venture are affiliated with each other with 
regard to the application. SBA will apply the joint venture affiliation 
exception at Sec.  121.103(h)(3)(iii) for two firms approved to be a 
mentor and prot[eacute]g[eacute] under SBA's 8(a) program.
    (7) Affiliation based on the ostensible subcontractor rule. An 
applicant and its ostensible subcontractor are treated as joint 
venturers, and therefore affiliates, for size determination purposes. 
An ostensible subcontractor is a subcontractor that performs primary 
and vital requirements of a funding agreement, or a subcontractor upon 
which the applicant is unusually reliant. All aspects of the 
relationship between the applicant and subcontractor are considered, 
including, but not limited to, the terms of the proposal (such as 
management, technical responsibilities, and the percentage of 
subcontracted work) and agreements between the applicant and 
subcontractor (such as bonding assistance or the teaming agreement). To 
determine whether a subcontractor performs primary and vital 
requirements of a funding agreement, SBA will consider whether the 
applicant's proposal complies with the performance requirements of the 
SBIR or STTR Program.
    (8) Affiliation based on license agreements. SBA will consider 
whether there is a license agreement concerning a product or trademark 
which is critical to operation of the licensee. The license agreement 
will not cause the licensor to be affiliated with the licensee if the 
licensee has the right to profit from its efforts and bears the risk of 
loss. Affiliation may arise, however, through other means, such as 
common ownership or common management.
    (9) Exception to affiliation for portfolio companies. If a venture 
capital operating company, hedge fund, or private equity firm that is 
determined to be affiliated with an applicant is a minority investor in 
the applicant, the applicant is not affiliated with a portfolio company 
of the venture capital operating company, hedge fund, or private equity 
firm, unless:
    (i) The venture capital operating company, hedge fund, or private 
equity firm owns a majority of the portfolio company; or
    (ii) The venture capital operating company, hedge fund, or private 
equity firms holds a majority of the seats of the board of directors of 
the portfolio company.
    7. Revise Sec.  121.704 to read as follows:


Sec.  121.704  When does SBA determine the size and eligibility status 
of an SBIR or STTR applicant?

    The size and eligibility status of a concern for the purpose of a 
funding agreement under the SBIR and STTR programs is determined as of 
the date the concern submits a written self-certification that it is 
small and meets the eligibility requirements of the program to the 
Federal agency as part of its initial proposal (or other formal 
response) to a Phase I or Phase II SBIR or STTR announcement or 
solicitation and at the time of award.
    8. Revise Sec.  121.705 to read as follows:


Sec.  121.705  Must a business concern self-certify its size and 
eligibility status?

    (a) In its initial proposal (or other formal response) to a Phase I 
or Phase II SBIR or STTR announcement or solicitation, and at the time 
of award, a business concern must self-certify that it currently meets 
the eligibility requirements set forth in Sec.  121.702 of this title.
    (b) In addition, a small business concern that is more than 50% 
owned by multiple venture capital operating companies, hedge funds, or 
private equity firms must be registered with SBA as of the date it 
submits its initial proposal (or other formal response) to a Phase I or 
Phase II SBIR or STTR announcement or solicitation. The concern must 
indicate in any SBIR or STTR proposal or application that it is 
registered with SBA as majority-owned by multiple venture capital 
operating companies, hedge funds, or private equity firms.
    (c) A small business concern that was not subject to the 
requirements of paragraph (b) at the time of its SBIR proposal or 
application must notify the funding agreement officer if, on the date 
of award, the concern is more than 50% owned by multiple venture 
capital operating companies, hedge funds, or private equity firms. If 
the agency made award on or after the date that is 9 months from the 
end of the period for submitting applications under the SBIR 
solicitation, the concern is eligible to receive the award without 
regard to whether it meets the requirements for receiving an award as a 
small business concern that is more than 50% owned by multiple venture 
capital operating companies, hedge funds, or private equity firms at 
the time of award, if the concern meets all other requirements for the 
award.
    (d) A funding agreement officer may accept a concern's self-
certification as true for the particular funding agreement involved in 
the absence of a written protest by other offerors or other credible 
information which would cause the funding agreement officer or SBA to 
question the size or eligibility of the concern.
    (e) Procedures for protesting an offeror's self-certification are 
set forth in Sec. Sec.  121.1001 through 121.1009. In adjudicating a 
protest, SBA may address both the size status and eligibility of the 
SBIR or STTR applicant.
    9. Amend Sec.  121.1001 by revising paragraph (a)(4) as follows:


Sec.  121.1001  Who may initiate a size protest or request a formal 
size determination?

    (a) * * *
    (4) For SBA's Small Business Innovation Research (SBIR) Program and 
Small Business Technology Transfer (STTR) Program, the following 
entities may protest:
    (i) An offeror or applicant;
    (ii) The funding agreement officer;
    (iii) The responsible SBA Government Contracting Area Director; the 
Director, Office of Government Contracting; or the Associate 
Administrator, Investment Division; and
    (iv) Any other offeror or applicant for that solicitation.
* * * * *
    10. Amend Sec.  121.1004 by revising paragraph (b) as follows:

[[Page 28530]]

Sec.  121.1004  What time limits apply to size protests?

* * * * *
    (b) Protests by contracting officers, funding agreement officers or 
SBA. The time limitations in paragraph (a) of this section do not apply 
to contracting officers, funding agreement officers or SBA, and they 
may file protests before or after awards, except to the extent set 
forth in paragraph (e) of this section, including for purposes of the 
SBIR and STTR programs.
* * * * *
    11. Amend Sec.  121.1008 by revising the fourth sentence of 
paragraph (a) to read as follows:


Sec.  121.1008  What occurs after SBA receives a size protest or 
request for a formal size determination?

    (a) * * * If the protest pertains to a requirement involving SBA's 
SBIR Program or STTR Program, the Area Director will also notify the 
Associate Administrator, Investment Division. * * *
* * * * *

    Dated: May 4, 2012.
Karen G. Mills,
Administrator.
[FR Doc. 2012-11586 Filed 5-11-12; 8:45 am]
BILLING CODE 8025-01-P