[Federal Register Volume 77, Number 94 (Tuesday, May 15, 2012)]
[Proposed Rules]
[Pages 28520-28530]
From the Federal Register Online via the Government Publishing 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