Affiliation Rules

As discussed in our second entry in this series, the SBA has proposed to establish presumptions of affiliation through identity of interest in certain circumstances. First, the SBA would establish a presumption of affiliation between "[f]irms owned or controlled by married couples, parties to a civil union, parents and children, and siblings" that conduct business with one another, such as by "subcontracts or joint ventures or share or provide loans, resources, equipment, locations or employees with one another." This presumption would apply only to the listed relationships, and other familiar relationships would not give rise to the presumption. The SBA would permit a presumption to be overcome "by showing a clear line of fracture between the concerns."

Second, the SBA would establish a presumption of identity of interest through economic dependence, and therefore affiliation, where one business derives 70% or more of its receipts from another business in a fiscal year. This presumption, which is already in place for the SBIR Program, also would be rebuttable, such as where a business is new and has received only a few contracts. Over time, however, the SBA expects that businesses will diversify and continued reliance on one source of business will leave the presumption unrebutted.

The SBA also has proposed a small but significant change to the "ostensible subcontractor" rule in 13 CFR § 121.103(h)(4). Under the proposed change, "[a]n ostensible subcontractor is a subcontractor that is not a similarly situated entity" that performs primary and vital contract requirements or upon which the contractor is unusually reliant. Thus, similarly situated entities would be excluded from the definition of an ostensible contractor, permitting small businesses to subcontract with similarly situated businesses without fear of running afoul of the ostensible subcontractor rule.

Joint Ventures

The SBA's proposed change to rules regarding joint ventures is conceptually similar to the proposed change to the ostensible subcontractor rule. As discussed in our third entry in this series, the SBA has proposed to expand the types of contracts for which small businesses may form a joint venture without being deemed affiliated. Currently, small businesses may joint venture without a finding of affiliation only where the procurement is bundled or large (i.e., valued at more than half the NAICS dollar limitation, or greater than $10 million if it is an employee-based size standard). Under the proposed new rules, that restriction would be limited, and small businesses would be free to joint venture without being deemed affiliates for any contract, provided each venturer meets the procurement's size standard. This could trigger more joint ventures between similarly situated entities, who will no longer have to consider the size of the procurement before entering into a joint venture.

The SBA gives three reasons for proposing this change. First, the SBA believes it will encourage more small business joint ventures, and therefore greater small business participation in procurements. Second, the SBA believes this change will encourage greater small business success with larger contracts, as recent results from the SBA's Small Business Teaming Pilot Program indicates that small businesses have more opportunities and greater success with smaller contracts, and less so with larger contracts. Third, the SBA believes this change is in line with the 2013 NDAA's provisions regarding limitations on subcontracting, which we discussed in the first entry in this series.

SBIR and STTR Programs

Finally, the SBA has proposed changes to the rules governing the Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) Programs. The proposed changes would clarify the ownership requirements for participants in those programs. Under the new rules, it will be explicit that a single venture capital operating company (VCOC), hedge fund, or private equity firm may own more than 50% of a participant in the SBIR or STTR Programs, provided that the owner also qualifies as a small business and is more than 50% directly owned and controlled by individuals who are U.S. citizens or permanent resident aliens. The SBA reports that businesses and federal agencies alike have misread the current regulations, believing that they excluded all VCOCs, hedge funds, or private equity firms, regardless of their size. Venable recently reported on other misperceptions affecting VCOC involvement in the SBIR program, and highlighted that venture capital companies may still not be aware of the program change, and may be interested in the program. The SBA's proposed rule may further educate VCOCs about the updated and clarified SBIR Program ownership requirements.

Submitting Comments

Contractors wishing to submit comments on these proposed rules can do so through regulations.gov by searching for RIN: 3245-AG58. Comments are due by February 27, 2015.