# HUBZone Program Updates and Clarifications, and Clarifications to Other Small Business Programs

> Briefs, arguments, decisions, and more.

URL: https://www.frixlaw.com/law-library/documents/fr%3A2024-29393

## Record

- **Collection:** Federal Register
- **Document type:** Rule
- **Published:** December 17, 2024
- **Citation:** 89 FR 102448

## Text

SMALL BUSINESS ADMINISTRATION
13 CFR Parts 121, 124, 125, 126, 127, 128, 134
[Docket ID SBA-2024-0007]
RIN 3245-AH68
HUBZone Program Updates and Clarifications, and Clarifications to Other Small Business Programs

AGENCY:

U.S. Small Business Administration.

ACTION:

Final rule.

SUMMARY:

The U.S. Small Business Administration (SBA or Agency) amends its regulations governing the Historically Underutilized Business Zone (HUBZone) Program to clarify certain policies. In 2019, SBA published a comprehensive revision to the HUBZone Program regulations, which implemented changes intended to make the HUBZone Program more efficient and effective. This rule clarifies and improves policies surrounding some of those changes. In particular, the rule requires any certified HUBZone small business to be eligible as of the date of offer for any HUBZone contract. The rule also makes several changes to SBA's size and 8(a) Business Development (BD) regulations, as well as some technical changes to the Women-Owned Small Business (WOSB) and Veteran Small Business Certification (VetCert) programs. Of note, the rule deletes the program specific recertification requirements contained separately in SBA's size, 8(a) BD, HUBZone, WOSB, and VetCert and moves them to a new section that covers all size and status recertification requirements. This should ensure that the size and status requirements will be uniformly applied.

DATES:

This rule is effective on January 16, 2025.

FOR FURTHER INFORMATION CONTACT:

Alison Amann, Chief HUBZone Counsel, Office of General Counsel, (202) 205-6841,
alison.amann@sba.gov
.

SUPPLEMENTARY INFORMATION:

I. Background

On August 23, 2024, SBA published in the
Federal Register
a proposed rule that primarily sought to amend the regulations relating to SBA's HUBZone program, but also proposed changes to SBA's size regulations and SBA's other small business contracting programs. 89 FR 68274.

The proposed rule first intended to clarify and amend several HUBZone regulations that were implemented in the November 26, 2019, final rule that was the first comprehensive revision of the HUBZone Program regulations since the program's implementation more than 20 years ago.
See
87 FR 68274. In the time since SBA published the comprehensive revision, the Office of the HUBZone Program has received questions and information that prompted refinement and clarification of policies contained in that revision, which SBA published in “Frequently Asked Questions” in February 2020 and in subsequent updates. The proposed rule sought to incorporate some of those clarifications and make other refinements in the HUBZone regulations. This rule finalizes revisions to the HUBZone regulations, including requiring HUBZone firms to be eligible on the date of offer for a HUBZone contract and relieving the burden of annual recertification by moving to a triennial recertification requirement. In addition, this rule clarifies policies related to “Governor-designated covered areas,” which were authorized by the NDAA 2018 and implemented through a direct final rule published by SBA on November 15, 2019 (84 FR 62447), and makes several changes to definitions pertinent to the HUBZone program.

This final rule also makes several changes to SBA's size and 8(a) business development (BD) regulations, as well as some technical changes to the women-owned small business (WOSB) and the Veteran Small Business Certification (VetCert) programs. Of note, the rule deletes the program specific recertification requirements contained separately in SBA's size, 8(a) BD, HUBZone, WOSB, and VetCert and moves them to a new section that covers all size and status recertification requirements. Currently, there is some language contained in the program specific recertification rules that is not identical in each of the programs. This has caused some confusion as to whether SBA intended the rules to be different in certain cases. That was not SBA's intent. Moving all size and recertification to new § 125.12 should alleviate any confusion between the different programs and ensure that the size and status requirements will be uniformly applied.

During the proposed rule's 45-day comment period, SBA timely received over 650 comments from 261 commenters, with a high percentage of commenters favoring the proposed changes. A substantial number of commenters applauded SBA's effort to clarify and address ambiguities contained in the current rules. For the most part, the comments supported the substantive changes proposed by SBA.

II. Section-by-Section Analysis

Sections 121.103(a)(3), 124.106(h), 127.202(h) and 128.203(j)(6)

SBA proposed to amend its rules on affiliation in the size regulations and control in the 8(a) BD, WOSB and VetCert program regulations regarding negative control. Specifically, the proposed rule made the negative-control rules consistent across SBA's various programs. The negative control provision states that a concern may be deemed controlled by, and therefore affiliated with, a minority shareholder that has the ability to prevent a quorum or otherwise block action by the board of directors or shareholders. The rule does not include any specific exceptions, though some have developed through caselaw at SBA's Office of Hearings and Appeals (OHA).
See, e.g., Southern Contracting Solutions III, LLC,
SBA No. SIZ-5956 (Aug. 30, 2018).

The proposed rule amended § 121.103(a)(3) (for affiliation relating to size), § 124.106(h) (for control in the 8(a) BD program) and § 127.202(h) (for control in the WOSB program) by adding language currently contained in the VetCert rules that developed from OHA case law to clarify that there are certain “extraordinary circumstances” under which a minority shareholder may have some decision-making authority without a finding of negative control. Specifically, SBA will not find that a lack of control exists where a qualifying individual or business does not have the unilateral power and authority to make decisions regarding: (1) adding a new equity stakeholder; (2) dissolution of the company; (3) sale of the company or all assets of the company; (4) the merger of the company; (5) the company declaring bankruptcy; and (6) amendment of the company's governance documents to remove the shareholder's authority to block any of (1) through (5). These exceptions to negative control are being implemented to promote consistency with other SBA contracting programs. Finally, since the current VetCert regulations have only the first five exceptions for control and the proposed rule also added six to the size, 8(a) BD and WOSB regulations, the proposed rule added that same sixth exception to the VetCert regulations in a new § 128.203(j)(6).

SBA received ten comments in response to the proposed changes regarding extraordinary circumstances. All of the commenters agreed with identifying “extraordinary circumstances” under which a minority shareholder may have some decision-

making authority without a finding of affiliation or negative control. Several commenters, however, believed that there should also be some sort of a catch-all to allow similar treatment for another extraordinary circumstance not specifically identified. One commenter recommended that SBA adopt language stated in OHA size appeal cases that super majority provisions crafted to protect the investment of the minority shareholders, and not to impede the majority's ability to control the concern's operations or to conduct the concern's business as it chooses should be permitted.
See
Size Appeal of S. Contracting Sols. III, LLC, SBA No. SIZ-5956 (2018) (citing Size Appeal of EA Eng'g., Sci. & Tech., Inc., SBA No. SIZ-4973 (2008), Size Appeal of Carntribe-Clement 8AJV #1, LLC, SBA No. SIZ-5357 (2012)). SBA agrees and has adopted this catch all language in this final rule.

One commenter recommended that the extraordinary circumstance identified as adding “a new equity stakeholder” should be broadened to also allow increasing the investment amount of an equity stakeholder. Similarly, another commenter recommended that SBA add a separate extraordinary circumstance allowing issuing additional capital stock. SBA adopts the first recommendation in this final rule, but believes the second is unnecessary since that should be covered in a provision which allows adding a new equity stakeholder or increasing the investment amount of an equity stakeholder.

Section 121.103(h)

Section 121.103(h)(3) sets forth SBA's “ostensible subcontractor” rule, which may find a prime contractor ineligible for the award of any small business contract or order where a subcontractor that is not similarly situated (as that term is defined in § 125.1) performs primary and vital requirements of a contract, order, or agreement, or where the prime contractor is unusually reliant on such a subcontractor. Prior to this change, the regulatory text provided that a contractor and its ostensible subcontractor are treated as joint venturers for size determination purposes, and as long as each concern is small under the size standard corresponding to the relevant North American Industry Classification System (NAICS) code or the prime contractor is small and the subcontractor is its SBA-approved mentor, the arrangement will qualify as a small business. The proposed rule sought to clarify SBA's intent, specifically in the context of a subcontractor that is an SBA-approved mentor of the prime contractor. There was some confusion that because a prime-subcontractor relationship was treated “as a joint venture”, then that relationship would automatically be acceptable if the subcontractor were the mentor of the prime contractor. That was not what SBA intended. SBA intended to allow the relationship to qualify as a small business only if all the joint venture requirements were met. That would mean that the protégé and mentor must have an underlying joint venture agreement that meets the requirements of § 125.8(b), the protégé will direct and have ultimate responsibility for the contract, and the performance of work requirements set forth in § 125.8(c) will be met. In a prime-subcontractor relationship, those requirements are not present and SBA would aggregate the revenues/employees of such “joint ventures” in determining size. The proposed rule simplified § 121.103(h) by eliminating the reference to a joint venture and instead specified that an offeror is ineligible as a small business concern, an 8(a) small business concern, a certified HUBZone small business concern, a WOSB/EDWOSB, or a VO/SDVO small business concern where SBA determines there to be an ostensible subcontractor relationship. The proposed rule also added a new § 121.103(h)(3)(v) that provided that a joint venture offeror is ineligible as a small business concern, an 8(a) small business concern, a certified HUBZone small business concern, a WOSB/EDWOSB concern, or a VO/SDVO small business concern where SBA determines that the managing joint venture partner will not perform 40% of the work to be performed by the joint venture, where a joint venture partner that is not similarly situated to the managing venturer performs primary and vital requirements of a contract, or of an order, or where the managing venturer is unusually reliant on such a joint venture partner.

SBA received 14 comments in response to proposed § 121.103(h). Twelve commenters supported deleting the joint venture language from the introductory language of § 121.103(h)(3). Two commenters opposed the language in proposed § 121.103(h)(3)(v) that would find a joint venture to be ineligible where a joint venture partner that is not similarly situated to the managing venturer performs primary and vital requirements of a contract, or where the managing venturer is unusually reliant on such a joint venture partner. These commenters noted that a primary reason why companies joint venture is because the managing member is not able to perform the contract by itself and may not be able to perform a significant amount of the primary and vital work to be done under the contract. They believed that finding a joint venture to be ineligible merely because a non-similarly situated partner was performing primary and vital work is contrary to the entire purpose of a joint venture. SBA agrees and has amended the regulatory text in this final rule to eliminate the language finding a joint venture to be ineligible where a joint venture partner that is not similarly situated to the managing venturer performs primary and vital requirements of a contract, or of an order, or where the managing venturer is unusually reliant on such a joint venture partner.

A joint venture is not only permissible but encouraged where a concern lacks the necessary capacity to perform a contract on its own. It would be contradictory to say that a joint venture is permissible where the managing member cannot perform the contract by itself but then say it is ineligible if a non-managing member partner was performing primary and vital work.

The proposed rule also made a corresponding change to § 121.702(c)(7) for the SBIR program. That change provided that a concern with an other than small ostensible subcontractor cannot be considered a small business concern for SBIR and STTR awards. SBA received one comment regarding proposed § 121.702(c)(7). The commenter recommended that SBA add language to § 121.702(c)(7) to safeguard the SBIR and STTR programs from foreign capture. SBA believes that the language of proposed § 121.702(c)(7)(iii) provides the necessary safeguards. The commenter references an OHA size appeal where an ostensible subcontractor was a foreign company.
See
Size Appeal of NFRL LLC, SBA No. SIZ-6174 (28 September 2022). In that case, OHA found the prime ineligible because the ostensible subcontractor did not also meet the ownership and control requirements of § 121.702(a) and (b). Specifically, because the ostensible subcontractor was not more than 50% directly owned and controlled by one or more individuals who are citizens or permanent resident aliens of the United States the relationship, treated as a joint venture under the regulations in place at that time, was ineligible. In eliminating the joint venture verbiage from the ostensible subcontractor SBIR rule, SBA replaced it with language specifically stating that the prime and any small

business ostensible subcontractor both must comply individually with the ownership and control requirements. As such, SBA adopts the proposed language without revision in this final rule.

Section 121.104

Section 121.104 defines the term annual receipts to mean all revenue in whatever form received or accrued from whatever source, including from the sales of products or services, interest, dividends, rents, royalties, fees, or commissions, reduced by returns and allowances. It goes on to state that generally, receipts are considered “total income” plus “cost of goods sold” as these terms are defined and reported on Internal Revenue Service (IRS) tax return forms. The section also provides that Federal income tax must be used to determine the size status of a concern. There has been some confusion as to whether SBA is restricted in all circumstances to examining only a concern's tax returns or whether SBA may look at other information if it appears or there is other information suggesting that the tax returns do not adequately capture a concern's total revenue. The proposed rule provided that SBA will always consider a concern's tax returns, but may also consider other relevant information in appropriate circumstances in determining whether the concern qualifies as small.

SBA received seven comments regarding proposed § 121.104, five of which opposed the proposed language. Commenters believed that the proposed language afforded SBA limitless discretion to go outside of a firm's tax returns and was overly vague. One commenter noted that financial statements may not reflect revenue the same way that it is reported for tax purposes. The commenter believed that it would be unfair to include revenue identified on financial statements that were legally excluded on the firm's tax returns. SBA agrees. The final rule clarifies that SBA will consider a firm's tax returns in every case and that SBA will generally rely solely on those tax returns. The final rule also specifies that where a concern may legally exclude certain revenue for tax purposes, SBA will not include that revenue in its size determination analysis. However, the final rule specifies that SBA may consider other relevant information beyond the submitted tax returns where there is reasonable basis to believe the tax filings are false.

Section 121.404

SBA proposed to simplify and reorganize § 121.404, which addresses the date used to determine size for size certifications and determinations. The proposed changes sought to clarify the current rules and make them easier to understand and apply. In addition to these clarifications, SBA proposed substantive changes to the rules regarding size recertification and proposed to remove paragraph (g) on size recertification and relocate that paragraph to new section 125.12, which addresses size and small business program status recertification.

Generally, a concern (including its affiliates) must qualify as small under the NAICS code assigned to a contract as of the date the concern submits a self-certification that it is small to the procuring activity as part of its initial offer or response which includes price. Once awarded a contract as a small business, a concern is generally considered to be a small business throughout the life of that contract. For orders and agreements issued under multiple award contracts, the date that size is determined depends on whether the underlying multiple award contract was awarded on an unrestricted basis or whether it was set aside or reserved for small business (
i.e.,
small business set-aside, 8(a) small business, service-disabled veteran-owned small business, HUBZone small business, or women-owned/economically disadvantaged women-owned small business).

Where an order or agreement is to be set aside for small business under an unrestricted multiple award contract, size is determined as of the date of initial offer (or other formal response to a solicitation), including price, for each order or agreement placed against the multiple award contract. In that scenario, the order or agreement is the first time that size status is important to eligibility. That is the first time that only some contract holders will be eligible to compete for the order or agreement while others will be excluded from competition because of their size status. SBA never intended to allow a firm's self-certification for the underlying unrestricted multiple award contract to control whether a firm is small at the time an order or agreement is set-aside for small business years after the multiple award contract was awarded.

Where the underlying multiple award contract was set aside or reserved for small business, size status will generally flow down from the underlying contract to the order or agreement, unless recertification is requested by a contracting officer with respect to an agreement or order. As such, size status for an order or agreement under a multiple award contract that itself was set aside or reserved for small business is determined as of the date of initial offer, including price, for the multiple award contract, unless size recertification is requested by the contracting officer in connection with a specific order or agreement.

SBA also proposed to clarify that where a contracting officer requests size and/or status recertification with respect to a specific order or agreement, size/status will be determined as of the date of initial offer (or other formal response to a solicitation), including price, for that specific order or agreement only. The requirement to recertify applies only to the order or agreement for which a contracting officer requested recertification. The recertification does not apply to the underlying contract. Where an initially-small contract holder has naturally grown to be other than small and could not recertify as small for a specific order or agreement for which a contracting officer requested recertification, it may continue to qualify as small for other orders or agreements where a contracting officer does not request recertification. Similarly, where an initially-eligible 8(a), HUBZone, WOSB or SDVOSB contract holder on an 8(a), HUBZone, WOSB or SDVOSB set-aside or reserve cannot recertify its status for a specific order or agreement for which a contracting officer requested recertification, it may continue to qualify as eligible for other competitively awarded orders or agreements where a contracting officer does not request recertification.

If size recertification is triggered by a merger, sale, or acquisition, or because it is a long-term contract in the fifth year of performance, size will be determined as of the date of the merger, sale, or acquisition, or the date of the size recertification in the case of a recertification in the fifth year of a long-term contract. The impact of a disqualifying recertification, the events that require recertification, and the timing of recertification, are discussed in detail in 125.12, which is a new proposed section of SBA's regulations.

SBA received 25 comments in response to the proposed changes to § 121.404. Most of the comments responded to the effect of a disqualifying recertification. As noted above, the proposed rule moved regulatory provisions regarding recertification from § 121.404(g) to a new § 125.12. The effect of disqualifying recertifications is addressed in new

§ 125.12. As such, the comments to § 121.404 pertaining to the effect of a disqualifying recertification will be addressed with other comments to § 125.12. Several commenters supported SBA's efforts to simplify and clarify when size status is determined. Three commenters also supported SBA's clarification that where a contracting officer requests size recertification with respect to a specific order, size is determined only with respect to that order. This clarification allows a contract holder that has grown to be other than small and cannot recertify as small for a specific order for which a contracting officer requested recertification to continue to qualify as small for other orders issued under the contract where a contracting officer does not request recertification. SBA adopts those provisions as final in this rule.

Three commenters disagreed with the exception set forth in proposed § 121.404(c)(4)(i) stating that for orders or BPAs to be placed against the Federal Supply Schedule (FSS), size is determined as of the date the business concern submits its initial offer, which includes price, for the FSS contract and not with respect to each order set aside for small business under the FSS. The commenters noted that the FSS is an unrestricted contract and size is not relevant to the award of the underlying contract.

They recommended that the general rule applicable to set-aside orders under an unrestricted multiple award contract (
i.e.,
that size status for each such order placed against the multiple award contract be determined as of the date a business concern submits its initial offer which includes price for the order) should apply similarly to the FSS. The commenters believe that this exception does not adequately serve the interests of the small business community. SBA notes that GSA has the statutory authority to establish FSS contracts and the procedures used to order under them. As such, this rule adopts the proposed language as final.

Section 121.1001

Section 121.1001 identifies who may initiate a size protest or request a formal size determination in different instances. Paragraph 121.1001(b)(2)(ii) identifies who may request a formal size determination where SBA cannot verify that an 8(a) Participant is small for a specific sole source or competitive 8(a) contract. There have been a few cases where SBA initially determined that a Participant qualified as small for a sole source 8(a) contract, but later received information that questioned that determination. Under a strict reading of § 121.1001(b)(2)(ii), SBA could not then request a formal size determination because the wording of § 121.1001(b)(2)(ii) authorized such a request only where SBA “cannot verify the eligibility of the apparent successful offeror because SBA finds the concern to be other than small.” Since verification, albeit initial verification only, had already occurred, some have questioned whether SBA could request a formal size determination at all in that context. SBA notes that it was never SBA's intent to prohibit further analysis of an 8(a) Participant's size eligibility when new information becomes available to SBA that questions the firm's eligibility at any point prior to award. SBA seeks to ensure that only firms that qualify as small receive 8(a) contracts. The proposed rule added a new § 121.1001(b)(2)(iii) to specifically authorize SBA to request a formal size determination where SBA initially verified the eligibility of an 8(a) Participant for the award of an 8(a) contract but then subsequently receives specific information that the Participant may be other than small and consequently ineligible. SBA received two comments on this proposal, both supporting this clarification. One commenter recommended that SBA clarify that the request for a formal size determination contemplated here by SBA occurs prior to the award of the 8(a) contract at issue. SBA agrees and has made minor wording changes to clarify its intent in this rule.

SBA also proposed to add a new § 121.1001(b)(12) to specifically authorize requests for formal size determinations relating to size recertifications required by § 125.12. Section 125.12 requires a concern to recertify its size when there is a merger, acquisition, or sale and prior to the sixth year and every option thereafter of a long-term contract. Although SBA and the relevant contracting officer may file a size protest before or after the award of a contract (
see
§ 121.1004(b)), the regulations do not currently specifically authorize a protest or a request for a formal size determination in connection with a size recertification. More importantly, there currently is no mechanism to allow a protest or request for a formal size determination from another interested small business concern who believes that a size recertification is incorrect. For example, on a multiple award contract, if after a merger or acquisition a concern re-certifies itself to be small, another contract holder on that multiple award contract could not currently challenge that recertification. Because this rule will render a concern ineligible for orders set aside for small business or set aside for a specific type of small business under a multiple award contract where the concern submits a disqualifying recertification (
see
§ 125.12 below), SBA believes that other contract holders should have the ability to question a size recertification. The proposed rule specifically authorized the contracting officer, the relevant SBA program manager, or the Associate General Counsel for Procurement Law to request a formal size determination. The relevant SBA program manager is that individual overseeing the program relating to the contract at issue. For an 8(a) contract, that would be the Associate Administrator for Business Development; for a HUBZone contract, that would be the Director of HUBZone; and for a small business set-aside, WOSB/EDWOSB or SDVOSB contract, that would be the Director of Government Contracting. The proposed rule also specified that in connection with a size recertification relating to a multiple award contract, any contract holder on that multiple award contract could request a formal size determination in addition to the contracting officer, the relevant SBA program manager, or the Associate General Counsel for Procurement Law. As with a size protest, a request for a formal size determination questioning the size of a concern after its size recertification must be sufficiently specific to provide reasonable notice as to the grounds upon which the recertifying concern's size is questioned. SBA received five comments in response to proposed § 121.1001(b)(12). All five commenters supported the SBA's proposal to allow a mechanism to challenge a size recertification. One commenter, however, recommended that the challenge be a size protest in § 121.1001(a) as opposed to a request for a formal size determination in § 121.1001(b). The commenter believed that without this clarification, it is unclear if/whether the protest time limits apply. The final rule adopts this recommendation and moves proposed §§ 121.1001(b)(12) and (13) to a new § 121.1001(a)(11). In moving the proposed authority from a request from a formal size determination to a protest, the final rule eliminates the specific language contained in proposed § 121.1001(b)(13) requiring a challenge to a recertification to be specific. The requirement for specificity applies to all size protests currently. There is no need to repeat that requirement in new § 121.1001(a)(11).

The proposed rule also noted that SBA was considering allowing a size protest in connection with the award of an order issued under a multi-agency multiple award contract where the protest relates to the ostensible subcontractor rule. Whether a large business subcontractor will perform primary and vital requirements or whether a small business prime contractor will be unduly reliant on a large business subcontractor will not be an issue at the time of award of an underlying small business multiple award contract. It is at the order level where undue reliance may become an issue. SBA requested comments on this issue. Three commenters supported the inclusion of such a protest, while two opposed. Two commenters supported the addition of such a provision generally. One commenter noted that § 121.1001(a)(1) already authorized a size protest “in connection with a particular . . . order.” The commenter noted that if a protest is currently authorized for an order, then it can relate to any protest ground in SBA's regulations, including one based on the ostensible subcontractor rule. Although the commenter believed it was unnecessary to add language regarding the ostensible subcontractor rule to protests regarding orders, the commenter did not object to such inclusion if SBA thought it was necessary. The commenter also recommended that the language in § 121.1001(a)(1) authorizing a size protest in connection with a particular order be more clearly apparent in a separate paragraph. In response, SBA believes that it is not necessary to add specific language authorizing a protest of an order based on the ostensible subcontractor rule. SBA agrees that the language in § 121.1001(a)(1) authorizing a size protest in connection with a particular order generally allows a protest based on the ostensible subcontractor rule. SBA also agrees that this authority should be identified in a separate paragraph for clarity purposes, and adds a new § 121.1001(a)(10) to do so.

One commenter opposing such a provision believed that it would be difficult for competitors to know whether a contractor intends to use a subcontractor for a particular order since this information is not public or consistently reported, and that this would lead to speculative size protests. As with any size protest, the protest must be specific. If a competitor cannot identify a subcontractor that will perform primary and vital requirements or upon which the protested concern is alleged to be unduly reliant upon, the protest will be dismissed for lack of specific. The other commenter opposing adding specific language authorizing a size protest relating to the ostensible subcontractor rule with respect to an order believed that it would create significant additional work for contracting officers, small business specialists, and small businesses. As noted above, size protests relating to specific orders is already authorized by SBA's regulations and identifying or not identifying a specific ground upon which a protest could be made will not cause any additional burden on contracting officers, SBA or small businesses.

Section 121.1010

Section 121.1010 explains how a concern can become recertified as a small business after receiving an adverse size determination. The proposed rule made slight wording changes to § 121.1010(b) to make clear that size recertification is not required and the prohibition against future self-certification does not apply if the adverse SBA size determination is based solely on a finding of affiliation limited to a particular Government procurement or property sale, such as an ostensible subcontracting relationship or non-compliance with the nonmanufacturer rule. SBA received two comments supporting this provision and no comments opposing it. SBA adopts the proposed language as final in this rule.

Section 124.3

Section 124.3 sets forth the definitions that are important in the 8(a) BD program. Included within this section is the definition of the term Community Development Corporation or CDC. In 1981, Congress enacted the Omnibus Reconciliation Act. Included within Title VI of this Act was § 626(a)(2), codified at 42 U.S.C. 9815(a)(2), which required SBA to “promulgate regulations to ensure the availability to community development corporations of such programs as shall further the purposes of this subchapter, including programs under section 8(a) of the Small Business Act.” Pursuant to 42 U.S.C. 9802, a CDC is defined as a non-profit organization responsible to the residents of the area it serves which is receiving financial assistance under 42 U.S.C. 9805,
et seq.
Under 42 U.S.C. 9806 the Secretary of Health and Human Services (HHS) has the authority to provide financial assistance in the form of grants to nonprofit and for-profit community development corporations. The program authorized by 42 U.S.C. 9805,
et seq.
is the Department of Health and Human Services (HHS) Urban and Rural Special Impact Program. In 1998, as part of Community Opportunities, Accountability, and Training and Educational Act of 1998, Public Law 105-285, 202(b)(1), 112 Stat. 2702, 2755 (1998), Congress moved HHS' funding authority for the Urban and Rural Special Impact Program from 42 U.S.C. 9803 to 42 U.S.C. 9921. Thus, after that date CDCs could not receive funding under 42 U.S.C. 9805,
et seq.
CDCs that have been in existence for a long time may still be able to demonstrate that they have received funding under 42 U.S.C. 9805,
et seq.
However, those forming after 1998 could not do so. In order for such a CDC seeking to participate in the 8(a) BD program after that date, SBA has required the CDC to obtain a letter from HHS confirming that the CDC has received funding through the successor program to that authorized by 42 U.S.C. 9805,
et seq.
However, SBA's regulations have not been changed to acknowledge eligibility for a CDC-owned firm through that process. The proposed rule recognized that process.

The proposed rule also made the same change to the definition of the term Community Development Corporation or CDC contained in § 126.103 for the HUBZone program.

SBA received two comments supporting the clarifications for CDC 8(a) and HUBZone eligibility. SBA adopts the proposed language as final in this rule.

Sections 124.105(b), 127.202(d) and 128.202(c)

Sections 124.105(b) (for the 8(a) BD program), 127.202(d) (for the WOSB program), and 128.202(c) (for VetCert program) set forth ownership requirements pertaining to partnerships. The language of the three sections is not consistent. The proposed rule sought to harmonize the provisions so that a firm simultaneously applying to be certified in more than one program must meet the same requirements. SBA does not want possible contradictory determinations based on the same facts. In other words, SBA believes that it would be inappropriate to find that a qualifying individual controls a partnership firm for purposes of one certification program but not to control the same partnership firm for purposes of another certification program. This rule would revise the ownership requirements for partnership to be identical for the 8(a) BD, WOSB and VetCert programs. The final rule provides that in the case of a concern which is a partnership, one or more individuals determined by SBA to be

socially and economically disadvantaged must serve as general partners, with control over all partnership decisions. In addition, at least 51 percent of every class of partnership interest must be unconditionally owned by one or more individuals determined by SBA to be socially and economically disadvantaged; and the ownership must be reflected in the concern's partnership agreement.

SBA received four comments supporting the proposed clarifications to create consistency between SBA's various programs, and no comments opposing the changes. SBA adopts the proposed language as final in this rule.

Section 124.105

Section 124.105 sets forth the ownership requirements that an applicant to or Participant in the 8(a) BD program must meet in order to be and remain eligible for the program. Paragraph 124.105(h) provides certain ownership restrictions that are applicable to non-disadvantaged individuals and concerns that seek to have an ownership interest in an applicant or Participant. The proposed rule increased the allowable ownership percentages for certain non-disadvantaged individuals and business concerns (those owning more at least ten percent in other 8(a) Participant and those in the same or similar line of business) from 10 percent to 20 percent in the developmental stage of program participation and from to 20 percent to 30 percent in the transitional stage of program participation.

SBA received five comments supporting the increases in non-disadvantage ownership. Commenters believed that these changes could help 8(a) Participants attract additional partners, offering greater opportunities for growth and development. One commenter supported the increase to 30% in the transitional stage saying that it will facilitate access to capital for 8(a) firms preparing to graduate, enhancing their ability to compete in the open market. That commenter also recommended, however, that SBA increase the percentage to 35% in the transitional stage. SBA does not adopt this recommendation. SBA does not want any one non-disadvantage individual or business entity to unduly benefit from the program. The higher the percentage that SBA allows a non-disadvantaged individual or business to own in multiple 8(a) Participants, the more it appears that non-disadvantaged individuals are benefitting from the program instead of disadvantaged individuals. Similarly, the restriction on ownership by an individual or business in the same or similar line of work as the 8(a) firm is intended to ensure that the disadvantaged individual(s) upon whom 8(a) eligibility was based control the 8(a) Participant. The higher the percentage that SBA allows a non-disadvantaged individual or business in the same or similar line of business to own in an 8(a) firm, the more it appears that the non-disadvantaged individual or business concern is controlling the 8(a) firm. SBA adopts the proposed language as final in this rule.

The proposed rule also aligned the language in § 124.105(f)(1) (for the 8(a) BD program) with that appearing in § 128.202(g) (for the VetCert program) regarding the distribution of profits. There was a slight wording difference in the 8(a) BD and VetCert regulations and the proposed rule made the wording consistent. The proposed rule also added the same language to § 127.201(g) for the WOSB program. SBA received three comments all supporting these proposed changes. Commenters noted that the revision more clearly states how profits should be distributed for the various for-profit entities instead of only referencing corporations, which is the case in the current regulations. SBA adopts the proposed language as final in this rule.

Paragraph (i) sets forth the requirements relating to changes of ownership. Generally, a Participant may change its ownership or business structure so long as one or more disadvantaged individuals own and control it after the change and SBA approves the transaction in writing prior to the change. Section 124.105(i)(2) authorizes three exceptions as to when prior SBA approval of a change of ownership is not needed and provides four examples implementing the change of ownership requirements, one showing when prior SBA approval is required and three showing when it is not. Prior SBA approval is not needed where all non-disadvantaged individual (or entity) owners involved in the change of ownership own no more than a 20 percent interest in the concern both before and after the transaction. To be consistent with the change to § 124.105(h) above, the proposed rule required prior approval only where a non-disadvantaged individual owns more than a 30 percent interest in the 8(a) Participant either before or after the transaction. The proposed rule also added a fourth exception as to when prior SBA approval is not required. Specifically, the proposed rule provided that prior SBA approval is not required where the 8(a) Participant has never received an 8(a) contract. The proposed rule then clarified that where prior approval is not required, the Participant must notify SBA within 60 days of such a change in ownership, or before it submits an offer for an 8(a) contract, whichever occurs first. SBA must be able to determine the continued eligibility of the Participant before it accepts a sole source 8(a) procurement on behalf of or authorizes the award of a competitive 8(a) award to the Participant. Finally, the proposed rule made changes to the examples set forth in § 124.105(i)(2) to reflect the change from 20 percent to 30 percent and added a fifth example highlighting that prior SBA approval is not required where a Participant has never received an 8(a) contract.

SBA received 11 comments regarding the proposed revisions to the change of ownership requirements. The commenters generally supported the proposed revisions. One commenter believed that the exception to prior approval when the Participant has never received an 8(a) contract is an improvement because it reduces the regulatory burden of obtaining prior approval of an ownership change when the 8(a) Participant has not yet received benefits from the program. That commenter also believed that the notification requirement at § 124.105(i)(2)(i)(D)(iii) that requires a Participant to provide notice of the ownership change within 60 days of such a change, or before it submits an offer for an 8(a) contract, whichever occurs first, will serve as a sufficient safeguard to ensure that SBA has the opportunity to analyze ownership changes before a contract award. Two commenters recommended that SBA clarify § 124.105(i)(2)(i)(C) to make clear that an increase of any percentage of ownership by the disadvantaged individual obviates the need for SBA's prior approval, even if it is a small amount. The final rule makes that clarification. One commenter disagreed with allowing a change of ownership without SBA approval where the 8(a) firm has not received an 8(a) contract in all instances. Specifically, the commenter objected to allowing such a change of ownership where the individual(s) or entity upon whom eligibility would no longer own more than 50 percent of the Participant. The commenter noted that if the change in ownership were permitted to take effect without SBA's approval, the Participant could continue to market itself as an eligible 8(a) Participant. Although the proposed rule requires SBA approval before an 8(a) contract award, the commenter thought that the

Participant's self-marketing efforts could allow the Participant to advance far towards an award before contacting SBA and that either the Participant would receive an expedited eligibility review allowing the award to occur or an agency could be left without an eligible Participant and be forced to start the process over again. Particularly in the entity context, the commenter believed that this could allow a newly established NHO or Tribe that has not previously participated in the 8(a) program to acquire a Participant that has not yet received an 8(a) contract and obtain accelerated review of its 8(a) application, and that that review may not be as comprehensive as it would have been in the normal process. In order to alleviate any concern about possible expedited application processing, the final rule amends this provision to allow a change of ownership without SBA approval where the Participant has never received an 8(a) contract and the individual(s) or entity upon whom initial eligibility was based continues to own more than 50% of the Participant.

In order to align the 8(a) BD ownership requirements with those applicable in the WOSB and VetCert programs, SBA proposed to eliminate the requirement contained in § 124.105(k) that SBA consider State community property laws in determining ownership interests when an owner resides in a community property State. SBA received six comments in response to the proposal to eliminate current § 124.105(k). All six comments supported the proposal. Two commenters specifically addressed the statutory requirement that one or more disadvantaged individuals must unconditionally own an 8(a) applicant or Participant. Both believed that eliminating the requirement to consider community property laws would not in any way contradict the unconditional ownership requirement. One commenter also questioned SBA's authority to require transmutation agreements (
i.e.,
agreements between spouses relinquishing some percentage of his or her community property ownership rights in an applicant or Participant), and believed that even if that could be done it is a better policy not to require them since the commenter believed there was no specific statutory requirement for transmutation agreements. SBA adopts the proposed language as final in this rule.

The proposed rule added a new § 124.105(k) to allow a right of first refusal granting a non-disadvantaged individual the contractual right to purchase the ownership interests of a disadvantaged individual without affecting the unconditional nature of ownership, if the terms follow normal commercial practices. This aligns 8(a) ownership requirements with those set forth in the VetCert program. Of course, if those rights are exercised by a non-disadvantaged individual after certification that result in disadvantaged individuals owning less than 51% of the concern, SBA will initiate termination proceedings. The proposed rule added the same provision to § 127.201(b) to conform the WOSB unconditional ownership requirements as well. SBA received four comments supporting this provision. One commenter requested that SBA define what it believes normal commercial practices to be. SBA believes that any definition might inadvertently disallow a practice that could be deemed a normal commercial practice, and that it is better to allow an applicant or Participant to demonstrate to SBA that it has in fact followed normal commercial practices. Another commenter was concerned that a right of first refusal could be tied to allowing a non-disadvantaged individual to unduly benefit from the program. Specifically, the commenter posed a hypothetical where a non-disadvantaged individual owns a business concern and agrees to “sell” 51 percent of the business concern to a disadvantaged individual with the proviso that in nine years the disadvantaged individual would sell the 51 percent back to the non-disadvantaged individual through a right of first refusal provision in the corporate documents. SBA believes that such an arrangement would not be a right of first refusal that followed normal commercial practices, but rather a scheme to deceive SBA and allow greater participation in the program by a non-disadvantaged individual than would otherwise be permitted. If SBA were aware of such a right of first refusal provision, it would not approve the application for 8(a) certification. SBA adopts the proposed language as final.

Sections 124.106(e), 127.202(g) and 128.203(h)

Sections 124.106(e) (for the 8(a) BD program), 127.202(g) (for the WOSB program), and 128.203(h) (for VetCert program) address limitations on the involvement of non-qualifying individuals that can affect a business concern's eligibility for participation in the 8(a) BD, WOSB, and VetCert programs based on a qualifying individual's lack of control. Basically, each of these provisions generally prohibit a non-qualifying individual from unduly influencing the day-to-day management and control of qualifying individuals. The language of the three provisions, however, is not entirely consistent. This has led to questions as to whether SBA intended different application of the control requirements for different programs. In order to clear up any confusion, the proposed rule changed the wording of the three provisions to bring them more in line with each other to ensure that the control requirement is consistently applied. For example, the WOSB regulations did not previously contain a provision that generally required a qualifying woman to be the highest compensated individual in the business concern unless the concern demonstrates that the compensation to be received by a non-qualifying woman is commercially reasonable or that the qualifying woman has elected to take lower compensation to benefit the concern. Such a provision was contained previously in both the 8(a) BD and VetCert regulations, and the proposed rule added a similar provision for the WOSB program. In connection with the 8(a) BD program, SBA proposed to change the requirement that an 8(a) Participant must obtain the prior written consent of SBA before changing the compensation paid to the highest-ranking officer to be below that paid to a non-disadvantaged individual to a requirement that the Participant must notify SBA within 30 calendar days of such an occurrence. SBA believes that notification is preferable to prior approval because SBA does not want a Participant to lose an individual with a particular expertise where the approval process is lengthy. SBA would then have to determine that the compensation to be received by the non-disadvantaged individual is commercially reasonable or that the highest-ranking officer has elected to take lower compensation to benefit the Participant before SBA may determine that the Participant is eligible for an 8(a) award. SBA received six comments regarding the proposed changes relating to the involvement of non-qualifying individuals. Three commenters noted that the proposed provisions for the 8(a) program required an 8(a) Participant to notify SBA where the compensation paid to the highest-ranking officer fell below that paid to a non-disadvantaged individual and recommended that the same should apply to the WOSB and VetCert programs also. The final rule adds that same notification requirement to WOSBs/EDWOSBs and SDVOSBs.

Section 124.107

Section 124.107(a) currently provides that an applicant's income tax returns

for each of the two previous tax years must show operating revenues in the primary industry in which the applicant is seeking 8(a) BD certification. The proposed rule revised this provision to require merely that an applicant's income tax returns for each of the two previous tax years must show operating revenues. Revenue on an income tax return may not be aligned by industry or NAICS code and SBA does not seek to deny entry to the 8(a) program to a firm that has performed work in its projected primary industry but that work may not have been properly captured on its tax return. SBA received five comments on this provision, with all of them supporting the change. The commenters believed that the change will make the 8(a) BD program more accessible and remove an unnecessary barrier to entry. One commenter supporting the change noted that it is burdensome for 8(a) applicants to demonstrate “operating revenues in the primary industry” on income tax returns, as IRS business activity codes often do not align with NAICS codes. Where NAICS codes and IRS business codes do not align, the commenter stated that applicants have been asked to obtain a letter from their tax preparers to clarify code discrepancies, which adds an unnecessary burden to applicants. SBA adopts the proposed language as final in this rule.

Section 124.107(e) requires that, as a condition to show an 8(a) applicant's potential for success, the applicant or individuals employed by the applicant must hold all requisite licenses if the concern is engaged in an industry requiring professional licensing (
e.g.,
public accountancy, law, professional engineering). Generally, the potential-for-success requirements carry out the requirement in section 8(a)(7)(A) of the Small Business Act, 15 U.S.C. 637(a)(7)(A), that SBA determine that an 8(a) applicant have reasonable prospects for success in competing in the private sector. That same statutory provision, however, requires SBA to determine that with contract, financial, technical, and management support the applicant will be able to perform contracts which may be awarded to it. As such, SBA believes that issues of current responsibility should not prevent an applicant from being eligible for the 8(a) BD program where SBA believes that the business concern will be able to perform contracts awarded to it with certain contract, financial, technical, or management support. Although a business concern applying to the 8(a) BD program that does not have a required professional license may not currently be responsible to be awarded certain 8(a) contracts, as long as SBA determines that the concern would be able to perform such contracts with appropriate support, SBA believes that the concern should be eligible for participation in the 8(a) BD program. SBA proposed to remove the professional-licensing requirement. It is not only inapplicable to most applicants, it also can be overcome before any 8(a) contract opportunity is sought by those concerns to which it applies. SBA received six comments on the proposal to eliminate the license requirement at the time of application. Four commenters supported the removal of the license requirement as it will streamline the application process. Two commenters opposed the proposal, with one believing that eliminating the license requirement will encourage unprepared firms to apply to the 8(a) program and waste limited time in the program. SBA notes that an applicant must generally demonstrate that it has been in business and received revenue for at least two years. In addition, once admitted to the program, a Participant can seek and be awarded any 8(a) contract that a procuring agency believes that it is responsible to perform. SBA believes that applicants know the industry or type of business activity they hope to receive contracts in when they apply to the 8(a) BD program, so eliminating the license requirement will not adversely impact them or the program. Two commenters also recommended requiring an applicant to certify that it will obtain a necessary license in an industry requiring such a license where it does not possess a license at the time of application. SBA dos not believe such a requirement would add anything substantive to the process. Whether the firm certifies that it will obtain a license or not, it must in fact have a license in order for a contracting officer to determine the firm responsible to perform a contract in that industry. The firm could not be awarded a contract without an affirmative finding of responsibility. SBA also notes that there have been times where applicants have disagreed with SBA as to whether a license was required for the type of work the firm sought to perform. Removing the license requirement at the time of application eliminates those disagreements, which may unnecessarily delay the application process and impose a burden on the applicant in demonstrating that a license in fact is not needed in the work that the firm does. SBA adopts the proposed language as final in this rule.

Section 124.108

Section 124.108 sets forth other eligibility requirements that apply to 8(a) applicants and Participants. One of those requirements is that SBA must determine that an applicant or Participant and all of its principals possess good character. The 8(a) BD program is one of several certification programs to help small businesses win Federal contracting awards, but the scope of the 8(a) BD program is different. For the WOSB and VetCert programs, SBA only determines whether a small business applicant is owned and controlled by one or more qualifying individuals. SBA does not look at character or business integrity in determining whether a small business is owned and controlled by qualifying individuals. Similarly, for the HUBZone program, SBA only determines whether the small business applicant is located in and employs residents of a historically underutilized business zone. SBA certification of these qualifications allows the certified small businesses to compete for certain Federal contracts. These are not business development programs. Although SBA determines whether an 8(a) small business applicant is owned and controlled by one or more qualifying individuals, the program is not limited to this certification. Its scope is broader and includes a multi-year business development program with eligibility for specific management and technical assistance from SBA to support the business's successful competition in the marketplace. SBA requires “good character” to be admitted to this development program.

SBA proposed to limit the grounds that would serve as an automatic, mandatory bar from participation in the 8(a) BD program based on good character (
i.e.,
either an application denied or possible termination action commenced against a current Participant). The proposed rule amended the lack of business integrity bar to a lack of business integrity as demonstrated by conduct that could be grounds for suspension or debarment. SBA received six comments to this proposal, with three favoring the change and three opposing the change as written. Those favoring the change generally agreed with removing “possible criminal conduct” as grounds for declining based on character. The comments opposing the change as written believed that lack of business integrity based solely on conduct that could be grounds for suspension or debarment did not go far enough. They noted that suspension and debarment

should be imposed only in the public interest for the Government's protection and not for purposes of punishment and that mitigating factors or remedial measures could affect a suspension or debarment decision despite a lack of business integrity. They believed that some of the language currently in the regulation should be retained. These comments misunderstand the proposed change. The proposal does not limit the lack of good character requirement to suspension or debarment. When the regulations state that a lack of business integrity that could be grounds for suspension or debarment is needed to find a lack of good character for 8(a) BD purposes, it does not mean to imply that suspension or debarment needs to be imposed before SBA could find a lack of good character. The underlying conduct alone which demonstrates grounds for suspension or debarment is sufficient for SBA to find a lack of good character. In addition, SBA does not believe that adding back language providing that a lack of business integrity can be demonstrated by information related to an indictment or guilty plea, conviction, civil judgment, or settlement would be useful. A demonstrated lack of business integrity in an indictment, guilty plea, conviction, civil judgment, or settlement are all conduct that can be a cause for suspension or debarment actions. Moreover, there are instances in which an indictment, guilty plea, conviction, civil judgment, or settlement has no bearing on business integrity. Given the lack of connection to business integrity, they should not serve as a barrier to program entry. As such, SBA does not believe that the language as proposed needs to be amended and adopts it as final.

SBA will continue to conduct internal checks related to an applicant's business integrity that includes the applicant's criminal history, and consider all factors in evaluating whether an applicant would be a good candidate to participate in the 8(a) BD program. SBA will consider each application individually. This rule does not change business integrity requirements of procuring agency contracting officers or any business integrity evaluations done by them. Procuring agency contracting officers evaluate offerors' responsibility to perform Federal contracts prior to award, a process that can include an evaluation of business integrity.

Sections 124.108(e), 126.200(h), 127.200(h), and 128.201(b)

Sections 124.108(e) (for the 8(a) BD program) and 128.201(b) (for the VetCert program) provide generally that a small business concern is ineligible for certification if the concern or any of its principals has failed to pay significant financial obligations owed to the Federal Government. A similar provision is not currently contained in the WOSB or HUBZone eligibility requirements. SBA proposed to apply that restriction to the WOSB and HUBZone programs as well. To ensure consistency among the programs, SBA also proposed to revise the language in §§ 124.108(e) and 128.201(b) so that the regulatory language applying to all four programs is the same. SBA received two comments supporting these revisions and no comments opposing them. SBA adopts the proposed language in this final rule.

Sections 124.204(d), 126.306(d), 127.304(d), and 128.302

Sections 124.204(d) (for the 8(a) BD program), 126.306(d) (for the HUBZone program), 127.304(d) (for the WOSB program), and 128.302 (for the VetCert program) set forth the date at which at applicant must be eligible for each certification program. The wording of the regulations is not consistent. Section 124.204(d) specifies that an applicant must be eligible as of the date SBA issues a decision. Section 126.306(d) specifies that an applicant must be eligible as of the date it submitted its application and at the time SBA issues a decision. Section 127.304(d) specifies that an applicant must be eligible as of the date it submitted its application and up until the time SBA issues a decision. Section 128.302 details how SBA processes applications for VOSB and SDVOSB certification, but does not specifically address the point at which eligibility is determined. SBA is in the process of establishing a uniform application processing system. That system will allow a firm to simultaneously apply for multiple certifications for which it believes it is eligible. SBA believes that it is critical that eligibility be determined at the same point in time for all certification programs. If, for example, a firm amends a corporate document to come into compliance with a specific control requirement after initially submitting its application for the 8(a) BD program and the WOSB program, the current regulations would support a finding that a qualifying individual did control the applicant for 8(a) BD purposes but did not control the applicant for WOSB purposes. SBA believes that would be an inappropriate result. Therefore, the proposed rule amended each of these sections to require consistent wording that an applicant must be eligible as of the date SBA issues a decision. Although the proposed rule specified that an applicant must be eligible as of the date SBA issues a decision, implicitly a small business must believe that it is eligible at the time it applies for certification for any program. For purposes of applying for HUBZone certification, an applicant must submit payroll records for the four-week period immediately prior to its application date. It would be impossible to require payroll records for some unknown future date. After submitting an application for any program, a concern must immediately notify SBA of any changes that could affect its eligibility and provide information and documents to verify the changes. Four commenters supported these changes without substantive comment. SBA adopts the proposed language as final in this rule.

Section 124.207

Section 124.207 provides that a concern which has been declined for 8(a) BD program participation may submit a new application for admission to the program at any time after 90 days from the date of the Agency's final decision to decline. It also provides that a concern that has been declined three times within 18 months of the date of the first final Agency decision finding the concern ineligible cannot submit a new application for admission to the program until 12 months from the date of the third final Agency decision to decline. SBA proposed to remove that second provision. SBA believes it is unnecessary and does not seek to thwart firms who have made legitimate attempts to overcome deficiencies from again applying to the 8(a) BD program. Five comments supported the elimination of that provision, and no comments opposed it. One commenter, however, also recommended that SBA should eliminate the 90-day waiting period to reapply to the 8(a) program after being declined because it may cause firms to miss contracting opportunities. SBA first notes that prior to 2020, a business concern was required to wait 12 months from the date of SBA's final agency decision to reapply to the 8(a) BD program. SBA changed the waiting period to 90 days in a rulemaking published in the
Federal Register
on October 16, 2020. 85 FR 66146, 66185. The change to 90 days has been enthusiastically supported and has worked well in practice. SBA also notes that SBA works with business concerns during the application process to address deficiencies and allow those concerns to supplement and/or clarify their applications in order to attempt to meet SBA's requirements. As such, SBA does

not believe that further change is necessary and adopts the proposed language as final in this rule.

Sections 124.303(c), 126.503(c), 127.405(f), and 128.310(g)

SBA proposed to add a new provision to § 124.303(c) (for the 8(a) BD program), to § 126.503 (for the HUBZone program), to § 127.405(f) (for the WOSB program), and to § 128.310(g) (for the VetCert program) providing that a firm that is decertified or terminated from one SBA certification program due to the submission of false or misleading information may be removed from SBA's other small business contracting programs. In addition, SBA proposed to authorize SBA to require a firm to enter into an administrative agreement as a condition of admission or re-admission to one of the SBA certification programs. SBA believes that a firm that submits false information to obtain a certification in one program is more likely to submit false information to other SBA programs, and SBA needs a mechanism by which to investigate whether this has occurred and remove non-responsible firms from its programs expeditiously. SBA received 14 comments regarding these proposed changes. Commenters generally supported the provisions, but believed there were inconsistencies in some of the regulatory text. Commenters specifically pointed to the word “knowingly” submitting false or misleading information in § 126.900 and stating that the submission of “inconsistent” information 126.503(c) would be cause for decertification. SBA agrees that inconsistent or incorrect information that was provided in error should not warrant decertification or termination. SBA is concerned about the knowing submission of false or misleading information. As such, SBA has amended the regulatory text to provide that a firm may be decertified from the HUBZone, WOSB, or VetCert programs where SBA discovers that the firm or its representative knowingly submitted false or misleading information, and a firm that is decertified or terminated from the one SBA program due to the submission of false or misleading information may be decertified from another SBA program. The final rule amends § 127.405(d) (for the WOSB program) instead of adding a new § 127.405(f), and amends to § 128.310(d) (for the VetCert program) instead of adding a new § 128.310(g).

Section 124.503

Section 124.503 addresses how SBA will accept a procurement offered for award through the 8(a) BD program. An agency may offer a sole source procurement to SBA nominating a particular 8(a) Participant for performance based on the firm's self-marketing efforts, or may offer it as an open requirement (
i.e.,
an offering to the program generally, but not in support of a particular 8(a) Participant). SBA's acceptance policies for such offerings are contained in §§ 124.503(c) and (d), respectively. SBA has long recognized the importance of self-marketing in a Participant's business development and continued viability. Thus, where an agency offers a sole source 8(a) procurement in support of a particular Participant as a result of self-marketing and SBA deems it suitable for the program, SBA will normally accept it on behalf of the Participant recommended by the agency as long as specified eligibility criteria are met. This policy was first incorporated in SBA regulations in 1986, 51 FR 36132 at 36149, but had been previously part of the standard operating procedure for the 8(a) BD program.

Section 303 of the Business Opportunity Development Reform Act of 1988 (BODRA), Public Law No. 100-656, tit. III, sec. 303, 102 Stat. 3865 (1988), adopted and expanded SBA's sole source contract acceptance procedures, mandating that SBA shall award a sole source 8(a) contract to the 8(a) firm nominated by the offering agency, provided the following three statutory criteria are met: (i) the Program Participant is determined to be a responsible contractor with respect to performance of such contract opportunity; (ii) the award of such contract would be consistent with the Program Participant's business plan; and (iii) the award of the contract would not result in the Program Participant exceeding its 8(a) competitive business mix. This mandate is codified in Section 8(a)(16)(A) of the Small Business Act, 15 U.S.C. 637(a)(16)(A). BODRA also directed SBA to promote—to the maximum extent practicable—the equitable geographic distribution of sole source 8(a) contracts. In response to BODRA, SBA promulgated a rule stating that it would consider, among other things, equitable geographic distribution for open 8(a) sole source contracts offered to the 8(a) BD program. This policy is currently set forth in paragraph 124.503(d)(3).

There has been some confusion as to whether SBA considers equitable contract distribution for a follow-on to an 8(a) procurement offered to SBA on behalf of a specific 8(a) Participant. In SBA's view, the imperative statutory command of Section 8(a)(16)(A) restricts its authority to affirmatively deny a contract offering made on behalf of a specific Participant based on considerations related to the equitable distribution of sole source 8(a) contracts, irrespective of whether the procurement is a “new” or repetitive 8(a) requirement. The proposed rules sought to clarify this position by providing that § 124.503(g)(1)(iii) applies only to open sole source 8(a) offerings. SBA received four comments on this proposal, all of which were supportive. As such, the final rule adopts this clarification as proposed.

Sections 124.504(a)

Section 124.504 identifies several reasons why SBA will not accept a particular requirement for award through the 8(a) BD program. One of those reasons is where the procuring activity issued a solicitation for or otherwise expressed publicly a clear intent to award a contract as a small business set-aside, or to use the HUBZone, VetCert, or WOSB programs prior to offering the requirement to SBA for award as an 8(a) contract. SBA proposed to authorize SBA to accept a requirement for the 8(a) program where the AA/BD determines that there is a reasonable basis to cancel the initial solicitation or, if a solicitation had not yet been issued, a reasonable basis for the procuring agency to change its initial clear expression of intent to procure outside the 8(a) BD program. This could happen, for example, where the procuring agency's needs have changed since the initial solicitation was issued such that the solicitation no longer represents its current need, or where appropriations are no longer available for the requirement as anticipated, and the solicitation must be cancelled until a following fiscal year where funds are available. A change in strategy only (
i.e.,
an agency seeks to solicit through the 8(a) BD program instead of through another previously identified program) would never constitute a reasonable basis for SBA to accept the requirement into the 8(a) BD program.

SBA received six comments in response to this clarification, and all six supported the proposal. One commenter recommended that the Associate Administrator for Business Development should consult with the head of the Government Contracting Office before accepting a requirement to ensure that another SBA program is not adversely affected. SBA believes that such coordination should not be required in all instances (
i.e.,
there will be clear instances where the Director of Government Contracting's involvement is not needed), and that coordination

between SBA offices routinely happens when necessary. Nevertheless, in response to the comment, the final rule adds a provision specifying that AA/BD may coordinate with the D/GC, where appropriate, before accepting a requirement into the 8(a) BD program to ensure that another SBA program is not adversely affected.

Section 124.509

Section 124.509 establishes non-8(a) business activity targets (BATs) to ensure that Participants do not develop an unreasonable reliance on 8(a) awards. The reason for requiring a certain percentage of non-8(a) revenue during a Participant's last five years in the 8(a) BD program is to strengthen the Participant's ability to prosper once it exits the program. Congress believed that firms that were totally reliant on the 8(a) BD program for their revenues would be ill prepared to survive as on-going business concerns after leaving the program. As such, Congress required a certain percentage of non-8(a) revenue during the transitional stage of program participation to bolster Participants' continued viability. SBA amended § 124.509 as part of a comprehensive final rule in October 2020.
See
85 FR 66146, 66189 (Oct. 16, 2020). In that final rule, SBA recognized that a strict prohibition on a Participant receiving new sole source 8(a) contracts should be imposed only where the Participant has not made good faith efforts to meet its applicable non-8(a) business activity target. SBA sought to provide guidance regarding what SBA considers to be good faith efforts in a final rule published in April 2023.
See
88 FR 26164, 26208 (April 27, 2023). The proposed rule incorporated additional guidance on how SBA considers unsuccessful offers in determining whether good faith efforts have been made. Specifically, in determining the projected revenue that SBA will consider in determining whether one or more unsuccessful offers submitted by a Participant would have given the Participant sufficient revenues to achieve the applicable non-8(a) business activity target, the proposed rule provided that SBA will consider only procurements for which the Participant had reasonable prospects of success. The proposed regulatory text included an example showing how revenue for an unsuccessful offer would be considered in this context. The example explained that where a Participant has never received a contract in excess of a relatively small amount (the example cites $5M), SBA would not count any revenue from an unsuccessful offer for a contract that greatly exceeds what the Participant has previously performed (the example points to a $100M contract). In such a case, the Participant would not have a reasonable prospect of success in submitting an offer for a contract that was substantially higher than anything it had performed in the past. The proposed rule also clarified that only the value of the base year of the contract for which the Participant's offer was unsuccessful would be considered in determining whether the Participant made good faith efforts to achieve its non-8(a) BAT. In this regard, there had been some confusion as to whether the value of the entire contract or only the value of the base year should be considered in determining whether the revenues from that contract, if received, would have brought the Participant back into compliance with its BAT. As explained in the proposed rule, had the Participant been successful and received that contract, pursuant to § 124.509(b)(3) SBA would measure the Participant's compliance with the applicable BAT by comparing the Participant's non-8(a) revenue to its total revenue during the program year just completed. This analysis considers only the non-8(a) revenues received, not the total value of the non-8(a) contract that a Participant is performing. The proposed rule noted SBA's belief that same analysis should occur when considering whether a Participant has made good faith efforts to meet its BAT. In other words, it would not be appropriate for SBA to consider projected revenue under a contract for which the Participant's offer was unsuccessful beyond the contract's base year of performance.

SBA received 17 comments in response to the proposed changes to § 124.509. Commenters were generally supportive of SBA's proposal to consider only projected revenue under procurements for which the Participant had reasonable prospects of success in the good faith efforts evaluation. However, the majority of these comments urged SBA to provide additional clarity as to how SBA will determine whether a Participant had reasonable prospects of winning a particular contract. According to the commenters, the value of a Participant's prior contracts is one of several relevant factors SBA should consider in determining whether a Participant had reasonable prospects of winning a contract. SBA agrees and notes that the business development assistance provided through the 8(a) BD program is intended to improve a Participant's capabilities and ability to pursue larger, more complex contracts. In proposing this amendment to the BAT regulations, SBA sought to discourage Participants from disingenuously submitting offers, particularly for large dollar-value procurements, for the clear purpose of circumventing the BAT policies; it certainly was not intended to suggest that SBA would consider only projected revenues from lost contract opportunities at or below its current capacity in determining whether a Participant made good faith efforts to obtain work outside the 8(a) BD program. Several commenters recommended that for an entity owned Participant, SBA should consider the past performance and experience of sister subsidiary companies. SBA disagrees. SBA would consider the past performance and experience of affiliated companies, but, under applicable statute and regulations, individual business concerns owned by a Tribe, ANC, NHO or CDC are not affiliated with each other. As SBA has stated previously, SBA believes that the past performance of a sister company can be considered only where that sister company is involved in the procurement under consideration (
i.e.,
as a subcontractor or joint venture partner). In response to the comments, the final rule restructures § 124.509(d)(1)(ii) and adds language clarifying that SBA will consider all relevant factors, to include contract magnitude, and past performance and experience of a joint venture partner and/or subcontractor.

Most commenters agreed with SBA's clarification that only the value of the base year of the contract for which the Participant's offer was unsuccessful would be considered in determining whether the Participant made good faith efforts to achieve its non-8(a) BAT. Two commenters, however, urged SBA to consider the projected revenue under subsequent periods of performance in determining whether the Participant made good faith efforts during the appropriate compliance period. For example, where a Participant made a good faith, but unsuccessful, effort to capture a contract in the first year of its transitional stage of program participation (
i.e.,
program year five), SBA would consider the projected revenue under the base year of the contract when evaluating the Participant's compliance with its non-8(a) BAT for program year five. According to the above commenters, SBA should also consider the projected revenue of the first option period of performance when evaluating the Participant's compliance with its non-8(a) BAT for program year six (and continue doing so for the contract's

entire period of performance). SBA disagrees with this approach. As SBA has previously explained, the non-8(a) BAT requirement ensures that 8(a) Participants do not become unreasonably reliant on 8(a) contract support and are prepared to compete in the open marketplace after exiting the 8(a) BD program. Recognizing a Participant's “good faith efforts” to obtain non-8(a) work furthers this purpose while also promoting the firm's business development through ongoing access to sole source contract support. However, SBA is concerned that considering projected non-8(a) revenues from a missed contract opportunity over the total period of performance contract could inadvertently incentivize Participants to submit fewer offers for non-8(a) procurements, especially in years where their non-8(a) BAT threshold is relatively higher. As previously explained, the BAT requirement reflects legislative intent to prepare 8(a) Participants for competition outside the 8(a) BD program. In the agency's best judgment, limiting consideration to the value of the base year of performance and only for the period of compliance in which the offer was submitted strikes the right balance between this goal and continued business development through sole source contract support. In addition, options are not a guarantee of future revenue. If a firm received a non-8(a) contract in year five, SBA would count the revenue received as non-8(a) revenue in determining compliance with its applicable BAT. If the relevant procuring agency did not exercise the first option after the base year, SBA would not count the anticipated, but not received, revenue in year six as non-8(a) revenue for BAT purposes. SBA adopts the proposed clarification in the final rule.

Section 124.514(a)(1)

Section 124.514 provides guidance regarding the exercise of 8(a) options and modifications. Paragraph 124.514(a)(1) currently states that if a concern has graduated or been terminated from the 8(a) BD program or is no longer small under the size standard corresponding to the NAICS code for the requirement, negotiations to price the option cannot be entered into and the option cannot be exercised. Because the regulatory language specifies graduation and termination from the program, SBA has received a few inquiries as to whether this provision applies to firms that have voluntarily exited the program. SBA has always intended this provision to apply to all firms that are no longer active Participants in the program. The proposed rule merely made that intent clear by specifically providing that this provision applies to all firms whose term of participation in the 8(a) BD program has ended or who have otherwise exited the program through any means. Three commenters supported the clarification without substantive comment. As such, SBA adopts the proposed language as final in this rule.

Section 124.518

Section 124.518(c) provides that SBA may authorize another Participant to complete performance of an 8(a) contract and, in conjunction with the procuring activity, permit novation of that contract without invoking the termination for convenience or waiver provisions of § 124.515 where SBA determines that substitution would serve the business development needs of both 8(a) Participants. SBA has seen several instances where a joint venture between an 8(a) Participant and a non-8(a) business concern was awarded an 8(a) contract and for whatever reason the two firms seek to terminate the joint venture and novate the 8(a) contract individually to the 8(a) Participant that was the lead partner of the joint venture. If novation would occur, performance of the 8(a) contract would remain with an 8(a) Participant (
i.e.,
the 8(a) Participant that was the lead partner of the joint venture). As such the intent of the program would be furthered. It could be argued that the current § 124.518(c) authority could be used to novate the 8(a) contract in this instance; substitution would serve the business development needs of both the initial 8(a) awardee (the joint venture) and the substituting 8(a) Participant (the former lead 8(a) partner to the joint venture). The proposed rule added a new §  124.518(d) to specifically authorize such a substitution. SBA also requested comments on whether it should further define how substitution “would serve the business development needs of both 8(a) Participants.” For example, where a Participant was not in compliance with its applicable business activity target, sought to transfer an 8(a) contract to another eligible 8(a) Participant through the substitution process and then sought to perform a significant portion of that contract as a subcontractor to the new 8(a) Participant (to then count the revenue from the subcontract as non-8(a) revenue), SBA explained that it would not determine that such a transfer was in the best interests of the program or serve the business development needs of both 8(a) Participants.

SBA received six comments on the proposed additional of new §  124.518(d), all of which were supportive. SBA therefore adopts this language as proposed. SBA notes, however, that this substitution authority should not be construed as giving the managing 8(a) venturer the option to request a substitution without the consent of the other joint venture partners. While the 8(a) BD program regulations require that an 8(a) Participant, among other things, own at least 51% of the joint venture and serve as the managing venturer responsible for controlling the day-to-day management of the joint venture's contractual performance, nothing in SBA regulations or policy authorizes or gives to the managing 8(a) venturer the unilateral authority to transfer the joint venture's contracts to itself. SBA will consider these principles when reviewing a substitution request under §  124.518(d). Three commenters recommended that SBA provide examples or guidance on what SBA would consider when determining whether a proposed substitution “would serve the business development needs of both 8(a) Participants.” As explained in the proposed rule, SBA is concerned that some Participants could use the substitution authority to circumvent important program policies, such as the BAT requirement and the sole source follow-on contracting restriction applicable to sister subsidiaries owned by the same Tribe/ANC/NHO/CDC. In addition, SBA never intended for this substitution authority to allow Participants to sell or otherwise transfer prime 8(a) contracts when doing so would frustrate the program's interests or potentially violate other applicable Federal procurement rules. To this end, SBA has already received several substitution requests from contract holders on 8(a) multiple award contracts, such as the 8(a) Streamlined Technology Acquistion Resource for Services (STARS) III multiple award contract. The contract holders requesting a substitution have typically graduated from the 8(a) BD program or have exceeded the applicable size standard and are therefore no longer eligible to receive sole source orders under the 8(a) STARS III vehicle. Such firms have stated that a substitution would serve their business development needs by raising capital from the sale of STARS III contracting assets, and by eliminating the cost and burden of administering the contract. SBA does not believe a transfer under these and similar circumstances serves the programmatic business development

needs of the contract holder requesting a substitution. Participation in the competitive 8(a) procurement process has been and remains one of the most valuable forms of business development assistance available through the 8(a) BD program. Establishing and implementing a capture strategy, critically evaluating a Request for Proposals, and technical proposal writing are just some of the necessary skills for submitting a successful offer in the Federal marketplace. In SBA's view, losing the opportunity to acquire or hone these skills in the competitive 8(a) context would be antithetical to a firm's business development even where the transfer might provide other legitimate benefits. Additionally, SBA notes that 41 U.S.C. 6305, as implemented at Federal Acquisition Regulation (FAR) Subpart 42.1204, prohibits contractors from selling or transferring a prime Government contract to a third-party. The Government may novate a contract to recognize a third-party as a successor in interest to a Government contract where that interest arises out of the transfer of (1) all the contractor's assets; or (2) the entire portion of assets involved in performing the contract. Where a contract holder seeks to transfer an Indefinite Delivery, Indefinite Quantity 8(a) contract without any task order awards, this may not comply with the requirements of FAR Subpart 42.1204. SBA has and will continue to consider all these factors in determining whether to authorize a substitution on the grounds that doing so would serve the business development needs of both 8(a) Participants. The final rule adds clarifying language and examples to §  124.518(c) to better explain SBA's intent.

Sections 124.602 and 124.604

Section 124.602 sets forth the kind of annual financial statement an 8(a) BD Participant submits to SBA, depending upon its gross annual receipts. Prior to this rule, Participants with gross annual receipts of more than $10 million were required to submit to SBA audited annual financial statements prepared by a licensed independent public accountant; Participants with gross annual receipts between $2 million and $10 million were required to submit to SBA reviewed annual financial statements prepared by a licensed independent public accountant; and Participants with gross annual receipts of less than $2 million were required to submit to SBA an annual statement prepared in-house or a compilation statement prepared by a licensed independent public accountant. SBA believes that with the value of Federal contracts greatly increasing over the last few years, the top dollar threshold of $10 million is being met by most Participants far more frequently. Recognizing that requiring an audited financial statement can be a significant cost to many small businesses, SBA proposed to require audited financial statements for those Participants exceeding $20 million, reviewed financial statements for those Participants with gross annual receipts between $5 million and $20 million, and in-house financial statements for those Participants with less than $5 million in annual receipts. SBA received 11 comments responding to the proposed increases to the thresholds for the annual financial statement requirements for 8(a) Participants. Commenters overwhelmingly supported the increased thresholds. One commenter appreciated SBA's acknowledgment of the substantial expenses involved in obtaining audited and reviewed financial statements, especially since compliance costs can be a significant barrier for small businesses, particularly in the Federal contracting industry. One commenter recommended that SBA require only internal prepared financial statements. Two commenters supported the increases generally but requested that the threshold to require reviewed financial statements be raised so that the Participants with lower revenues do not have to incur the added cost of a reviewed financial statement. SBA does not believe that only internal prepared financial statements should be required regardless of a Participant's revenues. More sophisticated business concerns should have audited financial statements, which may be required for certain types of contracts as well. In response to the comments, the final rule increases the threshold at which reviewed financial statements are required from $5 million to $7.5 million.

In response to SBA's proposed changes to the financial statement reporting requirement, one commenter suggested that SBA also amend § 124.604, which provides that a Participant owned by a Tribe, ANC, NHO, or CDC must include with its annual financial statement submission information showing how the Tribe/ANC/NHO/CDC has provided benefits to its Native or underserved community through the Tribe's/ANC's/NHO's/CDC's participation in the 8(a) BD program. § 124.602 allows a Tribe/ANC/NHO/CDC to submit consolidated financial statements prepared by the parent entity with schedules for each 8(a) Participant instead of separate audited financial statements for each individual 8(a) Participant. According to this commenter, it would make sense to provide a similar consolidated reporting option for community benefits under § 124.604. While SBA did not specifically propose any changes to § 124.604, we note SBA has long permitted Tribes/ANCs/NHOs/CDCs to annually report consolidated community benefits. Because this commenter's suggested revision merely recognizes current program policy and the entity's discretion to consolidate benefits reporting but does not require such consolidation, the final rule adds language to § 124.604 to clarify that Tribes/ANCs/NHOs/CDCs may elect to submit a consolidated report showing how the applicable Native or underserved community has benefitted through the Tribe's/ANC's/NHO's/CDC's participation in the 8(a) BD program. Of course, as noted above, consolidated community benefits reporting is optional; Tribes, ANCs, NHOs, and CDCs may continue to submit separate annual community benefits reports through each 8(a) Participant.

Section 125.2

SBA's regulations currently make clear that a contracting activity cannot conduct a competition requiring multiple socioeconomic certifications. In this regard, § 124.501(b) prohibits a contracting activity from restricting an 8(a) competition to Participants that are also certified HUBZone small businesses, certified WOSBs or certified SDVO small businesses. There is a similar restriction for the HUBZone program in § 126.609, for the WOSB program in § 127.503(e), and for the VetCert program in § 128.404(d). However, there is no similar specific restriction for small business set-asides and reserves. Where a contracting activity seeks to require 8(a), HUBZone, WOSB or SDVO certification in addition to status as a small business, in essence the contracting activity would be soliciting as an 8(a), HUBZone, WOSB or SDVO small business contract. That is permissible. Similarly, current § 125.2(e)(6) specifies that a contracting officer may set aside orders for eligible 8(a) Participants, certified HUBZone small business concerns, SDVO small business concerns, WOSBs, and EDWOSBs against total small business set-aside multiple award contracts. As such, there should be no doubt that there can be an order or agreement set-aside or reserved for a specific type of small business (
i.e.,
8(a), HUBZone,

WOSB/EDWOSB, or SDVO) under a multiple award contract that itself was set aside for small business. SBA has been asked whether a contracting activity could require multiple certifications through “a small business set aside”. SBA believes that the current program specific regulations identified above would prohibit that. In order to eliminate any misinterpretation, the proposed rule added a new § 125.2(c)(6) that would clarify that a procuring activity cannot restrict a small business set-aside or reserve (for either a contract or order) to require multiple socioeconomic program certifications in addition to a size certification.

SBA received eight comments supporting this clarification. One commenter recommended that the regulatory text say “multiple” or “various” instead of “one or more,” since requiring size and one socioeconomic status (8(a), HUBZone, WOSB, or SDVO) is permitted. SBA agrees and has replaced the words one or more with the word multiple. Two commenters also questioned whether there can be a partial set-aside and a reserve on the same requirement. The commenters believe that it makes sense that both should be allowed and that it is currently permitted, but that the regulatory text should be clarified. SBA agrees that both can occur with respect to one procurement requirement. A partial set-side can be done for one or more CLINs that must be set-aside for small business and a reserve could also be done on the same procurement for other items or services where a contracting officer would have discretion to utilize the small business reserve or not. The final rule clarifies the regulatory text to eliminate any confusion as to whether there can be both a partial set-aside and a reserve on the same procurement requirement.

Section 125.3

Section 125.3 governs subcontracting plans and reporting of subcontracting achievements. SBA proposed to extend the due dates for subcontracting reports by 15 days, from 30 days to 45 days. SBA also proposed to extend the time period for reviewing such reports by 15 days, from 60 days to 75 days. These extended time periods recognize that prime contractors are under increased reporting burdens because of order-level subcontract reporting. SBA received three comments supporting these changes without substantive comment. SBA adopts the proposed language as final in this rule.

Section 125.6(d)

Section 125.6 sets forth the limitations on subcontracting that apply to a small business prime contractor. A small business prime contractor, together with any similarly situated entity, must perform a certain specified amount of a small business contract and cannot subcontract more than that amount to another business concern that is not similarly situated. Paragraph 125.6(d) provides that for a multi-agency set aside contract where more than one agency can issue orders under the contract, the ordering agency must use the period of performance for each order to determine compliance. A question has arisen as to who should monitor compliance with such an order, the contracting officer for the underlying multi-agency contract or the contracting officer for the ordering agency. SBA believes that the contracting officer for the ordering agency is in the best position to monitor compliance with the limitations on subcontracting for a specific order. As such, the ordering contracting officer should monitor compliance throughout performance. At the end of performance of the order, the ordering contracting officer should inform the contracting officer for the underlying multi-agency contract if the ordering contracting officer knows that the contractor has failed to meet the applicable limitations on subcontracting requirement.

Additionally, there has been some confusion as to how work performed by leased employees is considered in determining compliance with the applicable limitation on subcontracting. Paragraph 125.6(d)(3) explains that work performed by an independent contractor shall be considered a subcontract and will therefore count against the prime contractor's limitation on subcontracting unless the independent contractor qualifies as a similarly situated entity. Unlike independent contractors, employees obtained from a temporary employee agency, professional employee organization, or leasing concern perform work under the primary direction and control of the recipient concern. For this reason, such individuals are treated as employees of the recipient concern for purposes of determining that concern's employee count under Section 121.106(a). SBA believes the same logic should apply when determining a recipient prime contractor's compliance with the limitations on subcontracting. Work performed by employees leased to the small business prime contractor shall be considered the prime contractor's self-performance, and therefore will not count against the prime contractor's limitation on subcontracting. The proposed rule clarified this position in § 125.6(d)(3). The final rule recognizes an exception where a contract is a staffing contract. SBA believes that it does not make sense to treat leased employees as employees of the prime contractor where the prime contractor and the firm it is leasing from are basically in the same business—staffing.

SBA received 12 comments in response to the two proposed changes to § 125.6. Eight comments agreed that, for a multi-agency set-aside contract where multiple agencies can issue orders, the contracting officer of the ordering agency should be responsible for monitoring compliance with the limitations on subcontracting for a specific order. The commenters believed that the ordering agency contracting officer is in the best position to monitor compliance with the limitations on subcontracting and noted that this approach allows the ordering agency's contracting officer to more effectively oversee contract performance, rather than the contracting officer of the overarching multi-agency contract. One commenter recommended that the ordering agency contracting officer should report a perceived violation only where a concern exceeds the applicable limitation on subcontracting requirement by more than a certain percentage. SBA disagrees. SBA believes that the contracting officer for the underlying multi-agency contract should be made aware of all instances of a contractor's failure to comply with regulatory requirements, including here the limitation on subcontracting requirements. If there are mitigating reasons for a contractor's failure to comply with the applicable limitation on subcontracting (
e.g.,
the ordering changed made changes to the procurement that required more subcontracting than anticipated), the ordering agency contracting officer should identify those reasons to the contracting officer for the underlying multi-agency contract. SBA received six comments on the proposed language regarding leased employees. All six supported the proposal. One commenter requested clarification for an entity-owned Participant as to how leased employees from a holding company or another company owned by the entity will be treated, especially if assigned on an as needed basis. SBA does not believe that further clarification is needed in the regulatory text. If the other entity-owned company is a temporary employee agency,

professional employer organization, or leasing concern, then the work done by those individuals will be considered the prime contractor's self-performance, and therefore not count against the prime contractor's limitation on subcontracting. If not, the work done by those individuals would count as subcontracted work.

Section 125.8

Section 125.8(e) covers how agencies evaluate the capabilities, past performance, and experience of joint ventures, including SBA mentor-protégé joint ventures. For SBA mentor-protégé joint ventures, section 125.8(e) provides that a procuring activity may not require the protégé firm to individually meet the same evaluation or responsibility criteria as that required of other offerors generally. This provision recognizes that protégés may be less experienced when submitting an offer but, if they win the award, will gain experience and capabilities while performing with the mentor. SBA does not require, however, that every contract competition include special evaluation criteria for protégés.

A recent decision by the Court of Federal Claims has caused some confusion as to what past performance a procuring activity can require of a protégé joint venture partner and how that past performance should be evaluated.
See
SH Synergy, LLC v. United States, 165 Fed. Cl. 745 (2023). The SBA's mentor-protégé program is designed to enhance the capabilities of protégé firms by requiring approved mentors to provide business development assistance to protégé firms and to improve the protégé firms' ability to successfully compete for Federal contracts. The program recognizes that many small businesses may not have the necessary past performance and experience to individually compete successfully for certain larger contracts. Thus, it allows joint ventures between a protégé firm and a large business mentor to qualify as small to allow protégé firms to gain valuable experience overseeing and performing larger contracts. While the joint venture as a whole must meet the applicable limitation on subcontracting (or in other words perform a certain percentage of the contract), the protégé firm must perform at least 40% of all the work done by the joint venture partners in the aggregate. Because of that 40% requirement, some procuring activities require protégé joint venture partners to demonstrate some level of past performance as part of a joint venture's offer. Although SBA's current regulation provides that a procuring activity may not require the protégé firm to individually meet the same evaluation or responsibility criteria as that required of other offerors generally, it does not provide guidance on what a procuring activity could require. SBA proposed to provide such guidance. Specifically, SBA proposed to permit a procuring activity to require some past performance at a dollar level below what would be required of joint venture mentor partners or of individual offerors. The proposed rule provided an example of how this could work. In the example, where offerors must generally demonstrate successful performance on five contracts with a value of at least $20 million, a procuring activity could require a protégé joint venture partner to demonstrate one or two contracts valued at $10 million or $8 million. In addition, if a procuring activity requires a protégé joint venture partner to demonstrate successful performance on two contracts valued at $10 million or more, successful performance by the protégé firm on those $10 million contracts shall be rated equivalently to successful performance by the mentor partner to the joint venture or any other individual offeror on $20 million contracts.

SBA received 26 comments in response to the proposed changes to § 125.8(e). Sixteen comments supported the proposed changes and ten opposed them. Commenters supported giving less stringent requirements for protege firms' past performance. Several commenters recommended that SBA should highlight that the change is intended to limit the type of past performance agencies can require of proteges rather than authorizing the imposition of greater or more complex past performance requirements. SBA agrees that the guidance provided is intended to ensure that procuring activities do not require the same full level of past performance and experience of protégé joint venture members as they do of other offerors generally. This logically means that if a procuring activity requires past performance of a protégé joint venture partner, it must be at a reduced level. The majority of the opposing comments objected to the “change” that allows the procuring activity discretion whether to require a protege´ member of a joint venture to demonstrate some level of past performance and/or experience, although one commenter recommended that protégés should always be required to demonstrate some level of individual past performance. SBA notes that that is not a change from current policy. Procuring agencies currently have the discretion to require some level of past performance and experience of protégé joint venture partners. If that were not the case, there would not be GAO and Court of Claims cases considering if a procuring agency required too much past performance and experience of the protégé firm. The proposed rule merely provided guidance on what a procuring activity could require. In response to the comments, the final rule clarifies that a procuring activity contracting officer may rely solely on the past performance and experience of the mentor joint venture partner in its discretion. The final rule also adds a provision to the regulatory text providing that if a procuring activity requires a protégé joint venture partner to demonstrate some successful performance and/or experience on fewer previous contracts of lower values than that required of other offerors generally, successful performance by the protégé firm on the contracts it identifies shall be rated equivalently to successful performance by the mentor partner to the joint venture or any other individual offeror on the higher valued contracts they identify. Although this was clearly set forth in the example to paragraph (e), SBA believes that it should be specified in a separate regulatory provision as well.

Where a joint venture is the apparent successful offeror for a contract set aside or reserved for small business, § 125.8(f) currently authorizes the procuring activity to execute a contract in the name of the joint venture entity or a small business partner to the joint venture. There has been some confusion as to whether a procuring activity can choose to either execute the contract in the name of the joint venture entity or to a small business partner to the joint venture. SBA did not intend such discretion. SBA's joint venture rules set forth in § 121.103(h)(1) provide that a joint venture may be in the form of a formal or informal partnership or exist as a separate limited liability company or other separate legal entity. Where a joint venture exists as a separate legal entity, SBA intended a contract to be executed in the name of the joint venture. SBA intended to allow contracts successfully won by a joint venture to be awarded in the name of the small business partner only where the joint venture was not a separate legal entity, but rather an informal arrangement that had a written joint venture agreement that complied with SBA's regulations. The proposed rule clarified SBA's intent. Two commenters supported this clarification, with one specifying that although they acknowledge that it has always been the SBA's intent, they support explicitly

clarifying that a contract awarded to a joint venture shall be executed in the name of the joint venture if the joint venture is a separate legal entity. SBA adopts the proposed language as final in this rule.

Section 125.9

Section 125.9 sets forth the requirements relating to SBA's mentor-protégé program. Paragraph 125.9(b) specifies rules pertaining to firms seeking to become mentors and to firms which have been approved as mentors in the program. The introductory language to that paragraph provides that any concern that demonstrates a commitment and the ability to assist small business concerns may act as a mentor, including other than small businesses. There has been some confusion as to whether non-profit entities may act as mentors. The statutory authority for the mentor-protégé program specifies that the term “mentor” means a for-profit business concern, of any size, that has the ability to assist and commits to assisting a protege to compete for Federal prime contracts and subcontracts. 15 U.S.C. 657r(d). Although § 125.9(b) does not specifically state that a mentor must be a for-profit entity, it requires a mentor to be a “concern”, and that term is defined in SBA's regulations as a business entity organized for profit under § 121.105(1)(1). To eliminate any confusion, the proposed rule clarified that only for-profit business concerns may be mentors. Two commenters supported the clarification, and SBA adopts the proposed language as final.

Paragraph 125.9(b)(3)(ii)(B) authorizes a mentor to purchase another business entity that is also an SBA-approved mentor of one or more protégé small business concerns where the purchasing mentor commits to honoring the obligations under the seller's mentor-protégé agreement. Paragraph 125.9(b)(3)(i) provides that a mentor that has more than one protégé cannot submit competing offers in response to a solicitation for a specific procurement through separate joint ventures with different protégés. However, it is possible that the initial or selling mentor may be a contract holder as a joint venture with a protégé on the same multiple award contract where the acquiring mentor is also a contract holder as a joint venture with its protégé. In such a case, after the purchase and the purchasing mentor committing to fulfill the obligations of the selling mentor's mentor-protégé agreement, the purchasing mentor could then have two different joint ventures as contract holders on the same multiple award contract. This could allow the mentor to dictate which joint venture could compete for any specific order under the multiple award contract. SBA does not believe that the mentor should be able to choose one protégé over another to compete for an order. In order to clarify SBA's intent, the proposed rule provided that where a mentor purchases another business entity that is also an SBA-approved mentor that is a contract holder as a joint venture with a protégé small business and the mentor is also a contract holder with a protégé small business on that same multiple award contract, the mentor must exit one of those joint venture relationships. SBA understands that this could adversely affect one of the protégé firms involved in a joint venture. To alleviate harm to a protégé, the proposed rule also permitted the protégé firm connected to the joint venture from which the mentor exits to seek to acquire the new mentor's interest in the underlying multiple award contract or reserve and work with the contracting officer to determine whether novation of such contract or reserve to itself only may be appropriate. The protégé may also seek to continue performance under the contract by replacing the new mentor with another business in the joint venture such that the revised joint venture continues to qualify as small. Similarly, the proposed rule also added a new § 125.9(d)(1)(iv) to give a protégé firm a right of first refusal to purchase a mentor's interest in a mentor-protégé joint venture where the mentor seeks to sell its interest in the joint venture.

SBA received 14 comments on the proposed changes to § 125.9(b). Eight comments favored the proposed language, three questioned some of the language and three had comments outside the scope of this rulemaking. Those in favor believed that a protégé should be able to novate its joint venture contract to itself where its mentor is sold to another firm and that firm does not intend continue performance in that joint venture. They felt that to do otherwise would hurt the small business protégé and recommended that contracting officers should be encouraged to process such novation requests. One commenter supported prohibiting a mentor from having two different joint ventures as contract holders on the same multiple award contract since this situation could provide the mentor with an unfair advantage, create a conflict of interest, and potentially harm one or both protégés. One commenter questioned whether the proposed changes were intended to clarify existing guidance or introduce new restrictions. As noted in the proposed rule, SBA's current regulations provide that a mentor that has more than one protégé cannot submit competing offers in response to a solicitation for a specific procurement through separate joint ventures with different protégés. Because of that regulatory provision, SBA believes that current regulations require a firm that becomes the mentor of two protégés on the same multiple award contract to end one of those mentor-protégé relationships. SBA views this change as a clarification of existing policy, not the imposition of a new requirement. Similarly, SBA's current regulations provide that SBA may approve a second mentor for a particular protégé firm where the second relationship will not compete or otherwise conflict with the first mentor-protégé relationship. If a protégé firm enters joint venture relationships with each of its two mentors, those joint ventures cannot compete against each other. They cannot be contract holders on the same multiple award contract. Although that is currently policy, SBA has clarified that point in this final rule. One commenter recommended that SBA clarify that novation would not be necessary where there is merely a change in ownership of the joint venture (
e.g.,
another business buys the minority interest of the new mentor in the joint venture). The commenter believed that as long as there was merely a change in the ownership of the joint venture entity, the joint venture could continue to perform the contract without the need for a novation. SBA agrees that where a joint venture continues to qualify as small and otherwise eligible after a change of ownership of the joint venture, the joint venture can continue to receive orders under the multiple award contract without requiring a novation. One commenter supported the changes but was concerned that SBA assumed that a protégé firm was financially positioned to buy out a mentor's interest in an underlying multiple award contract or buy a mentor's interest in a mentor-protégé joint venture. The commenter recommended that the SBA provide that any financing that the protégé receives from another entity in order to purchase the mentor's interest in a multiple award contract or mentor-protégé joint venture shall not be grounds for a finding of affiliation. SBA agrees that as long as financing is on commercially standard terms affiliation will not be found and makes that clarification in this final rule. Finally, one commenter

sought clarification as to whether the time needed to find a substitute mentor would be tacked on to the new mentor-protégé agreement to give the protege its full six years. Under SBA's regulations, a small business may generally have a total of two mentor-protégé agreements with different mentors. Each mentor-protégé agreement may last for no more than six years. The current regulations also authorize the substitution of one mentor for another where the initial mentor-protégé relationship is terminated. SBA does not believe that the time it takes a protégé small business to find a new mentor should be subtracted from the six-year authorized mentor-protégé relationship. That is SBA's current policy, but the final rule makes that clear in a revised paragraph (c)(4)(iii).

The proposed rule also redesignated current § 125.9(e)(6) as § 125.9(c)(4). This provision relates to rules affecting protégé firms and SBA believes it should more appropriately be located in § 125.9(c), which has a heading entitled “Proteges.” The proposed rule added c

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A2024-29393. Public record. Not legal advice.