On December 17, 2024, the Small Business Administration (SBA) published a final rule that will make changes to its regulations for the Historically Underutilized Business Zone (HUBZone) Program, clarifying certain policies. PilieroMazza recently covered the proposed changes (linked here), which impact not just the HUBZone Program. This final rule goes into effect on January 16, 2025, “will apply to existing contracts,” and makes several amendments impacting all GovCon small businesses.
PilieroMazza’s Government Contracts Group will release various blogs on different aspects of the final rule and present a webinar in January (visit this link to register), but here are some key high-level takeaways:
HUBZone Program
Changes to the Definition of “Principal Office”
- One of the proposed changes was to require 51% residency if 100% of a firm’s employees telework; however, the final rule does not adopt the proposed language. Accordingly, HUBZone firms must have their principal office (i.e., the location where more employees work compared to any other location) in a HUBZone and at least 35% HUBZone resident employees.
Defining an “Employee”
- SBA proposed to change the number of hours per month an individual needs to work to be considered an employee from 40 hours to 80 hours. SBA is keeping the 40-hour requirement but is requiring that, generally speaking, employees work a minimum of 10 hours per week.
- A certified HUBZone small business concern may have up to four legacy HUBZone employees at a given time but must have at least one other HUBZone employee.
HUBZone Program Eligibility
- The final rule adopts the proposed change to require HUBZone firms to be eligible at the time of offer. This is a major shift and a big change to how things have worked for the last few years, where eligibility reverted back to the last date of recertification or anniversary date. SBA believes that this requirement will encourage firms to maintain the 35% throughout the year.
Negative Control Considerations
In our comments to the proposed rule, PilieroMazza urged SBA to consider SBA’s Office of Hearings and Appeals’ case law, which permits minority owners of small businesses to block certain extraordinary actions if those provisions are crafted to protect the minority shareholders’ investment and do not impede the majority’s ability to control operations or conduct business. In the final rule, SBA noted that it “agrees and has adopted this catch-all language in this final rule.” Namely, SBA will not find that a minority shareholder has negative control where such minority shareholder has the ability to block action by the board of directors or shareholders regarding the following extraordinary circumstances:
- adding a new equity stakeholder or increasing the investment amount of an equity stakeholder;
- dissolution of the company;
- sale of the company or all assets of the company;
- merger of the company;
- company declaring bankruptcy;
- amendment of the company’s corporate governance documents to remove the shareholder’s authority to block any of (1) – (5) above; and
- any other extraordinary action that is crafted solely to protect the investment of the minority shareholders and not to impede the majority’s ability to control the concern’s operations or to conduct the concern’s business as it chooses.
Notably, this concept will apply not just to small businesses but also to 8(a), WOSB/EDWOSBs, and SDVOSBs. This is a major change to 8(a), WOSB/EDWOSBs, and SDVOSBs, and will likely allow these businesses greater ability to obtain an equity investment.
Size and Status Recertification
We will be issuing a more detailed blog on this topic, but at a high level, the impacts of this final rule largely affect small businesses holding or seeking to bid on set aside or reserved multiple-award contracts (MAC).
If a concern undergoes a disqualifying recertification—such as a recertification as other than small or no longer a qualified small business program participant—due to a recertification requirement or merger, acquisition, or sale involving a business entity that does not itself qualify as small under the NAICS code assigned to the MAC, the company is ineligible to submit an offer for a set-aside or reserved award after the triggering event occurs. But, if the disqualifying recertification involves another small business, then the company remains eligible for set-aside or reserved orders under the MAC, although the procuring agency cannot count the order as an award to small business size/status.
Notably, the revisions discussed above (which will be included in the new 13 C.F.R. § 125.12) will have a delayed effective date and will not go into effect until January 17, 2026. SBA agreed that it makes sense to allow business concerns some time to adapt and plan how to best comply with the recertification provisions, as revised.
If you have questions about SBA’s final rule and how it may impact your business, please contact Meghan Leemon, or another member of PilieroMazza’s Government Contracts Group.
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