SBA Update: Final Rule Makes Investing in 8(a) Firms Easier Than Ever!

As PilieroMazza has been reporting, the Small Business Administration (SBA) recently issued its much-anticipated final rule, which updates and clarifies many regulations that impact small businesses. The revised regulations impact not only small businesses but also firms in preferential procurement programs like the 8(a) Program and individuals and larger businesses that do business with these firms. Of these amendments to the regulations, there are three that loosen ownership restrictions on the minority owners in 8(a) firms and should be welcomed by 8(a) owners and their minority investment partners.  Below, PilieroMazza identifies these changes and analyzes how they are beneficial to both the majority and minority owners of 8(a) firms.

Ownership Percentages Allowed by Non-Disadvantaged Partner Increase

The SBA has always placed restrictions on non-disadvantaged individuals and concerns with a minority ownership interest in 8(a) firms. The individual upon whom the 8(a) eligibility is based must own at least 51% of the 8(a) concern. For non-disadvantaged/non-qualifying owners, SBA specifies additional rules depending on the non-disadvantaged owners’ interest in other firms. Potential non-disadvantaged owners who own at least 10% in another 8(a) participant or who are in the same or similar line of business were previously limited to an ownership percentage of only 10% in the developmental stage of the 8(a) Program and 20% in the transitional stage of the 8(a) Program. SBA increased this percentage to 20% in the developmental stage and 30% in the transitional stage (except for SBA-approved mentors, in which case the limit remains 40%).

Broadened Exception to SBA’s Prior Approval for Ownership Changes

In addition to increasing non-disadvantaged ownership caps, the SBA is making it easier for 8(a) firms to increase the percentage ownership of non-disadvantaged individuals and concerns in the 8(a) firm without seeking SBA’s prior approval. Generally speaking, the SBA’s approval is needed for any changes of ownership in an 8(a) firm, even where the interest of qualifying owner(s) is not impacted. Currently, there are only three exceptions to this requirement:

1. when all non-disadvantaged owners involved in the change of ownership owned no more than a 20% interest in the concern both before and after the transaction;
2. the transfer results from the death or incapacity of a disadvantaged principal due to a serious, long-term illness or injury; or
3. the disadvantaged owner in control of the 8(a) firm will increase the percentage of its ownership interest by any percentage.

The final rule amends the first exception by increasing the ownership cap from 20% to 30%. When the final rule is implemented, SBA’s prior approval will not be required where all non-disadvantaged owners involved in the change own no more than 30% before and after the transaction. SBA also adds a fourth exception for where the 8(a) firm has never received an 8(a) contract and the owner(s) upon whom initial eligibility was based continues to own more than 50% of the 8(a) firm. Though prior approval will not be required in these circumstances, the 8(a) firm must notify the SBA of any of these changes within 60 days or before it submits an offer for an 8(a) contract, whichever occurs first, and SBA will review the documents associated therewith.

Minority Owners Get More Rights

Finally, as PilieroMazza’s Meghan Leemon previously reported here, the SBA introduced a list of extraordinary circumstances in which minority owners may have the power to block the 8(a) firm’s action. Previously, it was not clear what, if any, unanimous consent items were permissible or other protections for minority owners. In order to clarify such circumstances, PilieroMazza successfully advocated for the SBA to include such a list in the final rule. The final rule delineates seven extraordinary circumstances, including one catch-all provision allowing any other extraordinary action solely crafted to protect the investment of the minority shareholders, provided it does not impede the majority owners’ ability to control the concern’s operations or to conduct its business as they see fit. The other six are:

1. adding a new equity stakeholder or increasing the investment amount of an equity stakeholder;
2. dissolution of the company;
3. sale of the company or all assets of the company;
4. merger of the company;
5. company declaring bankruptcy; and
6. amendment of the company’s corporate governance documents to remove the shareholder’s authority to block any of (1) – (5) above.

These Amendments Help 8(a) Owners and Investors

PilieroMazza is pleased with these amendments, which makes investing in an 8(a) company easier and creates a significant opportunity for 8(a) owners to bring in new investors. Securing the SBA’s approval for changes in ownership involves a lot of paperwork, time, and resources. In some cases, the SBA’s approval process can take upwards of one year. The ownership percentages increase for non-disadvantaged owners in the same field will help current and future 8(a) firms attract partners with the experience and resources to help them grow. Additionally, the higher percentage in the transitional stage will facilitate access to capital for 8(a) firms preparing to graduate, enhancing their ability to compete in the open market.

Finally, investors in 8(a) firms benefit from the addition of the extraordinary circumstances outlined above. It gives them some say on very significant business decisions that may impact their interests. It makes the investment less risky, allowing the 8(a) owner to attract these investors who can provide much-needed capital and contributions to their business development.

The final rule goes into effect on January 16, 2025, and will apply to existing and new contracts and current and future 8(a) participants. If you have questions about the SBA’s final rule and how it may impact your business, please contact Tony Franco, Meghan Leemon, or another member of PilieroMazza’s Government Contracts or Mergers & Acquisitions practice groups. Special thanks to Krissy Cralle for her assistance with this client alert.

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