On February 5, 2015, the U.S. Small Business Administration (SBA) issued a Proposed Rule that would establish a government-wide mentor-protégé program (“Proposed Rule”). Currently, the 8(a) Business Development Program is the only SBA program with a mentor-protégé program, but the Proposed Rule would result in the expansion of the mentor-protégé program to all small business contractors. The Proposed Rule would amend SBA’s regulations to implement provisions of the Small Business Jobs Act of 2010 and the National Defense Authorization Act for Fiscal Year 2013 (NDAA). In addition to expanding the mentor-protégé program across all small businesses, the Proposed Rule would make changes to the current 8(a) mentor-protégé program, clarify the meaning of a joint venture, and implement new compliance requirements to approved joint ventures.

Proposed Small Business Mentor-Protégé Program

The 8(a) program is currently the only SBA program with a mentor-protégé program. The Proposed Rule aims to expand the SBA’s mentor-protégé regulations across all SBA programs, i.e., Historically Underutilized Business Zone (HUBZone) small businesses, women-owned small businesses (WOSBs), service-disabled veteran-owned small businesses (SDVOSBs), and all small businesses.

The SBA has elected not to create an individual mentor-protégé program for each of these non-8(a) programs, which could result in a total of five different mentor-protégé programs (including the existing 8(a) program). Instead, the SBA will create one new mentor-protégé program to encompass all of the non-8(a) programs, which would operate very similarly to the existing 8(a) mentor-protégé program. The SBA requests comments on whether it should continue down the path of creating one new government-wide mentor-protégé program for non-8(a) small businesses, or instead create five separate mentor-protégé programs—8(a), HUBZone, WOSB, SDVOSB, and small business.

Mentor Qualifications

The Proposed Rule would not allow nonprofit businesses to serve as mentors in any mentor-protégé program. This enactment is pursuant to the NDAA defining a mentor as a “for-profit business concern of any size.” However, this would alter the 8(a) regulations that currently allow nonprofit mentors. Furthermore, the Proposed Rule establishes that a mentor will not be permitted to have more than three protégés, in the aggregate, across the two mentor-protégé programs (i.e., the 8(a) program and the proposed small business program).

Consistent with the 8(a) program, the Proposed Rule prohibits a protégé from becoming a mentor while retaining its protégé status. A company can be either a mentor or protégé, but cannot be both at the same time. The SBA seeks comments whether this policy makes sense, or whether a firm should be permitted to be both a protégé and mentor at the same time in appropriate circumstances.

Protégé Qualifications

The SBA has proposed to eliminate some current regulations that limit the ability for a small business to qualify as a protégé. There are current restrictions in the 8(a) program that prevent some small businesses from qualifying as a protégé, such as the restriction requiring the participant to have a size that is less than half the size standard corresponding to its primary North American Industry Classification System (NAICS) code. The SBA has proposed to eliminate this restriction across the board, removing it from the current 8(a) program and not applying it to the new small business mentor-protégé program.

The Proposed Rule also heightens the requirements to become a protégé. The SBA has proposed that a firm must be verified by the SBA as a small business before the firm can act as a protégé in a small business mentor-protégé relationship. Each small business seeking to qualify as a protégé must receive an affirmative determination by the SBA that it qualifies as small. This affirmative determination either may be made by independent request to the SBA, or may come as part of a size determination prior to the firm’s request to participate in the mentor-protégé program. If the latter scenario, the small business would be required to certify that there has been no changes to its status since the size determination.

Agency Specific Mentor-Protégé Programs

The Proposed Rule prohibits any non-SBA federal department or agency, excluding the Department of Defense, from conducting their own independent mentor-protégé program without receiving approval from the SBA. Current departments and agencies that have their own specific mentor-protégé programs, such as the Department of Veterans Affairs (VA), may continue to operate them for one year after the implementation of the new regulations. However, pursuant to the NDAA, after the expiration of this one-year grace period, a department or agency would need to go through an SBA approval process in order to continue with its own individual mentor-protégé program.

The SBA requests comments on whether the existing VA mentor-protégé programs should continue after the one-year grace period. Also, the SBA specifically requests comments on whether there would be a continuing need for other small business mentor-protégé programs once the SBA’s new mentor-protégé program is implemented.

Affiliation Implications of Mentor-Protégé Agreements

Under the current regulations, an SBA-approved joint venture agreement between a mentor and an 8(a) protégé would qualify as small for both 8(a) and non-8(a) contracts as long as the protégé qualifies as small for the procurement. The Proposed Rule would apply SBA the same affiliation exception to the small business mentor-protégé program. Thus, as long as the protégé qualifies as small for the procurement at issue, a joint venture between a protégé and its SBA-approved mentor in the small business mentor-protégé program would be deemed to be a small business for any contract or subcontract under that the procurement. However, this would not mean that a joint venture would qualify for every set-aside program. For example, a joint venture between a HUBZone protégé and its approved mentor would not automatically qualify for a WOSB set-aside contract, unless the protégé also met the WOSB eligibility requirements.

Limitations on Mentor-Protégé Agreements

The Proposed Rule would put certain requirements and limitations on mentor-protégé agreements. First, all mentor-protégé agreements must be in writing and identify the specific benefits intended to be derived by the protégé firms. Second, before a firm is to receive any benefits, the SBA must approve the agreement. Next, an annual review of the mentor-protégé agreement will be conducted by the SBA to determine whether continuation is appropriate. Finally, there will be a three-year limitation on the duration of mentor-protégé agreements. The SBA has requested comments on all of these anticipated requirements.

Impact of Proposed Rule on Joint Ventures

The Proposed Rule also addresses joint ventures, both within and outside of the proposed small business mentor-protégé program.

Definition of Joint Venture

The Proposed Rule clarifies a perceived confusion regarding what constitutes an informal joint venture. The Proposed Rule continues to require that all joint ventures must be created through a written document. However, a joint venture need not be formed as a limited liability company or other formal legal entity. The SBA considers informal joint ventures to be a partnership, whether or not established as a formal partnership. The Proposed Rule clarifies that an “informal joint venture” is only informal in that it does not need to be formed as a separate legal entity, but the requirement for a written joint venture agreement remains.

The Proposed Rule also addresses the issue of populated joint ventures. The current SBA regulations allow a joint venture formed as a separate legal entity, e.g., an LLC, to populate the joint venture with individuals intended to perform on the joint venture’s awarded contracts. The Proposed Rule eliminates that possibility. Under the Proposed Rule, a joint venture must either be unpopulated, or populated with employees to perform only administrative functions. This change was implemented by the SBA so that it could more easily identify the percentage of work performed by the protégé member of the joint venture.

The SBA has requested comments as to whether all joint ventures formed under mentor-protégé agreements should be required to be formed as separate legal entities.

HUBZone Joint Ventures

Currently, the HUBZone program only authorizes joint ventures between two or more HUBZone qualified small business concerns. The Proposed Rule would expand the program allowing large businesses and non-HUBZone small businesses to act as mentors and enter into joint venture agreements with HUBZone protégés. The Proposed Rule also brings the HUBZone program in line with the other small business programs by allowing a qualified HUBZone small business to enter into a joint venture agreement with non-HUBZone small businesses.

SBA requests comments on whether the purposes of the HUBZone program would be appropriately served by allowing this expansion of the HUBZone program.

Ensuring Compliance

Heavy emphasis is placed on compliance with the SBA regulations to prevent fraud or improper conduct. Thus, within the Proposed Rule are different procedures to ensure accountability. First, the SBA has proposed a certification requirement. Prior to performance of a contract, i.e., a SDVOSB, HUBZone, WOSB, or small business set-aside, all partners in a joint venture agreement must certify to the contracting officer and SBA that they will carry out the contract in compliance with the joint venture regulations and with the joint venture agreement.

Next, the Proposed Rule adds reporting requirements that each party to the joint venture must submit to the contracting officer and SBA. For example, the joint venture must submit an annual report explaining how the performance of work requirements are being met. According to the Proposed Rule, the government may consider a contractor’s failure to comply with the joint venture regulations or submit the required certifications and reports to be a ground for suspension and debarment.

The Proposed Rule posits that regulations ensuring that both the government and the public can track joint venture awards will promote transparency and accountability, deter fraudulent or improper conduct, and promote compliance with SBA regulations. The SBA is currently debating different methods to track awards made to joint ventures and seeks comments from interested parties on how to best accomplish this task.

Other Comments Sought

The SBA seeks comments on whether, to ensure consistency, there should be one office to review and either approve or decline all mentor-protégé agreements. The SBA asks for comments regarding whether there should be a maximum of two mentors per protégé or another maximum. The SBA acknowledges that the mentor-protégé programs currently run by other agencies have subcontracting incentives that may have value to the proposed small business mentor-protégé program. The SBA requests comments as to whether any of these subcontracting incentives from other programs should be incorporated into the SBA’s mentor-protégé program. The SBA requests comments on whether the rule allowing a mentor to own an equity interest of up to 40% in the protégé firm in order to raise capital for the protégé firm should only exist as long as the mentor-protégé relationship exists or allowed to continue after termination of the mentor-protégé relationship. The SBA requests comments as to whether an alternative approach to determining if a Native Hawaiian Organization is economically disadvantaged is more suitable. The SBA asks for comments on whether a change in a company’s primary NAICS code should be automatic, based on data from the Federal Procurement Data System.

Comments are due by April 6, 2015. The Proposed Rule is available for here for review.