On February 11, 2011, the U. S. Small Business Administration (“SBA”) published changes to its regulations governing the 8(a) Business Development (“BD”) program, the SBA’s size regulations, and the regulations affecting Small Disadvantaged Businesses (“SDB”). The SBA implemented these final rules after issuing proposed rules and soliciting comments. In some ways, the new regulations formalize existing SBA practices. This Alert summarizes and provides commentary on two of the more challenging changes to the 8(a) BD program regulations, which are contained in Title 13, Part 124 of the Code of Federal Regulations.
The revisions to 13 C.F.R. Part 124 apply to all applications for the 8(a) BD program pending as of March 14, 2011 and all 8(a) procurement requirements accepted by the SBA on or after March 14, 2011.
Recall that an 8(a) BD is a concern that is owned and controlled by individuals who are both socially and economically disadvantaged. The most radical changes in the 8(a) BD regulations arise in the SBA’s description of “Who is economically disadvantaged,” in subpart 124.103 of Title 13 of the C.F.R. Specifically, the SBA has created new standards for annual income and total assets. After March 14, 2011, the SBA will presume that an applicant or participant in the 8(a) BD program whose income or total assets exceed the new standards is not economically disadvantaged. These new income and total asset standards are in addition to the SBA’s net worth standards, which remain unchanged ($250,000 for applicants, and $750,000 for participants, for continued eligibility, excluding ownership interest in the company and equity in the primary personal residence). See 13 C.F.R. § 124.104(c)(2).
According to the new income standard, if an applicant individual’s adjusted gross income (averaged over the previous three years) exceeds $250,000, the SBA will presume that individual is not economically disadvantaged. Furthermore, the SBA will presume that an individual in the program is not economically disadvantaged and is not eligible to continue in the program if his or her adjusted gross income averaged over the preceding three years exceeds $350,000. See 13 C.F.R. § 124.104(c)(3).
Under the new total asset standard, the SBA will presume that an applicant is not economically disadvantaged if the fair market value of all of his or her assets exceeds $4 million. A participant will be presumed not to be economically disadvantaged, and therefore ineligible to continue in the program, if his or her total assets exceed $6 million. This total asset valuation includes the individual’s primary residence and the value of the participant firm. The regulations are not specific in this regard; however, the total asset standard appears to disregard whether the assets are encumbered (e.g., the value of the residence is not discounted by the amount of any mortgage) because SBA’s concern is with the individual’s access to credit and capital. See 13 C.F.R. § § 124.104(a) & (c). Similarly, the regulations do not describe how the SBA will assess the value of an applicant or participant firm.
The SBA will exclude from its determination of net worth or total assets, funds that are invested in an Individual Retirement Account or other official retirement account that is not available to an individual until retirement age without a significant penalty. In addition, for the income assessment, the SBA will exclude income received from an applicant or participant that is an S corporation or LLC when the individual provides documentary evidence that the income was reinvested in the firm or used to pay taxes arising in the normal course of operations of the firm.
Exceeding any of an individual owner or manager’s thresholds for economic disadvantage (i.e., net worth, personal income, or total assets) could result in the participant being terminated from the 8(a) BD program. See 13 C.F.R. § 124.303(a)(2). When a firm is terminated, it is no longer eligible to receive any 8(a) BD assistance, but it is obligated to complete previously awarded 8(a) contracts. See 13 C.F.R. § 304(f)(1). Generally, a terminated firm may not bid on future 8(a) procurements; however, a participant that believes it does qualify as an SDB and seeks to certify itself as an SDB must identify that it has been terminated, the statute or regulation that qualifies it for SDB status, and the circumstances that have changed since its termination. The Contracting Officer may accept the certification or protest the firm’s status to the SBA where questions about the firm’s status remain.
The impact of the SBA’s new economic disability regulations will be measured over time. Many 8(a) BD program participants are likely to face termination from the program; however, their termination might not always result in complete disqualification from future opportunities to compete for the work. Observers will be interested to learn whether the SBA’s more aggressive termination of these concerns from the 8(a) BD program might result in government agencies offering fewer of the affected requirements to the SBA for the 8(a) program.
In assessing an individual’s economic disadvantage, the SBA seeks to determine whether “socially disadvantaged individuals whose ability to compete in the free enterprise system has been impaired due to diminished capital and credit opportunities as compared to others in the same or similar line of business who are not socially disadvantaged.” 13 C.F.R. § 124.104(a). The SBA’s new standards are among several factors that it is to consider in its assessment of economic disability. The presumption that an individual whose net worth, income, or total assets exceed the new standards is not economically disadvantaged can be rebutted. Experienced advisors can assist applicants or participants in assessing their data pertaining to economic disadvantage and addressing presumptions that might be made against them.