This section of the FEDERAL REGISTER

contains notices to the public of the proposed

issuance of rules and regulations. The

purpose of these notices is to give interested

persons an opportunity to participate in the

rule making prior to the adoption of the final

rules.

Proposed Rules Federal Register

70197

Vol. 69, No. 232

Friday, December 3, 2004

SMALL BUSINESS ADMINISTRATION

13 CFR Part 121

RIN 3245–AF22

Small Business Size Standards; 

Selected Size Standards Issues

AGENCY: U.S. Small Business 

Administration.

ACTION: Advance notice of proposed 

rulemaking. 

SUMMARY: This Advance Notice of 

Proposed Rulemaking (ANPRM) seeks 

comments from the public on several 

issues that were raised during the public 

comment period of the U.S. Small 

Business Administration’s (SBA or 

Agency) recently withdrawn proposal to 

restructure its small business size 

standards. The issues discussed in this 

ANPRM address matters pertaining to 

SBA’s size standards but were not part 

of the March 19, 2004, proposed 

changes. To assist SBA with examining 

how best to restructure and simplify its 

size standards, the Agency invites 

comments on these issues to take into 

consideration in any future proposal. 

This ANPRM also seeks comments on 

an issue concerning the participation of 

businesses that are majority-owned by 

venture capital companies in the Small 

Business Innovation Research (SBIR) 

Program. Specifically, the SBA is 

seeking comments on whether it should 

provide an exclusion from affiliation 

with venture capital companies in 

determining small business eligibility 

for the SBIR Program.

DATES: Comments must be received on 

or before February 1, 2005.

ADDRESSES: You may submit comments, 

identified by RIN 3245–ZA02 by any of 

the following methods: 

• Federal eRulemaking Portal: http://

www.regulations.gov. Follow the 

instructions for submitting comments. 

• E-mail: 

restructure.sizestandandards@sba.gov.

Include RIN 3245–ZA02 in the subject 

line of the message. 

• Fax: (202) 205–6930. 

• Mail: Gary M. Jackson, Assistant 

Administrator for Size Standards, 409 

Third Street, SW., Washington, DC 

20416. 

• Hand Delivery/Courier: Gary M. 

Jackson, Assistant Administrator for 

Size Standards, 409 Third Street, SW., 

Washington, DC 20416. 

Upon receipt of a written request 

under the Freedom of Information Act, 

SBA will make available all public 

comments received.

FOR FURTHER INFORMATION CONTACT:

SBA’s Office of Size Standards at (202) 

205–6618 or at sizestandards@sba.gov.

SUPPLEMENTARY INFORMATION: On March 

19, 2004, SBA published a proposed 

rule to restructure its small business 

size standards by establishing them 

based primarily on the number of 

employees of a business concern and by 

limiting to 10 the number of different 

size standard levels (69 FR 13130). SBA 

believed this would simplify the 

existing structure of size standards and 

enable the public to better understand 

and use them. The proposed rule also 

included changes to several specific 

program-related and specialized size 

standards as an effort to reduce the 

overall variation of size standards. 

The SBA received more than 4,500 

comments on the proposed changes, 

with a majority of the comments 

expressing support for the proposal. 

More than 2,300 comments that 

supported the proposal agreed with the 

position advanced by one organization 

by submitting an identical comment, 

which focused primarily on the 

proposal to revise the 500 employee size 

standard for nonmanufacturers to 100 

employees. Of the remaining comments, 

most of them objected to the proposed 

size standards. These opposing 

comments raised concerns about SBA’s 

methodology for converting receiptsbased size standards to employee-based 

size standards and their resulting levels, 

the number of potential businesses 

losing small business status, the 

thoroughness of SBA’s regulatory 

flexibility analysis of the proposed 

changes, the determination of the 

employee size of a business, and SBA’s 

overall approach to simplifying size 

standards. As a result of the concerns 

expressed by a large number of 

comments, SBA withdrew the proposal 

on July 1, 2004 (69 FR 39874). 

SBA remains committed to modifying 

its size standards in a manner to make 

them simpler and easier to use. SBA 

seeks input from the public on several 

issues on which it believes additional 

comment would be helpful before 

deciding the next course of action. 

These issues concern various aspects of 

size standards that have implications on 

the restructuring proposal but were not 

part of the changes in the March 19, 

2004, proposed rule. Specifically, these 

issues pertain to the approach to 

simplify size standards, the calculation 

of number of employees (including how 

SBA defines an employee for size 

purposes), the use of receipts-based size 

standards, the designation of size 

standards for Federal procurements, the 

establishment of size standards for use 

solely in Federal procurement programs, 

the establishment of tiered size 

standards, the simplification of 

affiliation regulations, the simplification 

of the small business joint venture 

eligibility regulations, the 

grandfathering of small business 

eligibility, and the impact of SBA size 

standards on the regulations of other 

Federal agencies.

SBA is planning other actions on size 

standards in addition to this ANPRM. 

First, SBA plans to hold a series of 

public meetings on size standards. 

These meetings will focus on the issues 

raised in this ANPRM. Second, SBA is 

examining a number of specific size 

standards as separate rulemaking 

actions, such as the nonmanufacturer 

size standard which received a large 

number of comments supporting a 

reduction to the size standard. 

This ANPRM also seeks comments on 

an issue concerning the participation of 

businesses majority-owned by venture 

capital companies in the SBIR Program. 

Under SBA’s affiliation regulations, a 

business concern that is majority-owned 

by a company must include the size of 

the company and all of its affiliates in 

determining small business status for 

the SBIR Program and for most other 

programs. SBA seeks public comments 

on whether it should provide an 

exclusion from affiliation with venture 

capital companies in determining small 

business eligibility for the SBIR 

Program, assuming such companies met 

the other eligibility criteria for the 

program. 

Approaches to simplification of size 

standards. As discussed above, SBA 

proposed to restructure its size 

standards as a way to simplify and make

70198 Federal Register / Vol. 69, No. 232 / Friday, December 3, 2004 / Proposed Rules 

them easier to use. The March 19, 2004, 

proposal would have accomplished this 

by primarily modifying the structure of 

size standards. Many of the comments 

agreed with this approach. However, 

many other comments contended that 

the current structure is not complicated 

or difficult to understand, and that the 

proposal would in fact make size 

standards more complicated. 

Over the years, SBA’s size standards 

on occasion have been criticized as 

being difficult to understand. Many of 

these complaints relate to issues 

regarding the application of size 

standards, not to the size standards 

themselves. This ANPRM provides the 

public with an opportunity to advise 

SBA on what areas of size standards 

make them complicated or difficult to 

use or understand. SBA’s March 19, 

2004, proposal to simplify the structure 

of size standard is an approach to 

address one aspect of size standards. 

SBA is interested in whether this 

approach achieves simplification or if 

other approaches should be examined 

that address other aspects of size 

standards. Comments on this issue 

should explain how a particular aspect 

of size standards is complicated, and 

what modifications could be made to 

improve upon existing policies. The 

comments should also describe the 

benefits to small businesses and the 

users of size standards if such 

modifications were adopted. 

Calculation of number of employees.

The March 19, 2004, proposed rule 

expanded the use of employee-based 

size standards to industries that have 

traditionally used receipt-based size 

standards, such as the Construction, 

Retail Trade, and the Services Sectors. 

SBA did not propose to change its 

method for counting number of 

employees. Under the Small Business 

Size Regulations, 13 CFR 121.106, SBA 

calculates number of employees in the 

following manner: 

Section 121.106 How Does SBA 

Calculate Number of Employees? 

(a) In determining a concern’s number 

of employees, SBA counts all 

individuals employed on a full-time, 

part-time, or other basis. This includes 

employees obtained from a temporary 

employee agency, professional 

employee organization or leasing 

concern. SBA will consider the totality 

of the circumstances, including criteria 

used by the IRS for Federal income tax 

purposes, in determining whether 

individuals are employees of a concern. 

Volunteers (i.e., individuals who receive 

no compensation, including no in-kind 

compensation, for work performed) are 

not considered employees. 

(b) Where the size standard is number 

of employees, the method for 

determining a concern’s size includes 

the following principles: 

(1) The average number of employees 

of the concern is used (including the 

employees of its domestic and foreign 

affiliates) based upon numbers of 

employees for each of the pay periods 

for the preceding completed 12 calendar 

months. 

(2) Part-time and temporary 

employees are counted the same as fulltime employees. 

(3) If a concern has not been in 

business for 12 months, the average 

number of employees is used for each of 

the pay periods during which it has 

been in business. 

(4)(i) The average number of 

employees of a business concern with 

affiliates is calculated by adding the 

average number of employees of the 

business concern with the average 

number of employees of each affiliate. If 

a concern has acquired an affiliate or 

been acquired as an affiliate during the 

applicable period of measurement or 

before the date on which it self-certified 

as small, the employees counted in 

determining size status include the 

employees of the acquired or acquiring 

concern. Furthermore, this aggregation 

applies for the entire period of 

measurement, not just the period after 

the affiliation arose. (ii) The employees 

of a former affiliate are not counted if 

affiliation ceased before the date used 

for determining size. This exclusion of 

employees of a former affiliate applies 

during the entire period of 

measurement, rather than only for the 

period after which affiliation ceased. 

Many comments recommended that 

SBA modify its method for calculating 

the number of employees of a business 

concern. These comments pointed out 

that under SBA’s current method, 

businesses that utilize part-time 

employees, temporary employees, or 

lower-paid employees would tend to 

outgrow an employee-based size 

standard quicker than a similar business 

that primarily utilized full-time 

employees. Calculating employment 

size on a full-time equivalent (FTE) 

basis was often mentioned as an 

alternative. Calculating part-time 

employees in a different manner from 

full-time employees in determining the 

overall employment size of a business 

was also suggested. Comments on this 

issue also raised concerns regarding the 

treatment of independent contractors in 

determining employment size. 

SBA seeks comments on alternative 

methods of calculating the employment 

size of a business concern and, in 

particular, the feasibility of using FTEs. 

The comments should clearly describe 

the alternative calculation method and 

why it would be preferable to SBA’s 

current calculation of number of 

employees. Comments recommending 

an alternative calculation should also 

address the implications on the types of 

businesses that could be affected in 

terms of small business eligibility.

Related to this issue is whether the 

time period for calculating average 

employment should be modified from 

SBA’s current method, which uses a 

rolling average of the pay periods over 

the preceding 12 months. For example, 

should average employment be based on 

a fixed period of time, such as a 

calendar year? Also, should average 

employment be based on a longer period 

than one year? Comments should 

describe the alternative time period and 

explain why it would be an 

improvement to the current averaging 

calculation. 

If SBA chooses to modify its 

calculation of number of employees, the 

method must be one that allows 

businesses to provide supporting 

documents to the SBA, in the event of 

a size protest, in a verifiable manner and 

one that would not create an excessive 

administrative burden. Many comments 

on the use of employee-based size 

standards contended that calculating 

and reporting to SBA their business’

employment size is administratively 

burdensome. However, other comments 

pointed out that automated payroll and 

accounting systems enable businesses to 

readily document their employment 

size. SBA is particularly interested in 

comments that described the process 

small businesses must follow to 

calculate average employment and 

whether producing this information 

creates an unacceptable burden. 

Alternative methods of calculating 

average employment should address the 

implications on the alternative 

calculation on administrative burdens. 

Use of receipts-based size standards.

SBA received a number of comments 

recommending that it continue to use 

receipts-based size standards. These 

comments generally provided one of 

three reasons for their position. First, 

receipts are considered a more 

appropriate measure of business size for 

their industry than number of 

employees. Second, average annual 

receipts are simpler than number of 

employees for businesses when 

determining their small business status 

and less burdensome in providing 

documentation to SBA in the event of a 

size protest. (SBA evaluates the average 

annual receipts size of a business based 

on the Federal tax returns submitted by 

the business to the Internal Revenue 

Federal Register / Vol. 69, No. 232 / Friday, December 3, 2004 / Proposed Rules 70199

1The VSB Program was a pilot program 

authorized under Section 304 of the Small Business 

Administration Reauthorization and Amendments 

Act of 1994 (Pub. L. 103–403). This pilot program 

was extended to September 30, 2003, by the Small 

Business Reauthorization Act of 2000, and further 

extended through June 4, 2004, by Public Law 108–

217, 118 Stat. 591.

Service (13 CFR 121.104)). Third, the 

use of employee-based size standards 

could encourage businesses to reduce 

employment, use fewer part-time and 

lower-paid employees, convert 

employees to independent contractors, 

subcontract more work to other 

businesses, and make other employment 

related decisions that they would not 

otherwise adopt. 

SBA seeks comments on whether it 

should continue to use receipts-based 

size standards or establish size 

standards based exclusively on number 

of employees. SBA in particular seeks 

comments on what considerations it 

should give when deciding whether an 

industry size standard should be based 

on average annual receipts or number of 

employees. Also, for what industries are 

receipts-based size standards more 

appropriate than employee-based size 

standards, and in what ways are they 

more appropriate? Comments on this 

issue should address if having one 

measure of size for some industries and 

a different measure for other industries 

creates an unnecessary complication to 

size standards. 

Designation of size standards for 

Federal procurements. The size 

standard designated for a Federal 

procurement is determined by the North 

American Industry Classification 

System (NAICS) industry that best 

describes the principle purpose of the 

procurement (see 13 CFR 121.402). This 

decision is the responsibility of the 

contracting officer. Once the NAICS 

industry is designated, the size standard 

established by SBA is assigned to the 

procurement solicitation. Some 

comments pointed to this process as an 

area that makes size standards 

complicated. Because size standards 

vary by industry, businesses and 

contracting officers have at times argued 

for an incorrect NAICS designation so as 

to effect the small business eligibility of 

certain businesses. Other comments 

pointed out that Federal procurements 

that require a contractor to perform a 

significant amount of activities from 

several different industries are more 

difficult to designate a single NAICS 

industry than for procurements which 

primarily consists of activities of one 

NAICS industry. Furthermore, varying 

size standards by NAICS industry 

results in some businesses that operate 

in multiple industries being considered 

small for some Federal procurements 

but not for other types of procurements. 

SBA seeks comments on whether the 

process for applying size standards to 

Federal procurements should be 

modified. If so, the comments should 

describe an alternative system and how 

it would improve upon the current 

process. Comments should also address 

how the alternative process would 

ensure that small businesses fairly 

compete with other businesses that are 

small in that field of work. 

Establishment of size standards solely 

for Federal procurement. SBA received 

comments arguing that it should 

significantly increase size standards to 

assist small businesses in developing a 

sufficient infrastructure that will allow 

them to compete for Federal 

procurements in full and open 

competition against the leading Federal 

contractors. These comments contended 

that the requirements and growing size 

of Federal contracts create a situation in 

which a small business that is awarded 

one or two Federal contracts 

automatically outgrows the size 

standard and loses its eligibility to 

compete for future contracts requiring 

small business status. These comments 

further contended that businesses that 

are not small or among the largest 

Federal contractors enter a ‘‘dead zone’’

or ‘‘limbo zone’’ where they must 

compete for future Federal contracting 

opportunities against corporate giants 

before they have developed a 

competitive strength to do so.

In 1984, SBA adopted a policy that its 

industry size standards would apply to 

all programs. Before then, SBA had one 

set of size standards for Federal 

procurement and one set for all other 

small business programs. SBA is 

concerned that a significant increase in 

the size standards to reflect trends in 

Federal procurement would create size 

standards that are too high to 

realistically reflect small businesses in 

an industry or for the purposes of most 

other Federal small business programs. 

SBA seeks comments on whether a 

separate set of size standards should be 

established specifically for Federal 

procurement or whether this would 

needlessly complicate size standards. 

These comments should address the 

public policy justification for 

establishing such a separate set of size 

standards. That is, why should a small 

business be eligible for one program but 

not be eligible for another small 

business program? If separate Federal 

procurement size standards were 

established, what factors should SBA 

take into consideration in developing 

the size standards that are different from 

SBA’s current industry analysis 

methodology (see SBA’s size standards 

Web page for proposed rules that 

describe the industry analysis at

http://www.sba.gov/size)? Also, please 

address whether separate Federal 

procurement size standards that are 

higher than the current size standards 

would adversely affect the assistance to 

a particular segment of small businesses 

extending assistance to relatively 

successful larger small and mid-sized 

businesses. 

Establishment of tiered size 

standards. A number of comments 

suggested that SBA establish size 

standards to direct assistance to 

different sizes of small businesses. That 

is, SBA should establish size standards 

for sub-categories of small businesses, 

such as a very small business. These 

comments generally argued that two 

levels of size standards are needed to 

assist small businesses in developing 

into competitive businesses capable of 

being successful on Federal 

procurements competed on a full and 

open basis. These comments recognized 

that higher size standards may adversely 

affect the competitiveness of small 

businesses much smaller than the size 

standard. Many of these comments tied 

the establishment of tiered size 

standards with the estimated dollar 

value of a Federal procurement. That is, 

lower dollar value procurements could 

be reserved for very small businesses 

while other procurements could 

continue to be available to all small 

businesses. 

Two programs have provided for 

special treatment of sub-categories of 

small businesses. Both of these 

programs were authorized by 

legislation. Under the Small Business 

Competitiveness Demonstration 

Program (Pub. L. 100–656, the Small 

Business Competitiveness 

Demonstration Program of 1988, as 

amended), procurements of $25,000 or 

less are reserved for emerging small 

businesses, defined as businesses onehalf of the applicable size standards. 

This program applies to Federal 

procurements in four designated 

industry categories (construction, refuse 

systems, non-nuclear ship repair, and 

architectural and engineering services) 

issued by 10 participating agencies (64 

FR 29693, dated June 2, 1999). Until 

recently, the SBA also had a Very Small 

Business (VBS) Program.1 For purposes 

of that Program, a very small business 

was defined as one with 15 employees 

and $1 million or less in average annual 

receipts (13 CFR 125.7). The Program 

authorized Federal agencies in 10 

geographic locations to reserve 

procurements of $2,500 and $50,000 for 

very small businesses. A legislative 

70200 Federal Register / Vol. 69, No. 232 / Friday, December 3, 2004 / Proposed Rules 

provision also established a business 

category termed smaller enterprise for 

purposes of the Small Business 

Investment Company (SBIC) Program 

(Pub. L. 104–205, 110 Stat. 3009–740). 

A smaller enterprise is defined as a 

business with $6 million or less in net 

worth and $2 million or less in net 

income (13 CFR 107.710). Under the 

SBIC Program, a small business 

investment company’s portfolio must 

include a certain proportion of its 

financings to smaller enterprises.

Although legislative authority would 

be necessary before SBA could consider 

establishing tiered size standards, it 

seeks comments on whether the concept 

of tiered size standards addresses a 

compelling need to assist certain 

segments of small businesses with 

meaningful Federal contracting 

opportunities. If tiered size standards 

have potential to better assist small 

businesses with Federal contracting 

opportunities, how could such a system 

be structured? Because tiered size 

standards would create more 

complexity in Federal contracting, what 

are implications of a small business subcategory on other designated business 

types (8(a), HUBZone, service-disabled 

veteran owned small business, womenowned small business, etc.) in terms of 

assistance to those businesses? 

Simplification of small business 

status and affiliation with other 

businesses. A key provision of SBA’s 

size standards is the consideration of 

affiliation with other businesses in 

determining the size of a business. This 

fundamental concept ensures that 

Federal small business assistance 

programs are limited to small businesses 

that, because of their size, possess 

inherent disadvantages that larger 

businesses do not experience.

SBA’s general principles of affiliation 

provide that concerns are affiliates of 

one another when one concern controls 

or has the power to control the other, or 

a third party (or parties) controls or has 

the power to control both. The power to 

control need not be exercised; it need 

only be present. More than 50% 

ownership of a concern by another will 

always create affiliation (with certain 

exceptions, summarized in the next 

paragraph). Affiliation may also exist if 

there is less than 50% ownership of a 

concern by another. In these situations, 

SBA will also consider factors such as 

management, previous relationships, 

shared business or economic interests, 

economic dependence, convertible 

debentures, agreements to merge, etc., in 

determining when affiliation exists in a 

given situation. The regulations have 

been developed over many years to 

provide guidance to the public on how 

SBA evaluates affiliation. Because 

relationships among business concerns 

can be extremely complicated and at 

times difficult to fully discover, the 

affiliation regulations are more 

extensive than other size regulations. 

SBA invites comments addressing 

ways to clarify its affiliation regulations. 

SBA is not considering altering its 

principles of affiliation. Rather, it seeks 

suggestions that have the potential of 

improving the language of the affiliation 

regulations to make them easier for the 

public to understand. Comments on 

affiliation should explain how a current 

regulatory provision is unclear and 

suggest revised language. 

The SBA does seek comments on one 

specific area of affiliation involving the 

small business eligibility of franchises. 

SBA has received requests from the 

Temporary Staffing Franchise industry 

to allow for an exemption from its 

franchise affiliation regulations. The 

SBA is considering excluding certain 

practices of temporary franchisors as 

conditions for finding affiliation. The 

practices are (1) the franchisor being the 

employer of the individuals placed as 

temporary workers by a franchisee, (2) 

the franchisor being responsible for the 

franchisee’s payroll and associated 

costs, (3) the franchisor collecting the 

franchisee’s accounts receivable, and (4) 

the franchisor remitting client fees to 

their franchisees. Before developing a 

proposed rule, SBA seeks comments 

from businesses in the temporary 

staffing industry, including those 

independent staffing firms that are not 

involved in franchise agreements. SBA 

is interested in knowing how a change 

in its affiliation rule for franchises 

would affect the temporary staffing 

industry, in particular: 

• Do SBA’s current franchise 

regulations hamper the ability of 

franchisees to compete in the temporary 

staffing industry? 

• Would allowing this exemption 

continue to allow for temporary staffing 

franchisees to be ‘‘independently owned 

and operated’’ businesses? 

• Does allowing this exemption give 

franchisors too much control over their 

franchisees? 

• Would allowing this exemption 

give franchisors and franchisees a 

competitive advantage in contracting 

over independent temporary staffing 

businesses? 

Joint ventures and small business 

eligibility. SBA’s size regulations have 

specific provisions determining the 

small business eligibility of joint 

ventures. In general, a joint venture of 

two or more businesses may qualify as 

an eligible small business if the 

aggregate size of all the members does 

not exceed the applicable size standard 

(13 CFR 121.103(f)). For certain larger 

Federal procurements, a joint venture 

whose members individually qualify as 

a small business may qualify as an 

eligible small business joint venture. On 

May 21, 2004, SBA adopted a change to 

this provision that allows a joint venture 

to compete for multiple opportunities 

(69 FR 29192). However, an ongoing 

joint venture is limited to submitting 

offers on three procurement 

opportunities over a 2 year period. SBA 

believes that joint ventures among small 

businesses facilitate opportunities for 

small businesses to compete for largersized Federal procurements. 

SBA is seeking additional comment 

on its joint venture eligibility criteria. 

Comments addressing the nature of joint 

ventures formed by small businesses to 

compete on Federal procurements, the 

duration of such joint ventures, their 

competitive strength against other small 

businesses, and other aspects of joint 

ventures that have a bearing on policies 

to assist small business opportunities 

are also encouraged. SBA is specifically 

interested in obtaining comments on the 

recent policy of limiting a small 

business joint venture to three offerings 

over a 2 year period. SBA is concerned 

about permitting a joint venture among 

the same small businesses to operate as 

an on-going concern competing against 

other small businesses. At the same 

time, this new policy may be too 

restrictive in today’s Federal contracting 

environment. 

Grandfathering of currently eligible 

small businesses. As mentioned above, 

one of the concerns with the March 19, 

2004, proposed rule was the potential 

impact on small business that might 

lose small business eligibility as a result 

of the restructuring of size standards. 

Many of these comments pointed out 

that businesses develop their business 

plans over the next several years 

premised on the existing regulations. 

Abrupt changes that take away small 

business eligibility significantly disrupt 

these business plans and force 

businesses to reassess the viability of 

their strategies.

SBA expects that any new proposed 

rule to address the current structure of 

size standards will have significantly 

less impact on current small business 

eligibility than the March 19, 2004, 

proposal. However, any worthwhile 

changes will invariably have an adverse 

impact on a few small businesses. SBA 

seeks comments on approaches by 

which to grandfather small businesses 

that could be adversely impacted by a 

future restructuring. A related 

alternative may consist of a longer 

implementation date than the typical 30 

Federal Register / Vol. 69, No. 232 / Friday, December 3, 2004 / Proposed Rules 70201

day period to allow businesses to adjust 

to the new regulations. SBA realizes that 

it may be difficult to provide comments 

without a specific proposal. However, 

SBA seeks general ideas on the 

approaches and relevant factors it 

considers if a provision to maintain 

small business eligibility becomes 

necessary for a particular proposal. 

Impact of SBA size standards on the 

regulations of other Federal Agencies.

An area of concern expressed by the 

comments pertained to SBA’s analysis 

of the impact of the March 19, 2004, 

proposed changes. Under the Regulatory 

Flexibility Act (5 U.S.C. 601–612), 

Federal agencies must assess whether 

their regulatory changes will 

significantly impact a substantial 

number of small entities. In reviewing 

these comments, SBA believes it has 

sufficient information by which to fully 

analyze most of the concerns raised by 

these comments. 

However, one area that is more 

difficult to examine involves the impact 

of SBA’s size standards on the programs 

and regulations of other Federal 

agencies. SBA is aware of the use of its 

size standards in a number of Federal 

regulations and is in the process of 

identifying others. To ensure that future 

proposals adequately identify and assess 

the use of SBA’s size standards, SBA is 

requesting assistance in identifying 

Federal regulations and programs that 

utilize its size standards. In addition, 

SBA welcomes comments describing the 

impact that a size standard change may 

have on small entities being subject to 

different regulatory requirements or 

their eligibility for Federal benefits. 

Comments on how size standard 

changes may effect a Federal agency’s 

ability to meet the purposes of the 

regulation will also be helpful. 

Participation of Businesses MajorityOwned by Venture Capital Companies 

in the SBIR Program 

The U.S. Small Business 

Administration (SBA) seeks public 

comments on whether it should provide 

an exclusion from affiliation for venture 

capital companies (VCC) in size 

determinations for eligibility for the 

SBIR Program. Under such a policy, 

VCCs that invest in SBIR participants 

would not be considered affiliates of the 

SBIR participant and their size would 

therefore not be included in 

determining the size of the participant. 

On June 4, 2003, SBA proposed in the 

Federal Register, 68 FR 33412, to 

modify § 121.702 of its Small Business 

Size Regulations (13 CFR part 121) to 

allow a small business that is owned 

and controlled by another business 

concern to be eligible for funding 

agreements under the SBIR Program. 

The size standard for the SBIR Program 

requires that an eligible small business 

concern, with its affiliates, have no 

more than 500 employees. The proposed 

rule did not propose to change this 500 

employee size standard for the SBIR 

Program. The rule proposed only to 

modify the small business eligibility 

requirements so that the SBIR awardee 

must meet one of the two following 

additional criteria: (1) It must either be 

a for-profit business concern that is at 

least 51% owned and controlled by one 

or more individuals who are citizens of, 

or permanent resident aliens in, the 

United States (as the regulations 

currently require); or (2) it must be a forprofit business concern that is 100% 

owned and controlled by another forprofit business concern that is itself at 

least 51% owned and controlled by one 

or more individuals who are citizens of, 

or permanent resident aliens in, the 

United States. Comments on the 

proposed rule were due to SBA by July 

7, 2003. SBA received 164 comments to 

the proposed rule. SBA has not yet 

issued its final rule, but expects to do 

so in the very near future. 

Sixty commenters addressed an issue 

related to VCCs that was not a subject 

of the proposed rule. Forty commenters 

stated that a concern should be allowed 

to participate in the SBIR Program if one 

or more VCCs have majority ownership 

or control of the concern. In addition, 

most of these 40 commenters believed 

that if one or more VCCs owned or 

controlled a concern, the VCC should 

not be deemed affiliated with the 

concern. The justification offered was 

that VCC investment is crucial to 

startups in the biotech industry and that 

SBIR funds are needed to reduce the 

private risk of these investments. The 

remaining 20 commenters, however, 

were opposed to any proposal that 

would allow a concern to participate in 

the SBIR Program if one or more VCCs 

have majority ownership or control of 

the concern. These commenters 

expressed their concern that because 

VCC firms often represent and are 

established by large corporate interests, 

allowing their subsidiaries to receive 

SBIR awards could result in SBIR funds, 

which are reserved for small business 

concerns, being used to subsidize 

research projects of large corporations. 

The relationship of a VCC or other 

investment vehicle to an SBIR 

participant is a broader policy question 

than SBA sought to address with the 

June 4, 2003, proposed rule. Under 

current regulations (§ 121.103, ‘‘What is 

affiliation?’’), when VCCs have control 

of a firm in which they invest, they are 

considered affiliated with that firm, just 

as any other business entity would be if 

it had ownership or control.

SBA’s Small Business Size 

Regulations in 13 CFR 121.103 provide 

a small number of exclusions from 

affiliation. Concerns owned in whole or 

substantial part by Small Business 

Investment Companies (SBICs) or 

development companies licensed under 

the Small Business Investment Act are 

not considered affiliated with the SBIC 

or development company. Also, 

concerns owned and controlled by 

Indian Tribes, Alaska Regional or 

Village Corporations, Native Hawaiian 

Organizations and Community 

Development Corporations are not 

considered affiliates of these entities 

solely because of their common 

ownership and common management. 

Further, the regulation excludes VCCs, 

as defined in U.S. Department of Labor 

regulations (29 CFR 2510.3–101(d)), 

from affiliation with concerns receiving 

assistance under the Small Business 

Investment Act. (The SBIR Program is 

established under the Small Business 

Innovation Development Act, not under 

the Small Business Investment Act.) 

SBA believes that determining 

whether VCCs should be excluded from 

affiliation under § 121.103, assuming 

the small business concern meets the 

ownership and control criteria 

established by the SBA, requires a 

separate rulemaking action, affording 

the public an opportunity to comment 

directly on SBA’s proposal. Although 

SBA’s June 4, 2003, proposed rule did 

not address this issue, substantial public 

interest has persuaded SBA to seek 

additional comments directly on this 

question. SBA has not determined at 

this time if it will propose to exclude 

VCCs from affiliation or to provide some 

other type of exemption for VCC 

investments, but is seeking public 

comment on whether it should propose 

such a change to its affiliation rule. 

SBA requests comments on the issue 

of whether it should propose a change 

to the size affiliation regulation for SBIR 

Program purposes by allowing business 

concerns that are majority owned or 

controlled by one or more VCCs to be 

eligible for SBIR awards, regardless of 

the ownership and control of the VCCs. 

SBA is seeking information on how 

such a change is likely to impact the 

program and its participants, and how 

such a change could be implemented 

while at the same time ensuring that the 

SBIR Program remains a program that 

benefits small business entrepreneurs. 

Specific issues that SBA is seeking 

information on include the following: 

1. The role of VCC financing on SBIR 

projects during Phases I and II.

70202 Federal Register / Vol. 69, No. 232 / Friday, December 3, 2004 / Proposed Rules 

2. The impact of such a change in 

eligibility requirements on the 

composition of SBIR participants. For 

example, would the program shift 

towards lower-risk technologies closer 

to market, or become more 

geographically concentrated following 

industries and areas of venture capital 

focus? 

3. The types of firms and projects that 

would benefit most from such a change, 

and those that would benefit the least. 

4. Whether an exclusion from 

affiliation for VCCs would require 

justifying limiting the exclusion to VCCs 

and not including other entities such as 

not-for-profit organizations. 

5. Whether or not granting VCC 

exclusion from affiliation would 

adversely affect the ability of small 

business concerns without such access 

to private capital to compete for SBIR 

awards. 

6. Whether the participation of firms 

owned and controlled by VCC firms 

would ultimately create an environment 

of multiple repeat award winners. 

7. Alternative approaches that may 

assist small business concerns in 

obtaining and utilizing VCC funding 

while participating in the SBIR Program, 

aside from a policy that requires an 

exclusion from affiliation for VCC 

majority-owned small business 

concerns. 

If SBA ultimately determines that it is 

necessary to develop a proposed rule on 

this issue, then it will perform an 

analysis mandated by the Regulatory 

Flexibility Act (RFA). As part of an RFA 

analysis, SBA must determine whether 

the rule will have a significant 

economic impact on a substantial 

number of small entities. The RFA 

defines small entities as small business 

concerns, small not-for profit 

organizations, and small governmental 

jurisdictions. Thus, SBA is seeking 

comments to determine the number and 

type of small entities that would be 

affected by a rule that would provide an 

exclusion from affiliation for VCC 

companies in size determinations for 

eligibility for the SBIR Program. In 

addition, SBA is seeking comments on 

the number of small business concerns 

competing for SBIR awards that have 

received venture capital funding and the 

number of VCC majority-owned small 

business concerns that potentially may 

be interested in participating in the 

SBIR Program. 

As part of an RFA analysis, SBA must 

also determine whether the rule will 

have a significant economic impact on 

these small entities. To make this 

determination, agencies seek 

information about the percentage of 

revenues or profits affected by the rule. 

Therefore, SBA is also seeking 

comments on the costs to small entities 

if SBA implements a rule that would 

provide an exclusion from affiliation for 

VCC companies in size determinations 

for eligibility for the SBIR Program. 

Such costs include implementation 

costs and the effect the rule would have 

on profits or revenues, i.e., whether it 

would it reduce profits or raise or lower 

revenues. 

Comments on any other aspect of the 

SBIR Program that might directly affect 

whether or not SBA should propose 

excluding VCCs from affiliation for 

purposes of the SBIR Program are also 

welcome.

Dated: September 15, 2004. 

Hector V. Barreto, 

Administrator.

[FR Doc. 04–26609 Filed 12–2–04; 8:45 am] 

BILLING CODE 8025–01–P

DEPARTMENT OF TRANSPORTATION

Federal Aviation Administration 

14 CFR Part 39

[Docket No. FAA–2004–19795; Directorate 

Identifier 2004–NM–196–AD] 

RIN 2120–AA64

Airworthiness Directives; Boeing 

Model 777–200 and –300 Series 

Airplanes

AGENCY: Federal Aviation 

Administration (FAA), DOT.

ACTION: Notice of proposed rulemaking 

(NPRM). 

SUMMARY: The FAA proposes to adopt a 

new airworthiness directive (AD) for 

certain Boeing Model 777–200 and –300 

series airplanes. This proposed AD 

would require replacing the existing 

halogen lamps in the cargo 

compartment light assemblies with new 

incandescent lamps, and installing 

warning and identification placards. 

This proposed AD is prompted by a 

report of an aft cargo fire during flight. 

We are proposing this AD to prevent a 

fire in the cargo compartment.

DATES: We must receive comments on 

this proposed AD by January 18, 2005.

ADDRESSES: Use one of the following 

addresses to submit comments on this 

proposed AD. 

• DOT Docket Web site: Go to http:/

/dms.dot.gov and follow the instructions 

for sending your comments 

electronically. 

• Government-wide rulemaking Web 

site: Go to http://www.regulations.gov

and follow the instructions for sending 

your comments electronically. 

• Mail: Docket Management Facility, 

U.S. Department of Transportation, 400 

Seventh Street SW., Nassif Building, 

room PL–401, Washington, DC 20590. 

• By fax: (202) 493–2251. 

• Hand Delivery: Room PL–401 on 

the plaza level of the Nassif Building, 

400 Seventh Street SW., Washington, 

DC, between 9 a.m. and 5 p.m., Monday 

through Friday, except Federal holidays. 

For service information identified in 

this proposed AD, contact Boeing 

Commercial Airplanes, P.O. Box 3707, 

Seattle, Washington 98124–2207. 

You can examine the contents of this 

AD docket on the Internet at http://

dms.dot.gov, or in person at the Docket 

Management Facility, U.S. Department 

of Transportation, 400 Seventh Street 

SW., room PL–401, on the plaza level of 

the Nassif Building, Washington, DC. 

This docket number is FAA–2004–

19795; the directorate identifier for this 

docket is 2004–NM–196–AD.

FOR FURTHER INFORMATION CONTACT:

Technical information: Clint Jones, 

Aerospace Engineer, Cabin Safety and 

Environmental Systems Branch, ANM–

150S, FAA, Seattle Aircraft Certification 

Office, 1601 Lind Avenue, SW., Renton, 

Washington 98055–4056; telephone 

(425) 917–6471; fax (425) 917–6590. 

Plain language information: Marcia 

Walters, marcia.walters@faa.gov.

SUPPLEMENTARY INFORMATION: 

Docket Management System (DMS) 

The FAA has implemented new 

procedures for maintaining AD dockets 

electronically. As of May 17, 2004, new 

AD actions are posted on DMS and 

assigned a docket number. We track 

each action and assign a corresponding 

directorate identifier. The DMS AD 

docket number is in the form ‘‘Docket 

No. FAA–2004–99999.’’ The Transport 

Airplane Directorate identifier is in the 

form ‘‘Directorate Identifier 2004–NM–

999–AD.’’ Each DMS AD docket also 

lists the directorate identifier (‘‘Old 

Docket Number’’) as a cross-reference 

for searching purposes.

Comments Invited 

We invite you to submit any relevant 

written data, views, or arguments 

regarding this proposed AD. Send your 

comments to an address listed under 

ADDRESSES. Include ‘‘Docket No. FAA–

2004–19795; Directorate Identifier 

2004–NM–196–AD’’ in the subject line 

of your comments. We specifically 

invite comments on the overall 

regulatory, economic, environmental, 

and energy aspects of the proposed AD. 

We will consider all comments 

submitted by the closing date and may 

amend the proposed AD in light of those 

comments.