As PilieroMazza noted recently here, the Small Business Administration (SBA) released a major proposed rulemaking that will impact government contractors, including those that are participants in or seeking to be admitted to the 8(a) Business Development Program (8(a) Program). PilieroMazza is posting a series of client alerts regarding SBA’s proposed rulemaking. This alert highlights some of the proposed changes pertaining specifically to the 8(a) Program that will impact both applicants and participants.
8(a) Application
SBA is proposing certain revisions that would impact those seeking to apply to the 8(a) Program, including:
- If you live in a community property state, SBA mandates a transmutation agreement requiring a spouse to relinquish his or her community property ownership rights in order for the applicant to be considered at least 51% unconditionally owned by a disadvantaged individual. While SBA also requires unconditional ownership for SDVOSBs and WOSBs, the requirement for a transmutation agreement does not exist in those programs. SBA is requesting comments as to whether or not considering community property laws complies with the unconditional ownership requirement and whether transmutation agreements are permissible under state law.
- One of the requirements to be admitted to the 8(a) Program is that SBA must find the applicant has reasonable prospects for success. Part of this analysis requires applicants provide their tax returns, showing operating revenues in the primary industry the applicant seeks certification. This caused confusion, particularly where the business activity code for tax return purposes does not align with a particular NAICS code. SBA is proposing to relax this requirement to merely require that the applicant’s tax return for each of the two previous tax years show operating revenues.
- SBA is proposing to remove the professional licensing requirement or revise such that the applicant would acknowledge a license is needed and certify that it has such license or will obtain a license when performing a contract. SBA is requesting comments on the alternatives.
- SBA is proposing to remove the 12-month waiting period to reapply if the applicant is denied three times within 18 months.
Ownership and Control
As you may be aware, there are certain ownership restrictions on an 8(a) firm. One of the restrictions currently provides that a non-participant concern in the same or similar line of business (which is determined by looking at the first four digits of a company’s NAICS code) may not own more than a 10% interest of a participant in the developmental stage (years 1 – 4 of the program) or a 20% interest if the participant is in the transitional stage (years 5 – 9 of the program). SBA is proposing to increase these figures to 20% and 30%, respectively. The exception that an SBA-approved mentor may own up to 40% of its 8(a) protégé will still apply.
SBA’s regulations currently provide that ownership changes are subject to prior SBA approval. As one exception to the general rule, a change of ownership of an 8(a) firm may occur without needing prior SBA approval, so long as all the non-disadvantaged individual owners involved in the change of ownership own no more than 20% both before and after the transaction. The proposed rule proposes to increase this threshold to 30%. In addition, SBA would add a fourth exception where prior approval is not required for when the 8(a) participant has not received an 8(a) contract. Notice of any change, however, will still be required to SBA within 60 days of the change.
In addition, SBA’s regulations require the qualifying owner(s) unconditionally own and control the company. The same requirement exists for other socioeconomic programs, such as SDVOSB and WOSB, but the standards applied have been different. SBA is proposing to allow a right of first refusal, granting a non-disadvantaged individual the contractual right to purchase the ownership interests of a disadvantaged individual if the terms follow normal commercial practices. This would not interfere with the unconditional ownership requirement. This language currently exists in the SDVOSB program. SBA is also proposing to incorporate the extraordinary circumstances that currently exists in the SDVOSB program (and add a minor one) as the only permissible unanimous consent items for non-disadvantaged owners. The changes that SBA is proposing to apply across the socioeconomic programs will be further discussed in a subsequent client alert.
Also, regarding control of an 8(a) company, one area that SBA looks at in determining control is compensation. Currently, the regulations require the qualifying owner receive the highest compensation. If the 8(a) participant wants to change this, then it needs to obtain prior SBA approval. However, SBA is proposing to remove the requirement for prior approval and, instead, notify SBA within 30 days of the change.
8(a) Ongoing Compliance and Reporting
As companies progress through the 8(a) Program and in the transitional stage, SBA imposes certain non-8(a) business activity targets to ensure participants do not develop an unusual reliance on 8(a) awards. Meaning, a certain percentage of revenue must be obtained from non-8(a) contracts. If a contractor does not meet a certain minimum percentage in a given program year, then it may be restricted from receiving 8(a) sole-source contracts. However, this restriction should only be imposed where the participant has not made good faith efforts to meet its non-8(a) business activity targets. One way to demonstrate good faith efforts is by demonstrating that the participant submitted an offer for one or more non-8(a) procurements which, if awarded during the applicable program year, would give the participant sufficient revenues to achieve its target. However, with this new proposed rule, SBA proposes that it would only consider procurements for which the participant “had reasonable prospects of success.” And SBA proposes to clarify that only the base year of the contract would be considered, as opposed to the entire contract value.
Another ongoing reporting requirement for 8(a) companies is the requirement to provide SBA with certain financial statements, depending on the company’s receipts. Currently, if a participant has less than $2 Million in annual receipts, it can submit in-house or a compilation statement prepared by a licensed independent public accountant If a participant has between $2 Million and $10 Million in annual receipts, it is required to submit reviewed annual financial statements prepared by a licensed independent public accountant. And if a participant has more than $10 Million in annual receipts, it must submit audited annual financial statements. SBA is proposing to increase the thresholds to up to $5 Million (in-house); between $5 Million and $20 Million (reviewed); and more than $20 Million (audited), respectively.
If your firm is affected by these proposed changes and would like to submit public comments to SBA, please make sure to do so before the deadline on October 7, 2024.
If you have questions about SBA’s proposed changes, please contact the author of this client alert, Meghan Leemon, or another member of PilieroMazza’s Government Contracts Group.
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