# Small Business Size Regulations; 8(a) Business Development/Small Disadvantaged Business Status Determinations; Rules of Procedure Governing Cases Before the Office of Hearings and Appeals

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URL: https://www.frixlaw.com/law-library/documents/fr%3A98-17196

## Record

- **Collection:** Federal Register
- **Document type:** Rule
- **Published:** June 30, 1998
- **Citation:** 63 FR 35726

## Text

SMALL BUSINESS ADMINISTRATION

13 CFR Parts 121, 124, and 134

Small Business Size Regulations; 8(a) Business Development/Small
Disadvantaged Business Status Determinations; Rules of Procedure
Governing Cases Before the Office of Hearings and Appeals

AGENCY: Small Business Administration.

ACTION: Final rule.

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SUMMARY: In response to President Clinton's government-wide regulatory
reform initiative, the Small Business Administration (SBA) amends both
the eligibility requirements for, and contractual assistance provisions
within, the SBA's 8(a) Business Development (8(a) BD) program. This
final rule changes the name of the program from the Minority Small
Business and Capital Ownership Development program to the 8(a) BD
program to better reflect the purpose of the program. This rule
streamlines the operation of the 8(a) BD program, eases certain
restrictions perceived to be burdensome on Program Participants,
clarifies certain eligibility requirements, and deletes obsolete
regulations.

DATES: Effective Date: This rule is effective on July 30, 1998.
Compliance Dates: Subpart A applies to all applications for the
8(a) Business Development program pending as of July 30, 1998 and all
8(a) procurement requirements accepted by SBA on or after July 30,
1998. These rules do not apply to any appeals pending before SBA's
Office of Hearings and Appeals. The revisions to 13 CFR part 121 apply
with respect to all solicitations issued on or after June 30, 1998.
Except for 13 CFR 134.408(c), the procedural revisions to 13 CFR part
134 apply to all appeals served or filed on or after June

[[Page 35727]]

30, 1998. 13 CFR 134.408(c) applies as of the publication to all
pending appeals before SBA's Office of Hearings and Appeals.

FOR FURTHER INFORMATION CONTACT: William A. Fisher, Acting Associate
Administrator for Minority Enterprise Development, at (202) 205-6412.

SUPPLEMENTARY INFORMATION: On March 4, 1995, President Clinton issued a
Memorandum to federal agencies, directing them to simplify their
regulations. In response to this directive, SBA completed a page-by-
page, line-by-line review of all of its then existing regulations to
determine which might be revised or eliminated. Revisions to 13 CFR
Part 124 awaited a review by the Department of Justice (DOJ) of all
Federal procurement affirmative action programs. On May 23, 1996, DOJ
published in the Federal Register a comprehensive proposal for
tailoring affirmative action programs in the Federal procurement arena
(see 61 FR 26042), and on May 9, 1997 the Department of Defense, the
General Services Administration, and the National Aeronautics and Space
Administration proposed amendments to the Federal Acquisition
Regulation (FAR) concerning programs for small disadvantaged business
(SDB) concerns. In response to and in conjunction with the DOJ and FAR
reform proposals, on August 14, 1997, SBA published in the Federal
Register, 62 FR 43584, a proposed rule to amend 13 CFR part 124.
Subpart A of the proposed part 124 dealt with changes pertaining to the
8(a) Business Development (8(a) BD) program which is authorized by
sections 7(j)(10) and 8(a) of the Small Business Act, 15 U.S.C.
636(j)(10), 637(a). Subpart B of proposed part 124 dealt with SBA's
role in the certification and protest of small disadvantaged
businesses, as contemplated by the DOJ and FAR proposals. During the
proposed rule's 60-day comment period, SBA received 95 timely comments,
the majority of which favored the proposed changes. This rule finalizes
subpart A of 13 CFR part 124 (its regulations relating to the SBA's
8(a) Business Development Program. SBA continues to consider issues
relating to subpart B of 13 CFR part 124, and will finalize those
regulations at a later time. This rule does not address any comments
made regarding subpart B of part 124 or SBA's response thereto.
A substantial number of commenters applauded SBA's effort to remove
duplicative provisions, and rewrite those that appeared wordy or
unclearly written. For the most part, the comments also supported the
substantive changes proposed by SBA. SBA received comments on many
aspects of the proposed rule. With the exception of comments which did
not set forth any rationale or make suggestions, SBA discusses and
responds fully to all the comments below.
In addition to the changes to 13 CFR part 124, the final rule also
makes changes to SBA's size regulations (part 121) to permit size
protests and appeals of Standard Industrial Classification (SIC) code
designations in connection with 8(a) competitive procurements, and to
exclude certain joint venture arrangements from SBA's affiliation
rules. These changes should increase the potential pool of small
businesses available to compete for particular procurements and should
encourage contracting officers to consider small business contractors
more closely before determining a procurement strategy. The final rule
also transfers the procedures relating to certain statutorily
authorized appeals in the 8(a) program from part 124 to part 134 of 13
CFR.
This final rule streamlines the operation of the 8(a) BD program,
eases certain restrictions perceived to be burdensome on Participants,
amends certain eligibility procedures, and deletes obsolete
regulations. It reorganizes the regulations into identifiable
substantive areas for ease of use and clarity. It also changes all
references to SBA's Office of Minority Small Business and Capital
Ownership Development to the Office of 8(a) Business Development to
emphasize that individuals participating in the program need not be
members of minority groups and to stress the importance of assisting
participating firms in their overall business development.
SBA has attempted to rewrite the regulations in plain English
wherever possible. To this end, SBA has written section headings in
question format for ease of use, and has eliminated unnecessary
verbiage from the regulations.
This rule amends eligibility procedures for admission to the 8(a)
BD program and also amends contractual assistance provisions within the
8(a) BD program. It eliminates the requirement that a Participant must
have specified SIC codes approved by SBA in its business plan in order
to be eligible for 8(a) contracts, establishes consistent remedial
measures for firms that do not meet their non-8(a) business activity
targets, eases certain joint venture restrictions, and establishes a
mentor/protege program for developing 8(a) Participants. This rule also
liberalizes the standard of review for non-group members seeking
disadvantaged status from a clear and convincing evidence test to a
preponderance of the evidence standard.

Summary of Comments and SBA's Response

Part 121: SBA received a substantial number of comments agreeing
with SBA's proposal to exclude certain joint venture arrangements from
the normal affiliation rules. This provision will encourage contracting
officers to use small business contractors to a greater extent. With
the consolidation of procurements becoming an increasing reality, some
contracting officers may feel that requirements are too big for a small
business to perform successfully. The proposed rule would have
permitted two or more small business concerns to joint venture for a
particular procurement and be considered a small business concern so
long as each concern individually was small. Several commenters
recommended that this provision be broadened to exclude affiliation
rules where there are ``teaming'' agreements as well. SBA concurs with
this recommendation, and has changed the rule accordingly.
Part 124, subpart A: Most of the comments received by SBA focused
on subpart A of part 124. The following analysis discusses each of the
significant comments received.
The proposed rule contained no provision for reporting changes that
would adversely affect a firm's eligibility, either during the
application stage or during a Participant's tenure in the program. As a
result of a number of comments, several new provisions have been
included in the regulation. Section 124.2 requires, in part, that a
Participant must maintain its program eligibility throughout its tenure
in the program and is obligated to inform SBA of any changes that would
adversely affect its program eligibility. To continue a firm's
participation in the program, Sec. 124.112 specifically reasserts this
obligation and Sec. 124.112(b)(2) requires program Participants as part
of their annual review to represent that no adverse change occurred or,
in the alternative, to describe any adverse changes that have occurred.
During the application stage, the 8(a) applicant is obligated to inform
SBA of any adverse changes that may have occurred since the actual
application.
Section 124.103(c) of the proposed rule stated that individuals who
are not members of designated socially disadvantaged groups must
establish individual social disadvantage by a ``preponderance of the
evidence.''

[[Page 35728]]

Previously, individuals not members of a designated group needed to
prove individual social disadvantage by ``clear and convincing''
evidence. SBA received many comments regarding the proposed change in
the evidentiary standard. The majority of commenters did not favor
changing the standard. SBA believes that all individuals who can show
that they have personally suffered social disadvantage, including women
and handicapped individuals, should be admitted to the 8(a) BD program,
and that the change in the evidentiary standard is necessary for
constitutional reasons. In response to the Supreme Court's decision in
Adarand Constructors, Inc. v. Pena, 115 Sup. Ct. 2097 (1995), which
requires programs to provide a race-based remedy to be ``narrowly
tailored,'' the Department of Justice recommended the ``preponderance
of the evidence'' standard for government-wide disadvantaged business
programs. SBA based the ``preponderance of the evidence'' standard on
the Department of Justice proposal, and continues to believe that the
use of this standard strengthens the defense of the 8(a) BD program.
Therefore, SBA retains the ``preponderance of the evidence'' standard
in the final rule. While the criteria for a case of individual social
disadvantage remains basically the same, the final rule changes the
evidentiary standard that must be shown to demonstrate an individual
case of social disadvantage. In assessing a claim of individual social
disadvantage, SBA will consider all relevant information submitted by
an applicant. Evidence which tends to show generalized patterns of
discrimination against a non-designated group or statistical data
showing that businesses owned by a specific non-designated group are
disproportionately underrepresented in a particular industry may be
used to augment an individual's case. Statistics and generalized
patterns are not sufficient by themselves to establish a case of
individual social disadvantage. However, an individual's statement of
personal experiences in combination with the generalized evidence may
be sufficient to demonstrate social disadvantage.
Proposed Sec. 124.103(d) stated that representatives of an
identifiable group whose members believe that the group has suffered
chronic racial or ethnic prejudice or cultural bias may petition SBA to
be included as a group presumed to be socially disadvantaged. One
commenter asked what the evidentiary standard should be for approval of
a designated group. As a result of this comment, Sec. 124.103(d)(1) of
the final rule provides that a preliminary showing must be made that
substantial evidence exists that a group meets the criteria to be
determined presumptively socially disadvantaged. Once this showing is
made, SBA will publish a notice for comment and, where deemed
appropriate, hold hearings and/or conduct its own research. After
completion of the process, SBA will determine whether a preponderance
of the evidence shows that the group meets the necessary criteria to be
considered presumptively disadvantaged.
Proposed Sec. 124.104, which set forth the factors to be reviewed
to determine the economic status of socially disadvantaged individuals,
clarified that a contingent liability does not reduce an individual's
net worth. A commenter remarked that contingent liabilities reduce
capital and credit opportunities and should be considered as reducing
net worth. SBA understands this possibility, but does not adopt the
comment. There are wide varieties of contingencies and their impacts on
credit opportunities. Moreover, individuals should not be permitted to
satisfy the net worth criterion by offering guarantees and indemnities
with remote possibilities of becoming actual liabilities.
Another commenter felt that Sec. 124.104 needed to set forth in
greater detail the criteria SBA uses to determine whether an individual
is economically disadvantaged. SBA will study this issue for possible
later revision.
Another commenter suggested that under Sec. 124.104, review of the
financial status of individuals claiming economic disadvantage should
be performed going back two years prior to application. This is already
addressed in two subsections of this section and no further provisions
are needed. Proposed Sec. 124.104(c) provides that SBA will take into
account the individual's personal income for the previous two years.
Proposed Sec. 124.104(c)(1) provides that SBA will attribute to an
individual claiming disadvantaged status any assets which that
individual has transferred to an immediate family member, or to a trust
a or beneficiary of which is an immediate family member, for less than
fair market value, within two years prior to a concern's application
for participation in the 8(a) BD program or within two years of a
Participant's annual program review, unless the individual claiming
disadvantaged status can demonstrate that the transfer is to or on
behalf of an immediate family member for that individual's education,
medical expenses, or some other form of essential support.
One commenter expressed concern that transfers of assets to family
members within two years prior to application should be objectionable
even if the transfer was ``for fair market value.'' The commenter felt
that sham transfers would be made to enable individuals to qualify as
economically disadvantaged under the thresholds. SBA has not adopted
this comment since, if a transferee received fair market value for an
asset, the transfer would be a sale, not a sham. As such, the transfer
would not distort a calculation of the transferor's net worth.
SBA had specifically requested comments on proposed Sec. 124.105,
seeking input on whether and under what circumstances trust
arrangements might be considered permissible without violating the
statutory requirement that an applicant or Participant must be at least
51 percent unconditionally owned by one or more socially and
economically disadvantaged individuals. SBA received several comments
on this issue. Upon further reflection, SBA has determined that
ownership of an 8(a) applicant or Participant by trusts that are the
functional equivalent of individuals, like living trusts, are
tantamount to individual ownership and should be permitted in the
program. One commenter noted that the IRS treats living trusts as
individuals for the purposes of income tax calculation, and urged SBA
to do the same. The SBA recognizes that an increasing number of
entrepreneurs are using such vehicles for tax and estate planning
purposes. Therefore, a provision making certain trusts eligible for
8(a) participation has been included in Sec. 124.105(a). The new
provision states that an 8(a) BD concern owned by a trust is considered
to be directly owned by a disadvantaged individual if the trust is
revocable and the disadvantaged individual is also the grantor, a
trustee and the sole current beneficiary of the trust.
Section 124.105(h) of the proposed rule set forth certain ownership
restrictions for non-disadvantaged individuals and concerns. Proposed
Sec. 124.105(h)(1) stated that a non-disadvantaged individual or a non-
Participant concern that owns a 10 percent or greater interest in a
Participant as a general partner or stockholder may not own more than a
10 percent interest in another Participant. Proposed Sec. 124.105(h)(2)
stated that a non-Participant concern in the same or similar line of
business may not own more than 10 percent in a current Participant, and
a former

[[Page 35729]]

Participant in the same or similar line of business may not own more
than 20 percent in a current Participant. Five commenters disagreed
with these restrictions. They felt they were unnecessary and would
place extra burdens on 8(a) firms that non-8(a) firms do not have. Most
felt that if SBA determines that the firm is 51 percent owned, managed
and controlled by a disadvantaged individual, no other ownership
restrictions should apply. Two commenters pointed out that the
regulation as proposed would hinder the firm's access to capital. The
commenters pointed out that access to money is necessary to make the
transition into the competitive market place. In response to these
comments, the SBA has revised its regulations to raise the percentages
that non-disadvantaged individuals, non-disadvantaged firms and former
8(a) firms may own in an 8(a) Participant in the transitional stage of
program participation. With respect to a firm in the transitional stage
of 8(a) program participation, the final rule states that (1) a non-
disadvantaged individual or a non-Participant concern with at least a
10 percent ownership interest in another Participant may own up to a 20
percent interest; (2) a non-disadvantaged individual or concern in the
same or similar line of business may own up to a 20 percent interest;
and (3) a former 8(a) Participant may own up to a 30 percent interest.
Percentages of ownership for firms in the developmental stage of
program participation are not changed in this rule. SBA's decision to
ease the current restrictions on ownership of an 8(a) BD concern should
improve access to sources of capital. SBA decided not to raise the
percentages higher than 20 and 30 percent at this time due to its
continued concern over program abuse through the possible establishment
of fronts. SBA will continue to monitor this section of the rule and
may adjust the percentages further in the future if it deems it
appropriate to do so.
Section 124.105(i) contains standards for obtaining SBA approval of
a change in a Participant's ownership. Several commenters expressed
concern that a time limit should be imposed on SBA to approve or
decline change of ownership requests. The final rule provides that the
AA/8(a)BD will issue a decision within 60 days of receipt by the Agency
of a request containing all necessary documentation, and that the
decision of the AA/8(a)BD will be the final Agency decision. The final
rule further provides that the denial of a request for a change of
ownership may be grounds for program termination if the change is
nonetheless completed.
The preamble to the proposed rule solicited comments on a proposal
to use suspension as a tool to allow time for an SBA inquiry into a
Participant's change of ownership or control. No negative comments were
received relating to this issue. Commenters who did address the matter
approved of such use, providing that SBA would restore the length of
the suspension to the firm's program term if the change is ultimately
approved. As a result of the comments, SBA has revised Sec. 124.105(i).
As revised, Sec. 124.105(i) provides that, where a Participant requests
a change of ownership or business sture, and the che change has already
occurred, SBA will suspend the Participant pending a decision on the
request. If the change is approved, the SBA will restore the length of
the suspension to the Participant's program term where the change in
ownership results from the death or incapacity of a disadvantaged
individual, or where the firm requested prior approval and waited 60
days for SBA approval before making the change. SBA will not restore
the length of a suspension for any firm that did not request a change
in ownership prior to making the change (except, as noted, for a change
due to death or incapacity). This provision has also been added to
Sec. 124.305 governing suspensions.
The proposed regulation regarding suspension (Sec. 124.305) has
been modified to clarify the jurisdiction of the Office of Hearings and
Appeals and the standard of evidence necessary for SBA to sustain its
suspension action. The proposed rule stated that SBA has the burden of
showing that ``substantial'' evidence exists in support of at least one
of the grounds for termination cited in the Letter of Intent to
Terminate. SBA has decided not to adopt this new standard in the final
rule. The final rule provides that SBA is required to show only that
``adequate'' evidence exists in support of a least one of the grounds
for termination. The final rule defines the term ``adequate evidence''
as information sufficient to support the reasonable belief that a
particular act or omission has occurred. This definition is adopted
from Sec. 9.403 of Title 48 of the Code of Federal Regulations.
Section 124.305 has also been amended to provide that, unless the
Administrative Law Judge consolidates the suspension and termination
proceedings, the review must be limited to determining whether the
government's interest needs protection. SBA's Office of Hearings and
Appeals (OHA) may not review the grounds for termination under a
suspension action.
A commenter questioned whether proposed Sec. 124.105(i) conflicts
with the requirement in Sec. 124.515 that a change in ownership of an
8(a) BD concern requires a waiver from SBA for the Participant to
continue performing on an 8(a) contract. Section 124.105(i) allows
continued performance of a contract without a waiver if a disadvantaged
individual is substituted for another, with SBA approval before the
change is implemented. SBA requires waivers under Sec. 124.515 only
where ownership of an 8(a) Participant would be changed to an extent
that the 8(a) BD concern would be no longer at least 51 percent owned
by one or more disadvantaged individuals. If SBA does not approve a
change in ownership because it determines that the acquiring individual
is not disadvantaged or that the firm as structured after the change is
no longer owned and controlled by disadvantaged individuals, then the
firm must seek a waiver under Sec. 124.515 in order to continue to
perform any of its 8(a) contracts.
Proposed Sec. 124.106 explained the concept of control and the
factors which SBA looks at to determine who controls an 8(a) BD
concern. Several commenters raised issues of control where a non-
disadvantaged individual held a critical license. SBA does not believe
that the mere fact that a non-disadvantaged employee who is not also an
equity owner of the firm holds a critical license would cause the
disadvantaged principal(s) to lose control. In such a case, the
disadvantaged principal(s) must demonstrate their management expertise
and the right to replace the non-disadvantaged employee at any time
with another technical employee. However, SBA agrees that the situation
is much more complicated where the non-disadvantaged individual who
holds a critical license is also an equity owner of the firm. The final
rule permits SBA to find negative control where a non-disadvantaged
owner holds a critical license. The burden is on the applicant or
Participant to demonstrate that control is in the hands of one or more
disadvantaged individuals. The final rule provides that an individual
need not have the technical expertise or possess a required license to
be found to control an applicant or Participant if he or she can
demonstrate that he or she has ultimate managerial and supervisory
control over those who possess the required licenses or technical
expertise. SBA recognizes that failure to possess technical expertise
or a required license are factors that may be considered in evaluating
the disadvantaged

[[Page 35730]]

individual's control of the concern, but that such circumstances are
not dispositive.
One commenter suggested that 8(a) concerns be allowed to own
subsidiary concerns without being in violation of the requirement under
proposed Sec. 124.106(a)(3) that an owner of an 8(a) concern devote
full time to management of the concern. SBA's policy is to allow such
ownership since working with the subsidiary indirectly advances the
interests of the 8(a) concern. Therefore, a provision expressly
allowing such ownership has been added to Sec. 124.106(a)(3). However,
this exception does not change the general requirement that an owner of
an 8(a) concern devote full time to manage the concern.
A few commenters requested that some flexibility be given to the
requirement under Sec. 124.106(a)(3) that a disadvantaged individual
who manages the Participant concern must devote full-time to the
business during normal working hours. As stated in the preamble to the
proposed regulations, this requirement is not intended to prevent such
individual from spending normal business hours away from the premises
in such areas as marketing and outreach that benefit the concern. The
rule does not imply that business activities could not be conducted by
such individual outside the office. It does, however, prohibit such
individual from being physically located at a site on a continuing
basis which is separate and distinct from the Participant concern
during normal business hours, despite any claim that he or she is
managing the concern from that location. SBA believes it is important
for the growth and development of the 8(a) BD concern that the
disadvantaged individual who manages the concern devote full time to
such management. Therefore, SBA makes no change to the final rule.
The proposed regulations continued SBA's current approach and
required that disadvantaged individuals have majority control of the
board of directors. Some commenters felt that this requirement did not
reflect business practice in the corporate world. One commenter felt
that, particularly in smaller corporations, the sole shareholder or the
majority shareholder virtually always controls the board of directors.
This control stems from his or her ability to replace directors at
will. The commenter recognized, however, that in rare situations the
sole or majority owner might not control the board, such as where
directors have fixed terms and cannot be removed before the end of such
terms. In addition, SBA notes that cumulative voting practices and
super majority requirements (i.e., any provisions requiring more than a
simple majority vote) may make it difficult for a shareholder owning
only 51% of a corporate concern to control the board of directors of
that concern. Likewise, where more than one disadvantaged owner is
involved, voting rights and control of the board of directors is harder
to pinpoint. As such, SBA accepts this comment to a point. The final
rule gives several alternatives for finding control by disadvantaged
individuals of the board of directors. Where a single disadvantaged
individual owns 100% of an applicant or Participant, SBA deems that
individual to control the board of directors, and no further analysis
is needed. Where a single disadvantaged individual owning less than
100% seeks to qualify a concern, SBA deems that individual to control
the board of directors where he or she owns at least 51% of the concern
or, where the concern has super majority voting requirements, that
percentage of ownership needed to overcome any such super majority
ownership requirements, and he or she is on the board of directors. The
applicant will be required to inform SBA of any super majority voting
requirements provided for in its articles of incorporation, its by-
laws, or by state law. Thus, the disadvantaged owner is able to convene
a shareholder's meeting, change corporate by-laws and articles of
incorporation, and change directors on the board at will. In such a
case, SBA will not look at the makeup of the board of directors for
determining control of the firm (although SBA will continue to examine
the character of directors). Where more than one disadvantaged owner
seeks to qualify an applicant or Participant (i.e., no one individual
owns 51%) and each such individual is on the board of directors, SBA
deems those individuals to control the board of directors where
together they own at least 51% of the concern or, where the concern has
super majority voting requirements, that percentage of ownership needed
to overcome any such super majority ownership requirements, and they
can demonstrate that they have made arrangements to overcome any
potential stalemates and that they have the comparable ability of a
single majority owner to act quickly. For example, where a concern has
three disadvantaged individuals each owning 17%, SBA will deem the
individuals to control the board of directors without looking at the
board's make-up if two of the three individuals have given their voting
rights to the third individual. Where an applicant or Participant
cannot demonstrate the ability for a disadvantaged individual to act
quickly to replace members of the board of directors, SBA will look at
the composition of the board of directors and will apply the current
board of directors control requirements to the concern. The concern
must meet the current requirement that one or more disadvantaged
individuals must control the board of directors through numbers of
individuals on the board or, where permitted by state law, through
weighted voting.
Numerous commenters expressed concern that, with the lowering of
the evidentiary standard for eligibility in cases of individual social
disadvantage, there would be a greater need to police fraud in the
program application process. Many warned of potential front situations
involving the transfer of ownership and/or control of the applicant
firm from one family member to another. This final rule addresses these
issues at several points. Section 124.106(f) provides that if a non-
disadvantaged individual transfers majority ownership or control of the
applicant firm to a family member within two years of the date of
application while remaining an owner, officer, director or key employee
of the company, the non-disadvantaged individual will be presumed to
control the company. As noted above, the final rule also requires
program applicants (Sec. 124.204(d)) and Participants (Sec. 124.112(b))
to inform SBA of any changes that would adversely affect their
eligibility. Failure to inform SBA of these adverse changes, or falsely
certifying that no adverse changes exist, are grounds for denial of
entry into the program or, if concern is a already a program
Participant, grounds for termination from the program.
Proposed Sec. 124.107 set forth the requirement that an 8(a) BD
applicant must possess potential for success in competing in the
private sector. One commenter questioned whether an 8(a) applicant that
can meet the requirements under Sec. 124.107(b)(iii) and (iv), needs
8(a) BD assistance. These subsections provide that if an applicant to
the 8(a) BD program does not meet the requirement that it has been in
business in its primary industry classification for at least two full
years prior to applying, this requirement may be waived if certain
conditions are met. In 1990, Congress passed legislation that would
allow concerns to waive the two year rule after satisfying five
conditions. See The Small Business Administration Reauthorization and
Amendments Act

[[Page 35731]]

of 1990, Pub. L. No. 101-574 Sec. 203(b)(1), 104 Stat. 2814, 2818-2819
(1990). SBA adopted the same five conditions for waiver in the 8(a)
regulations, but has clarified that applicants will be assessed in the
context of their proposed participation in the program.
As indicated above, several commenters expressed a need for greater
oversight by SBA during the application process to prevent fraud. SBA
notes that provisions included in the proposed regulations at
Sec. 124.108(a)(5) provide that SBA may decline an application due to
the submission of false information. SBA may also terminate a firm from
the program under Sec. 124.303(a)(1)(15) if it discovers later that the
Participant falsified information in its application. SBA retains these
provisions in the final rule.
Proposed Sec. 124.108(a) provided that SBA could exclude firms from
program participation for lack of good character in circumstances where
there was credible evidence of criminal activity. Upon further internal
deliberation, the final rule significantly expands and clarifies
Sec. 124.108(a). SBA will also find a firm ineligible for the 8(a) BD
program if it or one of its principals (1) lacks integrity as
demonstrated by information related to an indictment, guilty plea,
conviction, civil judgment or settlement; (2) is currently
incarcerated, or on parole or probation pursuant to a pre-trial
diversion or following conviction for a felony or any crime involving
business integrity; or (3) has knowingly submitted false information as
part of the application for program admission. This clarification and
expansion of the definition of good character reinforces the concept of
business character as a requirement for program eligibility. It also
promotes greater consistency between the eligibility requirements in
this section and the grounds for termination in Sec. 124.303(a).
Several commenters believed that payment of obligations to the
Federal government should be included as an element of good business
character under Sec. 124.108(a). Failure to pay significant obligations
owed to the Federal Government is already a basis for program
termination under Sec. 124.303(a)(11). Additionally, the existence of
defaults resulting in a loss on a federal loan or federally assisted
financing has long been a reason for denying financial assistance in
other SBA programs. See 13 CFR Sec. 120.110. For these reasons, SBA has
added a new paragraph (e) to Sec. 124.108, providing that any firm or
principal that fails to pay significant financial obligations owed to
the Federal Government is not eligible for admission to the 8(a) BD
program.
Section 124.108(f) of the proposed rule defined a ``broker'' as a
concern that adds no value to an item being supplied to a procuring
activity. One commenter suggested that the definition of broker be
expanded to provide that a company would not be considered a broker if
it purchased and shipped an item, despite the fact that purchasing and
shipping do not technically ``add value'' to an item. SBA concurs that
the proposed language did not adequately capture the meaning of the
term ``broker.'' SBA has, therefore, added language to Sec. 124.108 to
refine the definition of a broker. The final rule (Sec. 124.108(d))
provides that a broker is a concern that adds no material value to an
item being supplied to a procuring activity or which does not take
ownership or possession of or handle the item being procured with its
own equipment or facilities. This definition of ``broker'' is specific
to this rule. Some firms which refer to themselves as brokers in their
line of business may not be ineligible for 8(a) participation as
``brokers'' under this rule.
The final rule also clarifies the provision restricting a tribe's
(or an ANC's) ability to own more than one firm in the 8(a) program
doing the same work. Section 124.109(c)(3)(ii) specifies that a tribe
may own a Participant or an applicant that conducts or will conduct
secondary business in the 8(a) BD program under the same SIC code that
a current Participant owned by the tribe operates in the 8(a) BD
program as its primary SIC code. In other words, SBA will not deny an
application from a tribally-owned concern where the application plans
to do some work (but not its primary work) in the same SIC as another
8(a) firm owned by the tribe. The final rule makes this same
clarification for CDCs and Native Hawaiian Organizations as well. See
Secs. 124.110(c) and 124.111(d), respectively.
Proposed Sec. 124.112 listed the criteria Participants must meet in
order to remain eligible for the 8(a) BD program. One commenter
suggested that if SBA determines that a Participant is no longer
eligible for the 8(a) BD program under Sec. 124.112, that the
Participant be allowed to respond to the factors supporting
ineligibility even before SBA initiates early graduation or termination
proceedings under Sec. 124.302 and Sec. 124.303, respectively. If SBA
initiates such proceedings, the Participant now has 30 days to respond
to SBA under Sec. 124.304(b). SBA believes these procedures give the
Participant an adequate opportunity to respond on the issue of
continued eligibility.
Another commenter recommended that a Participant which obtains an
SBA loan should not thereby be considered to have ``access to credit''
under Sec. 124.112 such that the socially disadvantaged individuals are
no longer considered economically disadvantaged. Since this is already
SBA's policy, no change to the regulation is necessary.
One commenter felt that requiring certification of the transfer of
assets to family members under Sec. 124.112(b)(4) would penalize
individuals for making gifts to their families and would serve no
legitimate purpose. SBA does not intend that each disadvantaged owner
report every gift made to his or her family members. SBA is merely
trying to determine if an individual has transferred significant assets
to his or her family members in order to remain eligible for the
program (i.e., in order to remain ``economically disadvantaged'').
Where the individual retains some use or enjoyment of the asset
transferred (e.g., real estate is ``transferred'' to a spouse and the
individual continues to have access to it; a piece of art is
``transferred'' to a family member, but continues to be displayed in
the individual's residence), SBA will attribute the asset back to the
disadvantaged individual for purposes of determining his or her
continued economic disadvantage status. Where the individual
demonstrates that the transfer is an irrevocable transfer as to which
the disadvantaged individual retains no use or enjoyment (e.g., the
one-time transfer of funds to an adult child to assist the child's
purchase of a residence), the asset will not be attributed back to the
disadvantaged individual. In addition, Sec. 124.104(c)(1)(ii) of the
final rule specifies that SBA will not attribute to an individual
claiming disadvantaged status any assets transferred by that individual
to an immediate family member that are consistent with the customary
recognition of special occasions, such as birthdays, graduations,
anniversaries, and retirements. This does not mean that an individual
claiming disadvantaged status may transfer unreasonably large funds or
other assets to an immediate family member and claim that it should not
be attributed back to him or her because the transfer was, for example,
a birthday present. The funds or assets transferred must be reasonable
and within customary limits for the occasion.
Another commenter suggested that SBA also attribute back to the
disadvantaged transferor all transfers to

[[Page 35732]]

non-family members for less than fair market value. SBA does not adopt
this suggestion. Such a rule could discourage, for example, an
irrevocable charitable transfer of assets. SBA notes that if an asset
is transferred subject to a retained interest or a remainder, then the
present value of the retained interest will continue to be counted as
an asset in determining the donor's net worth. As such, there is no
need to impose further restrictions or requirements on these transfers.
A few commenters noted that language in proposed Sec. 124.112,
concerning the continuing eligibility of businesses in the 8(a) BD
program, inadvertently requires concerns owned by Alaska Native
Corporations (ANCs) to comply with Secs. 124.101 through 124.108. SBA
has revised Sec. 124.112 to correct this error. In addition, this
section has been revised to address the continuing eligibility of
concerns owned by Indian tribes, Native Hawaiian Organizations and
Community Development Corporations (CDCs).
With respect to the new mentor/protege program, one commenter
suggested that SBA should measure the performance of the mentor and
benefits of the program. SBA has adopted this suggestion by revising
Sec. 124.112(b) to require from protege firms a narrative report on the
program as part of their annual report. SBA has also revised
Sec. 124.520 to provide specific standards for SBA reviews of mentor/
protege relationships.
Proposed Sec. 124.112(c) set forth examples under which SBA may
determine that a socially disadvantaged individual is no longer
economically disadvantaged. One commenter noted that the proposed rule
referred to the economic status of the 8(a) BD Participant, rather than
the disadvantaged individual. This error has been corrected in the
final regulations, and language has been added to clarify that the
economic status of the Participant may be considered in analyzing the
status of the individual.
Proposed Sec. 124.204 set forth the process of applying to the 8(a)
BD program. Proposed Sec. 124.204(b) stated that eligibility for the
program is based on the circumstances existing on the date of
application, but that SBA may request clarification of information in
the application. Several commenters felt that this was too harsh and
that concerns which might easily be eligible for the program would not
be allowed the chance to make simple changes in order to be eligible.
While SBA understands the desire an applicant would have to be able to
change its application at any point in time in order to come into
compliance with SBA's requirements during the application process, SBA
believes that it is more important for reviewers not to have an
application that is an ever-changing moving target. In addition, SBA
notes that the applicant still has its right to request reconsideration
of an initial decline letter and it is free to make any changes in its
application at that time.
Proposed Sec. 124.302 of the regulations set forth the criteria for
early graduation. A Participant could be graduated early if it either
successfully completes the program prior to the end of its program term
or if one or more of the disadvantaged owners are no longer
economically disadvantaged. Some commenters felt that successful firms
would be penalized for their success if they were graduated before the
expiration of their 9 year term. Although SBA is authorized to graduate
firms that meet their business objectives early, this process is at the
discretion of the Administrator. Early graduation is not an automatic
process. Only Participants that show sufficient competitive strength
and viability to compete successfully outside the program will be
subject to early graduation. Once they show such strength and
viability, their need for continued participation in the program has
ended. Accordingly, SBA has retained these provisions in the final
rule.
One commenter suggested that SBA should graduate Participants early
when the Participants have demonstrated the ability to compete in the
marketplace without assistance under the 8(a) BD program, whether or
not they have achieved the targets, goals and objectives set forth in
their business plans. SBA believes that this recommendation is contrary
to the Small Business Act. The Small Business Act authorizes SBA to
graduate Participants early only under limited circumstances, among
them where a Participant has successfully completed the program by
substantially achieving its targets, goals and objectives. SBA
understands the concerns of the commenter, and will take efforts to
ensure that the targets, goals and objectives in the business plans are
realistic and appropriate.
Section 124.303(a) of the proposed rule provides for early
termination from the 8(a) program prior to the expiration of a
concern's Program Term for good cause. Section 124.303(a)(13) lists, as
an example of good cause, excessive transfers of funds or other
business assets hindering development of the concern, and excessive
withdrawals from the concern for the personal benefit of any of its
owners or any entity affiliated with the owners. Several commenters
were concerned with SBA labeling withdrawals ``excessive'' without
reviewing the totality of the circumstances. Section 124.112(d)(3)
defines as excessive those withdrawals during any one fiscal year of a
Participant that exceed $150,000 for firms with sales up to $1,000,000;
$200,000 for firms with sales between $1,000,000 and $2,000,000; and
$300,000 for firms with sales over $2,000,000. The regulation permits
SBA to terminate the concern for good cause for such withdrawals.
However, it does not state that SBA will automatically terminate the
concern. SBA realizes that some withdrawals above the ``excessive''
guidelines are not excessive in light of the totality of the
circumstances. SBA decides terminations on a case-by-case basis and
always considers the totality of the circumstances beforehand.
Nonetheless, the final rule clarifies that SBA will presume to be
excessive all withdrawals exceeding the specified amounts.
The final rule changes Sec. 124.303 to add clarity and to eliminate
redundancy. Proposed Sec. 124.303(a)(18) stated that a suspension or
revocation of any license required to run the business is good cause
for termination. SBA has deleted this paragraph and transferred its
substance to Sec. 124.303(a)(12). Section 124.303(a)(12) of the final
rule now lists as a ground for termination the failure to keep
licenses, charters and permits current.
SBA received several comments concerning the application of
benchmarks to the 8(a) BD program. This application is based on the DOJ
review of Federal procurement affirmative action programs and the
Government-wide SDB program. Because this rule is not finalizing SBA's
implementation of the SDB program at this time, it eliminates all
references to benchmarks from the 8(a) regulations (i.e, subpart A).
SBA has changed many of the 8(a) contracting sections as a result
of the comments. It has amended the general provisions in proposed
Sec. 124.501 in several respects. The final rule eliminates proposed
paragraph (d) of Sec. 124.501 as unnecessary, and renumbers proposed
paragraphs (e) and (f) as paragraphs (d) and (e) respectively. That
paragraph had clarified that a concern's success in meeting its support
level would not preclude future 8(a) BD contract awards. Although SBA
thought this clarification necessary at the time the regulations were
originally amended to permit 8(a) concerns to exceed their support
levels, SBA believes that that need no longer exists.

[[Page 35733]]

One commenter requested clarification concerning the purpose of
delegating contract execution authority. The primary purpose behind
such delegation is improved efficiency. Procuring activities can award
contracts much more quickly and efficiently with such authority and
may, therefore, see more opportunities for making use of the 8(a) BD
program.
A sentence was added to proposed Sec. 124.501 to provide that,
where practicable, simplified acquisition procedures should be used for
8(a) contracts at or below the simplified acquisition threshold. This
change conforms SBA's regulations to the Federal Acquisition Regulation
(FAR) governing simplified acquisition procedures (48 CFR Part 13) and
promotes efficiency and economy. SBA has also amended its rule,
including Sec. 124.501(e), to change the term ``procuring agency'' to
``procuring activity,'' thus identifying correctly the Government
contracting entity referenced. Since Federal contracting is frequently
performed at the sub-Agency level, using the term ``procuring agency''
did not cover every entity that may enter into an 8(a) contract.
As a result of the comments, SBA added a new paragraph (f) to
provide that an 8(a) Participant that identifies a requirement should
request SBA to contact the procuring activity to request that the
requirement be offered to the 8(a) program.
Proposed Sec. 124.502 addressed offers of procurements to the 8(a)
BD Program. SBA has amended its proposed Sec. 124.502(a) to provide
that a procuring activity may transmit an offering letter to SBA by
electronic mail, if available, or by facsimile transmission, mail or
commercial delivery service. This conforms the rule to the simplified
acquisition procedures contained in the FAR and helps ensure that
procuring activities can award small contracts expeditiously. SBA has
amended its proposed Sec. 124.502(b) to provide that, in cases where
performance of a construction contract is to take place overseas, the
contract should be offered to the Office of 8(a) BD located in SBA
Headquarters.
One commenter asked why SBA verified the size of an 8(a) concern
prior to accepting a sole source contract on its behalf since self-
certification is accepted in every other case. SBA performs this
function for sole source awards since there is no mechanism in place
for protesting a concern's size in reference to a sole source award.
Thus, there is no other check to ensure that concerns in line for award
of sole source contracts are in fact small for such contracts.
Moreover, since sole source awards are significant benefits, enabling
firms to receive contracts without having to compete with other firms,
it is particularly important that eligibility, including size, is
verified.
Proposed Sec. 124.503 set forth the procedures for accepting a
requirement for the 8(a) BD Program. This rule amends Sec. 124.503(a)
to provide that, where a contract is valued at or below the simplified
acquisition threshold, SBA will accept or reject the requirement within
two days of receipt of the offer. In cases where the offer is made on
behalf of a particular Program Participant, if SBA does not accept or
reject the requirement or request an extension within two days, the
procuring activity may assume that the offer has been approved and go
forward with the award. SBA intends this change to conform to the
simplified acquisition procedures contained in Part 13 of the FAR and
to promote efficiency. This final rule also makes a significant change
to promote efficiency where SBA has delegated its 8(a) contract
execution functions to an agency and a procuring activity within that
agency has a procurement requirement whose value is less than the
Simplified Acquisition Procedures (SAP) threshold amount. In such case,
this rule authorizes SBA, in its discretion, to permit the procuring
activity to award an 8(a) contract under the SAP threshold amount
without sending an offering letter to SBA and without receiving SBA's
official acceptance of the requirement for the 8(a) program.
A number of comments requested clarification of the treatment of
multiple award and federal supply schedule contracts. SBA has added a
paragraph to Sec. 124.503 setting forth the standards to be applied to
these types of contracts. Since, unlike Basic Ordering Agreements
(BOA's), multiple award schedule contracts and federal supply schedule
contracts are contracts, a new task order under such a contract will
not require a new offer and acceptance. Likewise, if a concern
qualifies for award of a multiple award schedule or federal supply
schedule contract in terms of eligibility and size, it will not be
denied future task orders on that contract if it subsequently grows
large. Finally, if a multiple award schedule or federal supply schedule
contract was competed when awarded, subsequent task orders under such
contract will not require further competition under Sec. 124.506.
As a result of the comments, SBA has added a new paragraph (i) to
clarify that where SBA has delegated its 8(a) contract execution
authority to a procuring activity, the procuring activity must still
offer and SBA must accept all requirements intended to be awarded as
8(a) contracts. The only exception to the normal offer and acceptance
process is that identified above where a procurement requirement is
less than the SAP threshold amount and SBA has specifically authorized
(through the Memorandum of Understanding delegating its contract
execution functions or otherwise) a procuring activity to dispense with
offer and acceptance.
Proposed Sec. 124.504 set forth the circumstances limiting SBA's
ability to accept a procurement for award as an 8(a) contract. In
response to comments identified below, this final rule specifically
authorizes the use of SAP in connection with 8(a) contract awards, and
requires SBA to review offering letters for requirements under SAP in
an expedited two-day time frame. In order to meet this quick acceptance
turn around, SBA has decided not to consider adverse impact in
connection with a requirement offered under SAP. It is not feasible for
SBA to obtain current financial statements from affected small
businesses and to make adverse impact determinations within two days.
However, because the SAP threshold is $100,000, SBA believes that
adverse impact should not be a real factor with these smaller
contracts, and that this change should not have a harmful effect.
Proposed Sec. 124.504(e) (Sec. 124.504(d) in the final rule)
concerned the release of a procurement for non-8(a) competition. One
commenter pointed out that the language in proposed Sec. 124.504(e)(3)
was misleading. That language provided that if SBA declines to accept
an offer and releases the requirement, it will recommend to the
procuring agency that the requirement be procured as a small business
or SDB set-aside. The commenter correctly pointed out that SDB set-
asides are not authorized at this time. SBA has, therefore, amended
this paragraph to provide that if SBA declines to accept an offer for
the 8(a) program, it will recommend that the requirement be procured as
a small business or, if authorized, SDB set-aside.
One commenter suggested that industries for which SBA has elected
not to accept requirements should be listed on SBA's website. SBA is
considering adopting this idea; however, it need not revise its
regulations to adopt this policy. Another commenter recommended that
firms that have graduated be permitted to compete for follow-on
contracts where the firm had been awarded the original

[[Page 35734]]

contract. Applicable law precludes SBA from making this change.
A number of commenters requested additional procedures to protect
the rights of small firms which could be adversely impacted by a
decision to accept an award for the 8(a) BD program. SBA carefully
considered these comments and weighed them against the need of
procuring activities for prompt award of contracts. SBA determined that
the current procedures were sufficient to ensure that small businesses
performing contracts are not unduly harmed by the acceptance of an
award for the 8(a) program.
Proposed Sec. 124.506 provided that 8(a) procurements above certain
dollar thresholds must be competed among eligible Participants. A
number of commenters requested that the competitive thresholds be
lowered. These thresholds were set by statute and, therefore, may not
be lowered by SBA.
One commenter requested clarification concerning how the thresholds
are applied to indefinite delivery/indefinite quantity (ID/IQ)
contracts. The commenter asked whether the total value of such
contracts would be the value of what the procuring activity actually
expects to order or the maximum ordering amount it may order. SBA
considers the maximum ordering amount to be the total value of the
contract for purposes of determining whether a particular ID/IQ
contract must be competed. As a result of this comment,
Sec. 124.506(a)(2) has been amended to provide that for indefinite
delivery or indefinite quantity type contracts, the thresholds are
applied to the maximum order amount authorized.
Language was mistakenly included in proposed Sec. 124.507(c) which
referred to limiting competitions to the transitional stage of program
participation. SBA has eliminated this language in the final rule,
since it does not restrict competitions to the transitional stage.
One commenter objected to the language in proposed
Sec. 124.506(c)(3) requiring SBA to deny a request to compete a
requirement under the competitive thresholds where the request is made
following the inability of the procuring activity and the potential
sole source awardee to reach an agreement on price or some other
material term or condition. The commenter pointed out that this
provision unnecessarily restricts the flexibility of the Federal
Government. SBA agrees with this comment and has amended this paragraph
to provide only that SBA may deny a request under such circumstances.
A number of commenters objected to SBA's proposal to eliminate its
authority to award an 8(a) contract above the competitive threshold on
a sole-source basis where there is only one eligible firm capable of
performing the requirement. As a result of the comments, SBA has added
this provision back to the regulations at Sec. 124.506(d).
Proposed Sec. 124.507 set forth the procedures applicable to
competitive 8(a) contracts. One commenter objected to the elimination
of the requirement that a firm must obtain SBA approval to do business
under a particular SIC code. SBA has considered this comment, but has
rejected it. After several years of experience, SBA believes that the
burden on an 8(a) Participant to obtain SBA approval for every SIC code
under which the Participant might want to perform contracts hinders
more than helps the Participant's business development. Moreover, the
procuring activity's determination that a particular 8(a) Participant
is responsible to perform a given contract should suffice to prevent
firms from brokering contracts or from competing for contracts for
which they are not qualified.
One commenter correctly pointed out that Certificate of Competency
(COC) procedures should not be inapplicable in cases where SBA has
delegated contract execution authority to the procuring activity as
provided in proposed Sec. 124.507(b)(7). SBA agrees. SBA did not intend
to make the COC procedures inapplicable where contract execution
authority has been delegated. In addition, the final rule transfers the
substance of proposed Sec. 124.507(b)(6) (dealing with the execution of
competitive 8(a) contracts) to a new Sec. 124.508. The correction
regarding the availability of COCs where SBA has delegated its 8(a)
contract execution functions to a procuring activity and the transfer
of proposed Sec. 124.507(b)(6) to a new section make proposed
Sec. 124.507(b)(7) unnecessary. Thus, SBA has eliminated that provision
in this final rule.
A number of commenters objected to the special geographic
requirements for construction contracts in proposed Sec. 124.507(c)(2).
These requirements are mandated by the Small Business Act and,
therefore, may not be eliminated. One commenter correctly pointed out
that the reference to principal places of business in proposed
Sec. 124.507(c)(2) is incorrect and should be bona fide places of
business. SBA agrees with this comment and has made this correction.
This final rule adds a new Sec. 124.508 governing execution of 8(a)
contracts. This new section clarifies that SBA, the procuring activity
and the 8(a) firm may sign a tripartite agreement or, where SBA has
delegated contract execution authority, the procuring activity and the
Participant alone may sign an 8(a) contract. This section also provides
that, where SBA receives a contract for signature valued at or below
the simplified acquisition threshold, it will sign the contract and
return it to the procuring activity within three (3) days of receipt.
This addition was made to conform to the simplified acquisition
procedures in the FAR and to promote expeditious award of smaller
contracts.
Pursuant to proposed Sec. 124.508 (Sec. 124.509 in the final rule),
a Participant could not receive sole source 8(a) contracts where it was
not in compliance with its non-8(a) business activity targets. A
commenter recommended that SBA allow more flexibility to permit sole
source awards where the firm can demonstrate good faith efforts to
obtain non-8(a) revenue. SBA agrees that a waiver to the requirement
prohibiting further sole source contracts when a Participant does not
meet its non-8(a) business activity target may be appropriate in
limited, extraordinary circumstances. The final rule permits the AA/
8(a)BD, or his or her designee, to allow one or more sole source
contracts to a Participant that is not in compliance with its non-8(a)
business activity target where a denial of a sole source contract would
cause severe economic hardship to the Participant so that the
Participant's survival may be jeopardized, or where extenuating
circumstances beyond the Participant's control caused the Participant
not to meet its non-8(a) business activity target. For example, a
Participant might demonstrate that it was the apparent successful
offeror for a non-8(a) contract that was cancelled by the procuring
activity, and that a loss of that projected revenue caused the
Participant not to meet its non-8(a) business activity target. However,
loss of additional profit or other normal business consequences will
not be grounds for granting a waiver. SBA believes that a more
extensive waiver is not needed because the rule permits sufficient
flexibility by allowing a firm to come into compliance during
authorized quarterly reviews. The rule authorizes no appeal right for
decisions not to grant a waiver, and such a waiver is totally at SBA's
discretion. The final rule also adds a provision authorizing the SBA
Administrator to waive the requirement that a Participant cannot
receive an 8(a) sole source award when it is not in

[[Page 35735]]

compliance with its non-8(a) business activity targets where the head
of the procuring activity requests that award be made for the best
interests of the Government.
Proposed Sec. 124.509 (Sec. 124.510 in the final rule) set forth
the requirement that certain percentages of work be performed by the
8(a) BD concern on an 8(a) BD contract. One commenter pointed out that
compliance with the percentage of work requirements is an element of
responsibility and, therefore, should be determined as of the date of
award. SBA agrees with this comment and has amended this section to
provide that SBA will determine whether the firm will be capable of
complying with the percentage of work requirements by the time of award
of the contract for both sealed bid and negotiated procurements.
Another commenter correctly pointed out that the example in the
regulation conflicts with the requirements set forth in 13 CFR
Sec. 125.6, which refer to the work required as a percentage of total
labor rather than as a percentage of the total value of the contract.
SBA agrees with this comment and has changed example 1 as well as some
of the language in Sec. 124.510(c) of the final rule to conform to the
language in Sec. 125.6. (The legislation on which the performance of
work requirements are based states the percentage of work required as a
percentage of total labor and not total value.) Example 2 was not
changed because the example does not conflict with either Sec. 125.6 or
the legislation. Example 2 merely clarifies application of the rule in
the early stages of performance of an ID/IQ contract.
One commenter pointed out that application of the subcontracting
limitations at all times during performance of an ID/IQ contract would
keep many contractors from proposing on task orders. SBA agrees that
the regulation is not flexible enough in this regard and has amended
the language in paragraph (c) to provide that SBA may approve in
writing an 8(a) BD firm's request to subcontract out more than the
required percentage where it receives assurances from both the
contractor and the procuring activity that the percentages will be met
by the time performance is completed. SBA believes that this addition
will provide firms with the necessary flexibility without undermining
the purposes of the rule. Where a firm has received permission to
subcontract out more than the required percentage and does not comply
with the percentage requirements by the end of the contract, SBA will
not grant future waivers.
There were a number of comments on proposed Sec. 124.512 governing
joint ventures. Several commenters objected to the requirement in
proposed Sec. 124.512(e) that a contract be awarded in the name of the
8(a) BD participant or participants, even though the contract is to be
performed by the joint venture. The commenters argued that the contract
should be in the name of the joint venture to assure that all parties
to the joint venture are obligated to perform. SBA agrees with this
view and has amended this section to provide that the procuring
activity will execute an 8(a) contract in the name of the joint venture
entity. With respect to the statutory requirement that all 8(a)
contracts be performed by participant concerns, SBA interprets the AA/
8(a)BD's acceptance of Participants into the program to extend to
approved joint ventures in which the Participant is the lead joint
venture partner. In other words, for purposes of contracting, admission
into the program includes both a concern in its own capacity and any
approved joint venture in which the concern is the lead entity. For
contracting purposes, SBA will consider the joint venture to be the
Participant where the joint venture meets all applicable requirements
and is approved by SBA.
Paragraph (f) requiring all parties to the joint venture to sign
such documents as are necessary to obligate themselves to ensure
performance of the contract was deleted as unnecessary where the
contract is entered into in the joint venture's name. However, a
provision was added requiring the joint venture agreement to obligate
each party to the venture to complete performance of the contract even
if one of the members withdraws. (See Sec. 124.513(c)(7))
A number of commenters felt that the provision requiring the 8(a)
members of the joint venture to perform the applicable percentages of
work under the performance of work requirements (Sec. 124.510) would
undermine the benefits derived from the joint venture arrangement. SBA
considered this comment and agrees that many of the advantages of
performing a particular contract as a joint venture would be lost if
the 8(a) BD concern is required to perform as much of the contract as
it would have had to perform had it been awarded the contract directly.
Therefore SBA has amended paragraph (b)(1)(iv) of this section to
provide that the joint venture must perform the applicable percentage
of work. Paragraph (g) was also eliminated in light of this change.
SBA made a number of other technical changes to the joint venture
provisions (Sec. 124.513 in the final rule) as a result of the
comments. The term ``lead entity'' was changed to ``managing venturer''
to comport with current terminology. One commenter requested
clarification of the term ``very little'' in proposed Sec. 124.512(a)
which states that SBA will not approve a joint venture arrangement
where the 8(a) concern brings ``very little'' to the relationship. That
provision has been clarified to provide that SBA will not approve the
joint venture if the 8(a) concern brings very little in terms of
resources and expertise to the relationship. A more precise definition
would not leave SBA sufficient discretion to judge each case on its own
merits.
Proposed Sec. 124.514 (Sec. 124.515 in the final rule) set forth
the provisions requiring an 8(a) contract to be performed by the
Participant that was initially awarded it, and requiring the contract
to be terminated for convenience if there is a change in the ownership
or control of the concern. SBA received several comments regarding the
authority for a waiver where one Participant transfers ownership and
control to another eligible Participant. The commenters believed that a
bulk transfer of all or substantially all of one 8(a) concern's assets
to another 8(a) concern should satisfy the requirement this
requirement. SBA carefully considered the legal requirements of the
Small Business Act as it pertains to this provision. Upon further
deliberation, SBA agrees that a transfer of all a Participant's
operating assets to another Participant should be treated the same as a
transfer of stock or another ownership interest, provided the
Participant that transfers its assets to another eligible Participant
withdraws from the 8(a) BD program, and it ceases its business
operations, or presents a plan to SBA for its orderly dissolution. The
requirement that all ``operating assets'' be transferred excludes
accounts receivable and cash. SBA will require dissolution or a plan to
dissolve as a condition for the waiver because SBA does not believe
that it is appropriate for the transferor to remain a separate legal
entity that could restart operations and seek to obtain 8(a) contracts
after the transfer of all of its operating assets.
SBA received three comments on proposed Sec. 124.516 (Sec. 124.517
in the final rule) concerning protests of 8(a) contract awards. All
three commenters recommended extending this provision to permit
protests of the size of a concern in line for a sole source award. SBA
rejected this comment since it is difficult for other firms to find out
about sole source awards and only a few, if

[[Page 35736]]

any, firms would have standing to protest the award of a sole-source
contract under SBA's size regulations. SBA has historically verified
the size of each potential awardee of a sole-source contract since the
benefits of receiving a contract without having to compete are so
significant. Moreover, if any concern or individual believes a firm in
line for a sole-source award does not meet the size standard for the
SIC code for the contract, such firm may contact SBA and explain why it
believes that the firm is not small. SBA will consider such information
in verifying the size of that concern for the award provided the
information is specific and credible. While SBA makes no changes to
allow size protests and SIC code appeals in connection with sole source
8(a) contracts at this time, SBA will continue to examine this issue
and may make additional changes at a later date.
Proposed Sec. 124.518 (Sec. 124.519 in the final rule), authorized
Participants (other than firms owned by an Indian tribe or an ANC) to
receive any combination of 8(a) sole source and 8(a) competitive
contracts up to a specified dollar amount (excluding contracts of
$100,000 or less). Once that dollar amount of 8(a) contracts is
reached, the firm will not be eligible to receive any more 8(a) sole
source contracts, but will remain eligible for competitive 8(a) awards.
The proposed rule set the dollar limit above which a firm could not
receive sole source 8(a) awards at five times the size standard for the
firm's primary SIC code or $100,000,000, whichever was less. SBA
received comments on both sides of this issue. Several thought the cap
was set at too high a level, while others thought that it should be set
even higher. No commenters presented persuasive reasons for setting the
cap at a level other than that set forth in the proposed rule. As such,
the final rule continues the five times the size standard or
$100,000,000 language. If the size standard for a particular SIC code
increases over time, the corresponding cap amount will also increase.
One comment suggested that after a firm reaches the specified dollar
threshold amount, SBA should require it to use other 8(a) concerns that
have not received contracts as subcontractors in order to receive
additional sole source awards. SBA considered this comment, but decided
not to adopt it. It is important to remember that SBA will not restrict
all 8(a) contract support after a Participant receives total 8(a)
contract support equaling at least five times the size standard for its
primary SIC code or $100,000,000. A firm will be unable to receive only
sole source 8(a) contracts after reaching the cap amount. The
alternative suggested by the commenter seeks to have a Participant that
has exceeded the cap subcontract 8(a) sole source contracts to other
Participants that have not received an 8(a) contract. SBA believes that
enforcing the cap should enable more of those same firms (i.e., the
Participants that have not received an 8(a) contract) to receive 8(a)
contracts directly. While both would aid in distributing the
performance of 8(a) contracts to more Participants, from the
perspective of a Participant that has not received an 8(a) contract,
receiving a sole source contract directly is preferable to getting a
piece of an 8(a) contract as another Participant's subcontractor. In
addition, SBA believes that the alternative cap amounts are
sufficiently high so that a Participant that reaches the cap amount
should be able to compete effectively for 8(a) competitive contracts.
That, in turn, should assist such firms in reaching viability after
leaving the 8(a) program.
Upon further reflection, SBA also amended the date at which a
Participant's eligibility for a sole source contract is measured. The
proposed rule stated that such eligibility would be measured as of the
date of contract award, without taking into account whether the value
of that award would cause the limit to be exceeded. SBA believes that
such a requirement could cause an undue hardship for both 8(a)
Participants and procuring activities. As proposed, SBA could accept a
sole source requirement on behalf of a particular Participant (because
the Participant had not yet received contracts in excess of the cap
amount), the Participant and the procuring activity could enter into
protracted negotiations, and SBA could be required later to deny the
award of the contract because eligibility would be determined as of the
date of award and the Participant may have received one or more
competitive 8(a) contracts between the acceptance and award dates.
Thus, this final rule changes the date that a firm's eligibility for a
sole source award, in terms of whether the firm has exceeded the dollar
limit for 8(a) contracts, from the date of award to the date that the
requirement is accepted by SBA. This does not in any way imply that all
eligibility for an 8(a) sole source contract will now be measured at
the acceptance date. In other words, this final rule will continue to
require that a firm be a current Participant in the 8(a) program on the
date of contract award in order to receive an 8(a) sole source award.
See Sec. 124.508(c).
Finally, similar to the provision identified above when a
Participant fails to achieve its non-8(a) business activity targets,
the final rule adds a provision authorizing the SBA Administrator to
waive the requirement that a Participant cannot receive an 8(a) sole
source award in excess of the cap amount where the head of the
procuring activity requests that award be made for the best interests
of the Government.
Proposed Sec. 124.519 (Sec. 124.520 in the final rule) set forth
the standards for the mentor/protege program. Most of the commenters
were in favor of this new program, although several warned that the
potential existed for abuse. Numerous commenters requested greater
detail in this section. Some of the commenters felt that a section
explaining the purpose of the program would be helpful. In response to
those comments, SBA has amended paragraph (a) of this section to
clarify that the program is designed to encourage approved mentors to
provide various forms of assistance to eligible Participants, with
examples of the assistance contemplated.
SBA received varying views regarding the type of business that
should be able to act as a mentor. The comments ranged from
recommendations that any business, large or small, disadvantaged-owned
or not, should be able to be a mentor, to only small businesses, to
support for the proposed rule which limited mentors to former 8(a)
Participants and current 8(a) Participants in the transitional stage of
the program. Upon further deliberation, SBA believes that the focus
should not be on who the mentor is, but what the concern acting as a
mentor will provide to the protege. For that reason, the final rule
permits any business, large or small, to be a mentor if it can
demonstrate the commitment and ability to assist small, developing 8(a)
Participants. Under the final rule, a mentor generally will have no
more than one protege at a time. The AA/8(a)BD may, however, authorize
a concern to mentor more than one protege at a time where the concern
can demonstrate that the additional mentor/protege relationship will
not adversely affect the development of either protege firm. SBA does
not believe that it would be appropriate to authorize a concern to be a
mentor in a second mentor/protege relationship if that relationship
would harm or compete with the protege of the first mentor/protege
relationship approved by SBA.
Some of the commenters felt that the amount of a contract the
protege could perform should be limited. After considering this
comment, SBA has

[[Page 35737]]

decided not to adopt it at this time. SBA does not want to impose
additional requirements on mentor/protege joint ventures that do not
apply to joint ventures between 8(a) BD concerns and other entities.
Many of the commenters requested guidelines so that the mentor does
not take control of the contracts or the company. SBA will monitor the
mentor/protege arrangement on a regular basis to help ensure that this
does not occur.
Some commenters requested that the program be expanded to enable
companies which have never been in the 8(a) BD program to become
proteges. SBA has not adopted this recommendation. It must be
remembered that SBA's mentor/protege program is designed to be an
additional developmental tool for Participants in the 8(a) BD program.
Only firms that SBA has certified to participate in the 8(a) BD program
are statutorily eligible to receive any of the benefits of the program.
One commenter suggested that a provision be added clarifying that a
mentor and protege will not be determined to be affiliated based on the
mentor/protege agreement or assistance provided pursuant to the
agreement. SBA agrees with this comment and has amended paragraph (d)
of this section to add a new subparagraph (4) to this effect.
Several commenters suggested standards for SBA monitoring of the
relationship and the adoption of objective standards by which to
measure the success of a mentor/protege relationship. In response to
these comments, SBA has added a new paragraph (f) to impose specific
reporting requirements on the protege and to provide standards under
which SBA will review the mentor/protege relationship. The final rule
also amends paragraph (e) of this section (Sec. 124.519(d) in the
proposed rule) to provide that SBA will review the mentor/protege
relationship annually to determine whether to approve its continuation
for another year. As set forth in the rule, the mentor/protege program
is designed to assist the development of Participants in the
developmental stage of the program, Participants that have not received
an 8(a) contract, and Participants having a size that is less than half
the size standard corresponding to its primary SIC code. Where a
Participant leaves the developmental stage of the program, receives
several significant 8(a) contracts, or has a size that exceeds half the
size standard corresponding to its primary SIC code, the firm may no
longer need the assistance provided by the mentor/protege relationship,
and the AA/8(a)BD may decide not to authorize its continuation.
SBA received no comments to proposed Secs. 124.601 through 124.603
and Secs. 124.701 through 124.704. As such, this rule makes no changes
to those sections from the proposed rule.
Part 124, subpart B: Subpart B of the proposed rule defined a Small
Disadvantaged Business (SDB) and set forth the procedures by which a
firm can be recognized as an SDB. As noted above, SBA will discuss the
comments to subpart B and finalize its provisions in a later rulemaking
action.
Part 134: The proposed new Subpart D of Part 134 contained the
rules of procedure applying to appeals of denials of 8(a) BD program
admission based solely on the negative finding(s) of social
disadvantage, economic disadvantage, ownership or control pursuant to
Sec. 124.206; early graduation pursuant to Sec. 124.302 and 124.304;
termination pursuant to Sec. 124.303 and 124.304; and denials of
requests to issue a waiver of the performance of work/termination for
convenience requirements pursuant to Sec. 124.513.
The proposed rules transferred the rules of procedure governing the
8(a) program from Sec. 124.210 to Part 134 so that all procedures
related to appeals before OHA are contained in one part of SBA's
regulations.
SBA received one comment regarding the proposed revisions to Part
134. The majority of these comments dealt with streamlining the
regulations governing the appeals of denials of 8(a) BD program
admission and protecting appellant rights.
The proposed rule did not change Sec. 134.202 and Sec. 134.203 of
the former regulations. The commenter requested that SBA amend
Sec. 134.202 to require that the appeal petition include the SBA
determination. SBA agrees that the appeal petition should include the
SBA determination and modified Sec. 134.203, which specifies the
requirements of a petition, to include the submission of the SBA
determination. This provision will allow the Administrative Law Judge
to determine, without further delay, whether the appeal was timely
filed.
This rule does not finalize the proposed amendment to
Sec. 134.206(a) that would have changed the date on which the SBA's 45-
day period to file an answer would run. The proposed rule would have
changed that date from the date that an appeal is served on SBA to the
date that an appeal is filed at OHA. Upon further consideration, SBA
does not believe that this change is appropriate. The proposed rule was
concerned about SBA not having the allotted time to answer an appeal
where the appeal was incorrectly served on SBA's Office of General
Counsel. SBA has addressed this concern by clarifying the service
requirements for 8(a)-related appeals set forth in Sec. 134.403.
Proposed Sec. 134.401, which outlined the scope of the rules in
Subpart D, had no provision for appeals to OHA from suspensions
pursuant to Sec. 124.305. A commenter stated that the inclusion of
appeals related to suspension was necessary pursuant to Sec. 124.305(b)
which provides that notice of suspension includes a statement that a
request for hearing on the suspension will be considered by an
Administrative Law Judge at OHA and granted or denied as a matter of
discretion. SBA agreed with the comment and added Sec. 134.401(e) in
response to it.
A commenter noted that proposed Sec. 134.405, which deals with
jurisdiction, failed to include a provision for the jurisdiction of
suspension cases pursuant to Sec. 124.305. SBA added subsection (c) to
proposed Sec. 134.405 in response to this comment. Subsection (c)
provides that the jurisdiction of OHA in suspension cases is limited to
determining whether the protection of the Government's interest
requires suspension pending resolution of the termination action,
unless the Administrative Law Judge has consolidated the suspension
appeal with the corresponding termination appeal.
Proposed Sec. 134.406 dealt with review of the administrative
record and replaced Sec. 124.210. A commenter requested that an
appellant be permitted to object to the absence of a document in the
administrative record. Since Sec. 134.406(c) provides that the
administrative record need not contain all documents pertaining to the
appellant, SBA decided that Sec. 134.406(c) should be amended in
response to this request. Revised Sec. 134.406(c) allows an appellant
to object to the absence of a document he or she believes was
erroneously omitted from the administrative record, thereby helping to
ensure that the Administrative Law Judge has all of the information
needed to decide the case.
Proposed Sec. 134.406(e) limited remand to situations where ``due
to the absence in the written administrative record of the reasons upon
which the determination was based, the administrative record is
insufficiently complete to decide'' the case. A commenter requested
that remand be extended to include cases in which SBA made an erroneous
analysis of facts. SBA determined that SBA error is properly handled on
appeal under

[[Page 35738]]

proposed Sec. 134.408 and, therefore, did not adopt this comment.
Proposed Sec. 134.408, which dealt with decisions on appeal,
replaced Sec. 124.210. A commenter requested that the term ``re-
examine'' be changed to ``reconsider,'' and that a time limit be placed
on when the decision is final. SBA determined that for clarity purposes
the term ``re-examine'' should be changed to ``reconsider.'' SBA
further determined that, in response to the commenter's request for a
reasonable time period after which the decision is final, a period of
20 days should be inserted into the proposed regulation after which
time the decision is final.

Compliance With Executive Orders 12612, 12778, and 12866, the
Regulatory Flexibility Act (5 U.S.C. 601, et seq.), and the
Paperwork Reduction Act (44 U.S.C. Ch. 35)

SBA certifies that this rule is not a major rule within the meaning
of Executive Order 12866 and will not have a significant economic
impact on a substantial number of small entities within the meaning of
the Regulatory Flexibility Act, 5 U.S.C. 601, et seq.
The rule addresses changes in the SBA's 8(a) BD program. The
overall impact of the changes to the 8(a) BD program will be beneficial
to small businesses. The rule also makes several changes to SBA's size
regulations that will have an impact beyond that program, and should
result in more procurement opportunities for small business generally.
No definitive data exist that would allow SBA to conclude that the
proposed rule will have a substantial impact on a significant number of
small businesses.
Specifically, the rule improves and strengthens the 8(a) BD
program. It responds to the challenges posed by the findings in the
Adarand Constructors, Inc. v. Pena, 115 Sup. Ct. 2097 (1995) (Adarand),
and are designed to improve the success rates for firms after their
terms of participation in the 8(a) BD program end. The rule changes
fall within three major categories. They are: (1) measures designed to
more equitably distribute 8(a) contracts; (2) small business
affiliation rule revisions; and (3) a new mentor/protege program.
The changes that exclude certain joint venture and teaming
arrangements from SBA's affiliation rules and the 8(a) mentor/protege
program are designed to enable small businesses to effectively compete
for contracts that were previously too large for a single small
business to perform as a prime contractor. By allowing small businesses
to form joint venture and teaming relationships without regard to
affiliation, they can be considered responsible contractors for
``bundled'' and other large contracts which exceed the capability of
any of the individual small businesses to perform as prime contractors.
Likewise, 8(a) Participants will be able to submit offers for and be
considered responsible businesses for larger contracts than they would
be able to obtain individually without the newly established mentor/
protege program. Expanding the number and dollar amount of contracts
available for award through the 8(a) BD program may result in a shift
of dollars to small business.
In fiscal year (FY) 1996, the federal government spent $197.6
billion on the procurement of goods and services. Small businesses were
awarded $41.1 billion in prime contracts, representing about a 21
percent share of the total contract dollars. There are approximately
180,000 small firms registered on PRO-Net, SBA's database of small
businesses actively seeking federal government contracts. By
comparison, there are approximately 5,800 small firms certified as
eligible 8(a) Participants. In FY 1996, $6.4 billion or 3.2 percent of
the total government prime contracts were awarded to less than 2,000
8(a) certified small businesses. SBA believes that the changes set
forth in this rule will benefit small firms, but not increase the net
number of current 8(a) Participants by more than 500 to 800 businesses,
or less than 1 percent of the total universe of small firms seeking
federal government contracts.
Similarly, the changes regarding affiliation eligibility and the
mentor/protege program will benefit small business contractors, but
impact a relatively small number of businesses and dollars, when
compared to total government spending and the universe of small firms
seeking federal government contracts. Because of consolidation,
contracts are becoming larger and fewer in number. It has become
increasingly more difficult for small business to possess the
wherewithal to individually perform these larger contracts. The changes
in small business affiliation rules are designed to counter the growing
trend of contract consolidation and allow small firms to compete for
larger contracts.
For purposes of the Paperwork Reduction Act of 1995 (Public Law
104-13), SBA certifies that this final rule contains no new reporting
or recordkeeping requirements.
For purposes of Executive Order 12612, SBA certifies that this rule
has no federalism implications warranting the preparation of a
Federalism Assessment.
For purposes of Executive Order 12778, SBA certifies that this rule
is drafted, to the extent practicable, in accordance with the standards
set forth in Section 2 of that Order.

List of Subjects

13 CFR Part 121

Government procurement, Government property, Grant programs--
business, Individuals with disabilities, Loan programs--business, Small
businesses.

13 CFR Part 124

Government procurement, Hawaiian Natives, Minority businesses,
Reporting and recordkeeping requirements, Technical assistance,
Tribally-owned concerns.

13 CFR Part 134

Administrative practice and procedure, Organization and functions
(Government agencies).

Accordingly, for the reasons set forth above, SBA amends Title 13,
Code of Federal Regulations (CFR), as follows:

PART 121--[AMENDED]

1. The authority citation for 13 CFR part 121 continues to read as
follows:

Authority: Pub. L. 105-135 sec. 601 et seq., 111 Stat. 2592; 15
U.S.C. 632(a), 634(b)(6), 637(a) and 644(c); and Pub. L. 102-486,
106 Stat. 2776, 3133.

2. Section 121.103 is amended by redesignating paragraphs (f)(3)
and (f)(4) as paragraphs (f)(4) and (f)(5), respectively, by revising
paragraph (f)(2) and by adding a new paragraph (f)(3) to read as
follows:

Sec. 121.103 What is affiliation?

* * * * *
(f) * * *
(2) Except as provided in paragraph (f)(3) of this section,
concerns submitting offers on a particular procurement or property sale
as joint venturers are affiliated with each other with regard to the
performance of that contract.
(3) Exclusion from affiliation. (i) A joint venture or teaming
arrangement of two or more business concerns may submit an offer as a
small business for a non-8(a) Federal procurement without regard to
affiliation under paragraph (f) of this section so long as each concern
is small under the size standard corresponding to the SIC code assigned
to the contract, provided:
(A) For a procurement having a revenue-based size standard, the
procurement exceeds half the size standard corresponding to the SIC
code assigned to the contract; or

[[Page 35739]]

(B) For a procurement having an employee-based size standard, the
procurement exceeds $10 million.
(ii) A joint venture or teaming arrangement of at least one 8(a)
Participant and one or more other business concerns may submit an offer
for a competitive 8(a) procurement without regard to affiliation under
paragraph (f) of this section so long as the requirements of 13 CFR
124.513(b)(1) are met.
(iii) Two firms approved by SBA to be a mentor and protege under 13
CFR 124.520 may joint venture as a small business for any Federal
Government procurement, provided the protege qualifies as small for the
size standard corresponding to the SIC code assigned to the procurement
and, for purposes of 8(a) sole source requirements, has not reached the
dollar limit set forth in 13 CFR 124.519.
* * * * *
3. Section 121.1001 is amended by redesignating paragraphs (a)(2)
through (a)(6) as paragraphs (a)(3) through (a)(7), by adding the
following new paragraph (a)(2), and by revising paragraph (b)(2) to
read as follows:

Sec. 121.1001 Who may initiate a size protest or request a formal size
determination?

(a) * * *
(2) For competitive 8(a) contracts, the following entities may
protest:
(i) Any offeror;
(ii) The contracting officer; or
(iii) The SBA District Director, or designee, in either the
district office serving the geographical area in which the procuring
activity is located or the district office that services the apparent
successful offeror, or the Associate Administrator for 8(a) Business
Development.
* * * * *
(b) * * *
(2) For SBA's 8(a) BD program:
(i) Concerning initial or continued 8(a) BD eligibility, the
following entities may request a formal size determination:
(A) The 8(a) BD applicant concern or Participant; or
(B) The Assistant Administrator of the Division of Program
Certification and Eligibility or the Associate Administrator for
8(a)BD.
(ii) Concerning individual sole source 8(a) contract awards, the
following entities may request a formal size determination:
(A) The Participant nominated for award of the particular sole
source contract;
(B) The SBA program official with authority to execute the 8(a)
contract; or
(C) The SBA District Director in the district office that services
the Participant, or the Associate Administrator for 8(a)BD.
* * * * *
4. Section 121.1103 is amended by revising paragraph (a) to read as
follows:

Sec. 121.1103 What are the procedures for appealing a SIC code
designation?

(a) Generally, any interested party who has been adversely affected
by a SIC code designation may appeal the designation to OHA. However,
with respect to a particular sole source 8(a) contract, only the
Associate Administrator for 8(a)BD may appeal.
* * * * *

PART 124--[AMENDED]

5. The authority citation for part 124 continues to read as
follows:

Authority: 15 U.S.C. 634(b)(6), 636(j), 637(a), 637(d) and Pub.
L. 99-661, Pub. L. 100-656, sec. 1207, Pub. L. 101-37, Pub. L. 101-
574, and 42 U.S.C. 9815.

6. In part 124, subpart B consisting of Secs. 124.601 through
124.610 is redesignated as subpart B, Secs. 124.1001 through 124.1010,
and subpart A is revised to read as follows:

PART 124--8(A) BUSINESS DEVELOPMENT/SMALL DISADVANTAGED BUSINESS
STATUS DETERMINATIONS

Subpart A--8(a) Business Development

Provisions of General Applicability

124.1 What is the purpose of the 8(a) Business Development program?
124.2 What length of time may a business participate in the 8(a) BD
program?
124.3 What definitions are important in the 8(a) BD program?

Eligibility Requirements for Participation in the 8(a) Business
Development Program

124.101 What are the basic requirements a concern must meet for the
8(a) BD program?
124.102 What size business is eligible to participate in the 8(a)
BD program?
124.103 Who is socially disadvantaged?
124.104 Who is economically disadvantaged?
124.105 What does it mean to be unconditionally owned by one or
more disadvantaged individuals?
124.106 When do disadvantaged individuals control an applicant or
Participant?
124.107 What is potential for success?
124.108 What other eligibility requirements apply for individuals
or businesses?
124.109 Do Indian tribes and Alaska Native Corporations have any
special rules for applying to the 8(a) BD program?
124.110 Do Native Hawaiian Organizations have any special rules for
applying to the 8(a) BD program?
124.111 Do Community Development Corporations (CDCs) have any
special rules for applying to the 8(a) BD program?
124.112 What criteria must a business meet to remain eligible to
participate in the 8(a) BD program?

Applying to the 8(a) BD Program

124.201 May any business submit an application?
124.202 Where must an application be filed?
124.203 What must a concern submit to apply to the 8(a) BD program?
124.204 How does SBA process applications for 8(a) BD program
admission?
124.205 Can an applicant ask SBA to reconsider SBA's initial
decision to decline its application?
124.206 What appeal rights are available to an applicant that has
been denied admission?
124.207 Can an applicant reapply for admission to the 8(a) BD
program?

Exiting the 8(a) BD Program

124.301 What are the ways a business may leave the 8(a) BD program?
124.302 What is early graduation?
124.303 What is termination?
124.304 What are the procedures for early graduation and
termination?
124.305 What is suspension and how is a Participant suspended from
the 8(a) BD program?

Business Development

124.401 Which SBA field office services a Participant?
124.402 How does a Participant develop a business plan?
124.403 How is a business plan updated and modified?
124.404 What business development assistance is available to
Participants during the two stages of participation in the 8(a) BD
program?
124.405 How does a Participant obtain Federal Government surplus
property?

Contractual Assistance

124.501 What general provisions apply to the award of 8(a)
contracts?
124.502 How does an agency offer a procurement to SBA for award
through the 8(a) BD program?
124.503 How does SBA accept a procurement for award through the
8(a) BD program?
124.504 What circumstances limit SBA's ability to accept a
procurement for award as an 8(a) contract?
124.505 When will SBA appeal the terms and conditions of a
particular 8(a) contract or a procuring activity decision not to
reserve a procurement for the 8(a) BD program?
124.506 At what dollar threshold must an 8(a) procurement be
competed among eligible Participants?
124.507 What procedures apply to competitive 8(a) procurements?
124.508 How is an 8(a) contract executed?
124.509 What are non-8(a) business activity targets?

[[Page 35740]]

124.510 What percentage of work must a Participant perform on an
8(a) contract?
124.511 How is fair market price determined for an 8(a) contract?
124.512 Delegation of contract administration to procuring
agencies.
124.513 Under what circumstances can a joint venture be awarded an
8(a) contract?
124.514 Exercise of 8(a) options and modifications.
124.515 Can a Participant change its ownership or control and
continue to perform an 8(a) contract, and can it transfer
performance to another firm?
124.516 Who decides contract disputes arising between a Participant
and a procuring activity after the award of an 8(a) contract?
124.517 Can the eligibility or size of a Participant for award of
an 8(a) contract be questioned?
124.518 How can an 8(a) contract be terminated before performance
is completed?
124.519 Are there any dollar limits on the amount of 8(a) contracts
that a Participant may receive?
124.520 Mentor/Protege program.

Miscellaneous Reporting Requirements

124.601 What reports does SBA require concerning parties who assist
Participants in obtaining federal contracts?
124.602 What kind of annual financial statement must a Participant
submit to SBA?
124.603 What reports regarding the continued business operations of
former Participants does SBA require?

Management and Technical Assistance Program

124.701 What is the purpose of the 7(j) management and technical
assistance program?
124.702 What types of assistance are available through the 7(j)
program?
124.703 Who is eligible to receive 7(j) assistance?
124.704 What additional management and technical assistance is
reserved exclusively for concerns eligible to receive 8(a)
contracts?

Subpart A--8(a) Business Development

Provisions of General Applicability

Sec. 124.1 What is the purpose of the 8(a) Business Development
program?

Sections 8(a) and 7(j) of the Small Business Act authorize a
Minority Small Business and Capital Ownership Development program
(designated the 8(a) Business Development or ``8(a) BD'' program for
purposes of the regulations in this part). The purpose of the 8(a) BD
program is to assist eligible small disadvantaged business concerns
compete in the American economy through business development.

Sec. 124.2 What length of time may a business participate in the 8(a)
BD program?

A Participant receives a program term of nine years from the date
of SBA's approval letter certifying the concern's admission to the
program. The Participant must maintain its program eligibility during
its tenure in the program and must inform SBA of any changes that would
adversely affect its program eligibility. A firm that completes its
nine year term of participation in the 8(a) BD program is deemed to
graduate from the program. The nine year program term may be shortened
only by termination, early graduation or voluntary graduation as
provided for in this subpart.

Sec. 124.3 What definitions are important in the 8(a) BD Program?

Alaska Native means a citizen of the United States who is a person
of one-fourth degree or more Alaskan Indian (including Tsimshian
Indians not enrolled in the Metlaktla Indian Community), Eskimo, or
Aleut blood, or a combination of those bloodlines. The term includes,
in the absence of proof of a minimum blood quantum, any citizen whom a
Native village or Native group regards as an Alaska Native if their
father or mother is regarded as an Alaska Native.
Alaska Native Corporation or ANC means any Regional Corporation,
Village Corporation, Urban Corporation, or Group Corporation organized
under the laws of the State of Alaska in accordance with the Alaska
Native Claims Settlement Act, as amended (43 U.S.C. 1601, et seq.)
Bona fide place of business, for purposes of 8(a) construction
procurements, means a location where a Participant regularly maintains
an office which employs at least one full-time individual within the
appropriate geographical boundary. The term does not include
construction trailers or other temporary construction sites.
Community Development Corporation or CDC means a nonprofit
organization responsible to residents of the area it serves which has
received financial assistance under 42 U.S.C. 9805, et seq.
Concern is defined in part 121 of this title.
Days means calendar days unless otherwise specified.
Day-to-day operations of a firm means the marketing, production,
sales, and administrative functions of the firm.
Immediate family member means father, mother, husband, wife, son,
daughter, brother, sister, grandfather, grandmother, grandson,
granddaughter, father-in-law, and mother-in-law.
Indian tribe means any Indian tribe, band, nation, or other
organized group or community of Indians, including any ANC, which is
recognized as eligible for the special programs and services provided
by the United States to Indians because of their status as Indians, or
is recognized as such by the State in which the tribe, band, nation,
group, or community resides. See definition of ``tribally-owned
concern.''
Native Hawaiian means any individual whose ancestors were natives,
prior to 1778, of the area which now comprises the State of Hawaii.
Native Hawaiian Organization means any community service
organization serving Native Hawaiians in the State of Hawaii which is a
not-for-profit organization chartered by the State of Hawaii, is
controlled by Native Hawaiians, and whose business activities will
principally benefit such Native Hawaiians.
Negative control is defined in part 121 of this title.
Non-disadvantaged individual means any individual who does not
claim disadvantaged status, does not qualify as disadvantaged, or upon
whose disadvantaged status an applicant or Participant does not rely in
qualifying for 8(a) BD program participation.
Participant means a small business concern admitted to participate
in the 8(a) BD program.
Primary industry classification means the four digit Standard
Industrial Classification (SIC) code designation which best describes
the primary business activity of the 8(a) BD applicant or Participant.
The SIC code designations are described in the Standard Industrial
Classification Manual published by the U.S. Office of Management and
Budget.
Principal place of business means the business location where the
individuals who manage the concern's day-to-day operations spend most
working hours and where top management's business records are kept. If
the offices from which management is directed and where the business
records are kept are in different locations, SBA will determine the
principal place of business for program purposes.
Program year means a 12-month period of an 8(a) BD Participant's
program participation. The first program year begins on the date that
the concern is certified to participate in the 8(a) BD program and ends
one year later. Each subsequent program year begins on the
Participant's anniversary of program certification and runs for one 12-
month period.
Same or similar line of business means business activities within
the

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same two-digit ``Major Group'' of the SIC Manual as the primary
industry classification of the applicant or Participant. The phrase
``same business area'' is synonymous with this definition.
Self-marketing of a requirement occurs when a Participant
identifies a requirement that has not been committed to the 8(a) BD
program and, through its marketing efforts, causes the procuring
activity to offer that specific requirement to the 8(a) BD program on
the Participant's behalf. A firm which identifies and markets a
requirement which is subsequently offered to the 8(a) BD program as an
open requirement or on behalf of another Participant has not ``self-
marketed'' the requirement within the meaning of this part.
Tribally-owned concern means any concern at least 51 percent owned
by an Indian tribe as defined in this section.
Unconditional ownership means ownership that is not subject to
conditions precedent, conditions subsequent, executory agreements,
voting trusts, restrictions on or assignments of voting rights, or
other arrangements causing or potentially causing ownership benefits to
go to another (other than after death or incapacity). The pledge or
encumbrance of stock or other ownership interest as collateral,
including seller-financed transactions, does not affect the
unconditional nature of ownership if the terms follow normal commercial
practices and the owner retains control absent violations of the terms.

Eligibility Requirements for Participation in the 8(a) Business
Development Program

Sec. 124.101 What are the basic requirements a concern must meet for
the 8(a) BD program?

Generally, a concern meets the basic requirements for admission to
the 8(a) BD program if it is a small business which is unconditionally
owned and controlled by one or more socially and economically
disadvantaged individuals who are of good character and citizens of the
United States, and which demonstrates potential for success.

Sec. 124.102 What size business is eligible to participate in the 8(a)
BD program?

(a) An applicant concern must qualify as a small business concern
as defined in part 121 of this title. The applicable size standard is
the one for its primary industry classification. The rules for
calculating the size of a tribally-owned concern, a concern owned by an
Alaska Native Corporation, a concern owned by a Native Hawaiian
Organization, or a concern owned by a Community Development Corporation
are additionally affected by Secs. 124.109, 124.110, and 124.111,
respectively.
(b) If 8(a) BD program officials determine that a concern may not
qualify as small, they may deny an application for 8(a) BD program
admission or may request a formal size determination under part 121 of
this title.
(c) A concern whose application is denied due to size by 8(a) BD
program officials may request a formal size determination under part
121 of this title. A favorable determination will enable the firm to
immediately submit a new 8(a) BD application without waiting one year.

Sec. 124.103 Who is socially disadvantaged?

(a) General. Socially disadvantaged individuals are those who have
been subjected to racial or ethnic prejudice or cultural bias within
American society because of their identities as members of groups and
without regard to their individual qualities. The social disadvantage
must stem from circumstances beyond their control.
(b) Members of designated groups. (1) There is a rebuttable
presumption that the following individuals are socially disadvantaged:
Black Americans; Hispanic Americans; Native Americans (American
Indians, Eskimos, Aleuts, or Native Hawaiians); Asian Pacific Americans
(persons with origins from Burma, Thailand, Malaysia, Indonesia,
Singapore, Brunei, Japan, China (including Hong Kong), Taiwan, Laos,
Cambodia (Kampuchea), Vietnam, Korea, The Philippines, U.S. Trust
Territory of the Pacific Islands (Republic of Palau), Republic of the
Marshall Islands, Federated States of Micronesia, the Commonwealth of
the Northern Mariana Islands, Guam, Samoa, Macao, Fiji, Tonga,
Kiribati, Tuvalu, or Nauru); Subcontinent Asian Americans (persons with
origins from India, Pakistan, Bangladesh, Sri Lanka, Bhutan, the
Maldives Islands or Nepal); and members of other groups designated from
time to time by SBA according to procedures set forth at paragraph (d)
of this section. Being born in a country does not, by itself, suffice
to make the birth country an individual's country of origin for
purposes of being included within a designated group.
(2) An individual must demonstrate that he or she has held himself
or herself out, and is currently identified by others, as a member of a
designated group if SBA requires it.
(3) The presumption of social disadvantage may be overcome with
credible evidence to the contrary. Individuals possessing or knowing of
such evidence should submit the information in writing to the Associate
Administrator for 8(a) BD (AA/8(a)BD) for consideration.
(c) Individuals not members of designated groups. (1) An individual
who is not a member of one of the groups presumed to be socially
disadvantaged in paragraph (b)(1) of this section must establish
individual social disadvantage by a preponderance of the evidence.
(2) Evidence of individual social disadvantage must include the
following elements:
(i) At least one objective distinguishing feature that has
contributed to social disadvantage, such as race, ethnic origin,
gender, physical handicap, long-term residence in an environment
isolated from the mainstream of American society, or other similar
causes not common to individuals who are not socially disadvantaged;
(ii) Personal experiences of substantial and chronic social
disadvantage in American society, not in other countries; and
(iii) Negative impact on entry into or advancement in the business
world because of the disadvantage. SBA will consider any relevant
evidence in assessing this element. In every case, however, SBA will
consider education, employment and business history, where applicable,
to see if the totality of circumstances shows disadvantage in entering
into or advancing in the business world.
(A) Education. SBA considers such factors as denial of equal access
to institutions of higher education, exclusion from social and
professional association with students or teachers, denial of
educational honors rightfully earned, and social patterns or pressures
which discouraged the individual from pursuing a professional or
business education.
(B) Employment. SBA considers such factors as unequal treatment in
hiring, promotions and other aspects of professional advancement, pay
and fringe benefits, and other terms and conditions of employment;
retaliatory or discriminatory behavior by an employer; and social
patterns or pressures which have channelled the individual into
nonprofessional or non-business fields.
(C) Business history. SBA considers such factors as unequal access
to credit or capital, acquisition of credit or capital under
commercially unfavorable circumstances, unequal treatment in
opportunities for government contracts or other work, unequal treatment
by potential customers and business

[[Page 35742]]

associates, and exclusion from business or professional organizations.
(d) Socially disadvantaged group inclusion. (1) General.
Representatives of an identifiable group whose members believe that the
group has suffered chronic racial or ethnic prejudice or cultural bias
may petition SBA to be included as a presumptively socially
disadvantaged group under paragraph (b)(1) of this section. Upon
presentation of substantial evidence that members of the group have
been subjected to racial or ethnic prejudice or cultural bias because
of their identity as group members and without regard to their
individual qualities, SBA will publish a notice in the Federal Register
that it has received and is considering such a request, and that it
will consider public comments.
(2) Standards to be applied. In determining whether a group has
made an adequate showing that it has suffered chronic racial or ethnic
prejudice or cultural bias for the purposes of this section, SBA must
determine that:
(i) The group has suffered prejudice, bias, or discriminatory
practices;
(ii) Those conditions have resulted in economic deprivation for the
group of the type which Congress has found exists for the groups named
in the Small Business Act; and
(iii) Those conditions have produced impediments in the business
world for members of the group over which they have no control and
which are not common to small business owners generally.
(3) Procedure. The notice published under paragraph (d)(1) of this
section will authorize a specified period for the receipt of public
comments supporting or opposing the petition for socially disadvantaged
group status. If appropriate, SBA may hold hearings. SBA may also
conduct its own research relative to the group's petition.
(4) Decision. In making a final decision that a group should be
considered presumptively disadvantaged, SBA must find that a
preponderance of the evidence demonstrates that the group has met the
standards set forth in paragraph (d)(2) of this section based on SBA's
consideration of the group petition, the comments from the public, and
any independent research it performs. SBA will advise the petitioners
of its final decision in writing, and publish its conclusion as a
notice in the Federal Register. If appropriate, SBA will amend
paragraph (b)(1) of this section to include a new group.

Sec. 124.104 Who is economically disadvantaged?

(a) General. Economically disadvantaged individuals are socially
disadvantaged individuals whose ability to compete in the free
enterprise system has been impaired due to diminished capital and
credit opportunities as compared to others in the same or similar line
of business who are not socially disadvantaged.
(b) Submission of narrative and financial information. (1) Each
individual claiming economic disadvantage must describe it in a
narrative statement, and must submit personal financial information.
(2) When married, an individual claiming economic disadvantage also
must submit separate financial information for his or her spouse,
unless the individual and the spouse are legally separated.
(c) Factors to be considered. In considering diminished capital and
credit opportunities, SBA will examine factors relating to the personal
financial condition of any individual claiming disadvantaged status,
including personal income for the past two years (including bonuses and
the value of company stock given in lieu of cash), personal net worth,
and the fair market value of all assets, whether encumbered or not. SBA
will also consider the financial condition of the applicant compared to
the financial profiles of small businesses in the same primary industry
classification, or, if not available, in similar lines of business,
which are not owned and controlled by socially and economically
disadvantaged individuals in evaluating the individual's access to
credit and capital. The financial profiles that SBA compares include
total assets, net sales, pre tax profit, sales/working capital ratio,
and net worth.
(1) Transfers within two years. (i) Except as set forth in
paragraph (c)(1)(ii) of this section, SBA will attribute to an
individual claiming disadvantaged status any assets which that
individual has transferred to an immediate family member, or to a trust
a beneficiary of which is an immediate family member, for less than
fair market value, within two years prior to a concern's application
for participation in the 8(a) BD program or within two years of a
Participant's annual program review, unless the individual claiming
disadvantaged status can demonstrate that the transfer is to or on
behalf of an immediate family member for that individual's education,
medical expenses, or some other form of essential support.
(ii) SBA will not attribute to an individual claiming disadvantaged
status any assets transferred by that individual to an immediate family
member that are consistent with the customary recognition of special
occasions, such as birthdays, graduations, anniversaries, and
retirements.
(iii) In determining an individual's access to capital and credit,
SBA may consider any assets that the individual transferred within such
two-year period described by paragraph (c)(1)(i) of this section that
SBA does not consider in evaluating the individual's assets and net
worth (e.g., transfers to charities).
(2) Net worth. For initial 8(a) BD eligibility, the net worth of an
individual claiming disadvantage must be less than $250,000. For
continued 8(a) BD eligibility after admission to the program, net worth
must be less than $750,000. In determining such net worth, SBA will
exclude the ownership interest in the applicant or Participant and the
equity in the primary personal residence (except any portion of such
equity which is attributable to excessive withdrawals from the
applicant or Participant). Exclusions for net worth purposes are not
exclusions for asset valuation or access to capital and credit
purposes.
(i) A contingent liability does not reduce an individual's net
worth.
(ii) The personal net worth of an individual claiming to be an
Alaska Native will include assets and income from sources other than an
Alaska Native Corporation and exclude any of the following which the
individual receives from any Alaska Native Corporation: cash (including
cash dividends on stock received from an ANC) to the extent that it
does not, in the aggregate, exceed $2,000 per individual per annum;
stock (including stock issued or distributed by an ANC as a dividend or
distribution on stock); a partnership interest; land or an interest in
land (including land or an interest in land received from an ANC as a
dividend or distribution on stock); and an interest in a settlement
trust.

Sec. 124.105 What does it mean to be unconditionally owned by one or
more disadvantaged individuals?

An applicant or Participant must be at least 51 percent
unconditionally and directly owned by one or more socially and
economically disadvantaged individuals who are citizens of the United
States, except for concerns owned by Indian tribes, Alaska Native
Corporations, Native Hawaiian Organizations, or Community Develop

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A98-17196. Public record. Not legal advice.