55694 Federal Register / Vol. 74, No. 207 / Wednesday, October 28, 2009 / Proposed Rules 

SMALL BUSINESS ADMINISTRATION 

13 CFR Parts 121 and 124 

RIN 3245–AF53 

Small Business Size Regulations; 8(a) 

Business Development/Small 

Disadvantaged Business Status 

Determinations 

AGENCY: U.S. Small Business 

Administration. 

ACTION: Proposed rule. 

SUMMARY: This rule proposes to make 

changes to the regulations governing the 

8(a) Business Development (8(a) BD) 

and Small Disadvantaged Business 

(SDB) programs, and to the U.S. Small 

Business Administration’s (SBA or 

Agency) size regulations. Some of the 

changes involve technical issues such as 

changing the term ‘‘SIC code’’ to 

‘‘NAICS code’’ to reflect the national 

conversion to the North American 

Industry Classification System. Other 

changes are more substantive and result 

from SBA’s experience in implementing 

the current regulations. For example, 

SBA has learned through experience 

that certain of its rules governing the 

8(a) BD program are too restrictive and 

serve to unfairly preclude firms from 

being admitted to the program. In other 

cases, SBA has determined that a rule is 

too expansive or indefinite and has 

sought to restrict or clarify that rule. In 

one case wording changes are being 

proposed to correct past public or 

agency misinterpretation. Also, new 

situations have arisen that were not 

anticipated when the current rules were 

drafted and the proposed rule seeks to 

cover those situations. Finally, one of 

the changes, involving Native Hawaiian 

Organizations (NHO’s), implements a 

statutory change. 

DATES: Comments must be received on 

or before December 28, 2009. 

ADDRESSES: You may submit comments, 

identified by RIN: 3245–AF53, by any of 

the following methods: 

• Federal eRulemaking Portal: http:// 

www.regulations.gov. Follow the 

instructions for submitting comments. 

• Mail, for paper, disk, or CD/ROM 

submissions: Joseph Loddo, Associate 

Administrator, Office of Business 

Development, 409 Third Street, SW., 

Mail Code, Washington, DC 20416. 

• Hand Delivery/Courier: Joseph 

Loddo, Associate Administrator, Office 

of Business Development, 409 Third 

Street, SW., Washington, DC 20416. 

SBA will post all comments on 

www.regulations.gov. If you wish to 

submit confidential business 

information (CBI) as defined in the User 

Notice at www.Regulations.gov, please 

submit the information to LeAnn 

Delaney, Deputy Associate 

Administrator, Office of Business 

Development, 409 Third Street, SW., 

Washington, DC 20416, or send an 

e-mail to leann.delaney@sba.gov. 

Highlight the information that you 

consider to be CBI and explain why you 

believe SBA should hold this 

information as confidential. SBA will 

review the information and make the 

final determination of whether it will 

publish the information or not. 

FOR FURTHER INFORMATION CONTACT: 

LeAnn Delaney, Deputy Associate 

Administrator, Office of Business 

Development, at (202) 205–5852, or 

leann.delaney@sba.gov. 

SUPPLEMENTARY INFORMATION: 

This rule proposes to make a number 

of changes to the regulations governing 

the 8(a) BD and SDB programs, and 

several changes to SBA’s size 

regulations. Some of the changes 

involve technical issues. Other changes 

are more substantive and result from 

SBA’s experience in implementing the 

current regulations. 

The following specific changes are 

being proposed to SBA’s regulations. 

There are six proposed changes to SBA’s 

size regulations, two dealing with 

mentor/prote ́ge ́ situations, one 

amending requirements for joint 

ventures, one clarifying how a 

procurement should be classified, one 

further explaining the nonmanufacturer 

rule, and one relating to who may 

request a formal size determination. The 

remaining proposed changes are to the 

regulations governing SBA’s 8(a) BD and 

SDB programs. It is noted that all 

regulations governing the 8(a) program 

apply to the SDB program, unless 

otherwise specified. While the SDB 

program no longer has an application 

and certification component, the 

provisions specifying what constitutes 

an SDB are still needed for selfcertification and protest purposes. 

Exception to Affiliation for Mentor/ 

Prote ́ge ́ Programs 

The first proposed change would 

clarify when SBA would consider a 

prote ́ge ́ firm not to be affiliated with its 

mentor based on assistance received 

from the mentor through a mentor/ 

prote ́ge ́ agreement. The current 

regulation may be misconstrued to 

allow other Federal agencies to establish 

mentor/prote ́ge ́ programs and exempt 

prote ́ge ́s from SBA’s size affiliation 

rules. That was never SBA’s intent. The 

exception to affiliation contained in 

§ 121.103(b)(6) was meant to apply to 

SBA’s 8(a) BD mentor/prote ́ge ́ program 

and other Federal mentor/prote ́ge ́

programs that specifically authorize an 

exception to affiliation in their 

authorizing statute. Because of the 

business development purposes of the 

8(a) BD program, SBA administratively 

established an exception to affiliation 

for prote ́ge ́ firms. Specifically, prote ́ge ́

firms are not affiliated with their 

mentors based on assistance received 

from their mentors through an SBAapproved 8(a) BD mentor/prote ́ge ́

agreement. That exception exists in the 

current rule and remains in this 

proposed rule. The proposed rule 

merely spells out more explicitly the 

affiliation exception for clarity 

purposes. 

In addition, the proposed rule makes 

clear that an exception to affiliation for 

prote ́ge ́s in other Federal mentor/ 

prote ́ge ́ programs will be recognized by 

SBA only where specifically authorized 

by statute (e.g., the Department of 

Defense mentor/prote ́ge ́ program) or 

where SBA has authorized an exception 

to affiliation for a mentor/prote ́ge ́

program of another Federal agency 

under the procedures set forth in 

§ 121.903. By statute, SBA is the sole 

agency responsible for determining size 

for purposes of any Federal assistance. 

SBA does not believe that another 

agency should be able to exempt firms 

from SBA’s affiliation rules (and in 

effect make program-specific size rules) 

by itself. There is a formal process 

spelled out in § 121.903 that an agency 

must use if it would like to deviate from 

SBA’s size rules, including those 

relating to affiliation. This process must 

be followed and SBA must specifically 

authorize an exception to affiliation for 

another Federal mentor/prote ́ge ́ program 

in order for SBA to recognize the 

exception. SBA does not anticipate 

approving exceptions to affiliation to 

agencies seeking to have such an 

exception for their mentor/prote ́ge ́

programs except in limited 

circumstances. SBA believes that the 

8(a) BD program is a unique business 

development program that is unlike 

other Federal programs. If a program of 

another agency is also intended to assist 

business development and an exclusion 

from affiliation for joint ventures 

conducted under that agency’s mentor/ 

prote ́ge ́ program would promote such 

business development, SBA would be 

inclined to grant an exclusion from 

affiliation because it would serve the 

same purpose as the exclusion from 

affiliation for 8(a) mentor/prote ́ge ́

relationships. 

Joint Ventures 

The second proposed change to the 

size rules pertains to joint ventures. 

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Federal Register / Vol. 74, No. 207 / Wednesday, October 28, 2009 / Proposed Rules 55695 

Under current § 121.103(h), a joint 

venture is an entity with limited 

duration. Specifically, the current 

regulation limits a specific joint venture 

to submitting no more than three offers 

over a two year period. Two firms 

(including an 8(a) prote ́ge ́ firm and its 

mentor) are limited to pursuing three 

contract opportunities under one joint 

venture, but there is nothing in the 

regulations prohibiting the same two 

firms from forming a second joint 

venture and pursuing three additional 

contract opportunities. The rule limiting 

the number of contract opportunities 

any single joint venture can pursue was 

actually intended to loosen the 

requirements of the prior regulations. 

SBA’s previous regulations defined a 

joint venture to be an entity that was 

‘‘formed * * * to engage in and carry 

out a single, specific business venture 

for joint profit * * *’’ The genesis for 

the change initially came from 8(a) 

firms, which complained that it was 

hard and costly for them to go out and 

form a new joint venture entity (usually 

in the form of a limited liability 

company (LLC)) for every contract 

opportunity that they sought. SBA 

agreed, and decided to provide more 

flexibility. SBA did so by changing the 

size regulations, the place in SBA’s 

regulations where the term joint venture 

was defined. Because the provision 

appears in part 121 of SBA’s 

regulations, it applies to all of SBA’s 

programs, including the 8(a) BD 

program (as intended). 

This provision, however, has caused 

confusion. Some firms misunderstood 

that the limitation contained in the 

regulation was on the number of offers 

submitted by the joint venture instead of 

the number of contracts awarded to the 

joint venture. As such, some joint 

ventures continued to submit offers 

beyond the three permitted by the 

regulation and were determined not to 

be eligible for award where the joint 

venture was otherwise the apparent 

successful offeror, but the offer was a 

fourth (or more) offer. Firms have 

recommended to SBA that if there is 

such a limit, it should be on contracts, 

not offers. Upon further reflection, SBA 

agrees and proposes to change the limit 

of three offers to a limit of three contract 

awards under one joint venture 

agreement. 

The proposed rule would clarify that 

three contract awards is not an absolute 

limit for a specific joint venture 

agreement. A joint venture could choose 

to pursue and be awarded a fourth (or 

more) contract award, but in doing so 

would cause the partners to the joint 

venture to be deemed affiliated for all 

purposes. Again, the two (or more) firms 

could form a second joint venture and 

be awarded three additional contracts, 

and a third joint venture to be awarded 

three more. At some point, however, 

such a longstanding relationship or 

contractual dependence would lead to a 

finding of general affiliation, even in the 

8(a) mentor/prote ́ge ́ joint venture 

context. As an alternative, SBA also 

considered revising this provision to 

limit the number of contract awards that 

the same partners to one or more joint 

ventures could receive without the 

partners being deemed affiliates for all 

purposes. SBA thought that three 

awards might be too restrictive and 

considered limiting the number of 

contracts that the same joint venture 

partners could be awarded to five. 

Under this approach, the identical 

partners could form one joint venture 

and receive five contracts or form 

several joint ventures and receive five 

contracts in total before SBA would find 

the partners to be affiliated for all 

purposes. SBA specifically requests 

comments on this approach, specifically 

addressing whether this approach is 

preferable to the one proposed. 

In drafting the current three offers 

over two years requirement, SBA did 

not intend to limit the number of 

contracting opportunities that two (or 

more) firms could seek or contracts that 

they could be awarded through a joint 

venture relationship. As noted above, 

SBA believes that a ‘‘joint venture’’ is an 

entity of limited duration. If SBA did 

not limit the number of contracting 

opportunities, or under this proposed 

rule the number of contract awards, that 

a specific joint venture could receive, 

then the joint venture could be an 

ongoing entity with unlimited duration. 

In determining the size of a joint 

venture, the receipts or employees of the 

joint venture partners are generally 

aggregated (unless an exclusion from 

affiliation applies). If the aggregated 

receipts or employees are less than the 

size standard assigned to the relevant 

procurement, the joint venture qualifies 

as a small business. If one of the joint 

venture partners seeks a different 

contract opportunity apart from the joint 

venture, its size is generally considered 

individually (unless there are other 

bases for finding affiliation). If a specific 

‘‘joint venture’’ could seek unlimited 

contracting opportunities and be 

awarded unlimited contracts, then the 

parties to the joint venture would 

necessarily be deemed affiliates for all 

purposes because of their 

interdependent contractual relations. 

This is the case because in effect the 

‘‘joint venture’’ would be a new ongoing 

business entity that is owned by two 

individual firms. Because of this 

affiliation, the revenues or employees 

would be aggregated even where one of 

the firms sought a contract opportunity 

individually. 

The proposed rule also clarifies the 

time at which SBA will determine 

whether this three in two years 

requirement has been met. SBA 

understands that any offeror, including 

a joint venture offeror, may seek more 

than one contract opportunity at the 

same time. Under SBA’s regulations, 

size is determined as of the date a 

concern submits a written selfcertification that it is small as part of its 

initial offer including price. See 13 CFR 

121.404(a). As long as a concern is small 

as of that date, it may be awarded a 

contract as a small business even if it 

has grown to be other than small as of 

the date of award. In other words, even 

if a concern has received additional 

revenues which would render it other 

than small after it certifies itself to be 

small as part of its initial offer including 

price, it may be awarded a contract as 

a small business. Having one specific 

point in time to determine size gives 

certainty to the procurement process for 

both the concern and the procuring 

agency. SBA believes that compliance 

with the three awards in two years rule 

should be treated similarly. As such, 

SBA proposes to determine compliance 

with the three in two years rule as of the 

date of initial offer including price. An 

individual joint venture may have 

submitted offers to perform two, three or 

more procurements before it finds out 

that it has won any specific 

competition. If at the time of offer the 

joint venture had not yet received three 

contract awards, then the joint venture 

would be able to submit offers for 

several procurement opportunities and 

ultimately be awarded any contract for 

which it submitted an offer before 

receiving a third contract. For example, 

Joint Venture AB has received two 

contracts. On April 2, Joint Venture AB 

submits an offer for Solicitation 1. On 

June 6, Joint Venture AB submits an 

offer for Solicitation 2. On July 13, Joint 

Venture AB submits an offer for 

Solicitation 3. In September, Joint 

Venture AB is found to be the apparent 

successful offeror for all three 

solicitations. Even though the award of 

the three contracts would give Joint 

Venture AB a total of five contract 

awards, it could receive those awards 

without causing general affiliation 

between its joint venture partners 

because Joint Venture AB had not yet 

received three contract awards as of the 

dates of the offers for each of three 

solicitations at issue. 

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55696 Federal Register / Vol. 74, No. 207 / Wednesday, October 28, 2009 / Proposed Rules 

The proposed rule also clarifies that 

while a joint venture may or may not be 

a separate legal entity (e.g., an LLC), it 

must exist through a written document. 

Thus, even an ‘‘informal’’ joint venture 

must have a written agreement between 

the partners. In addition, the rule 

clarifies SBA’s current policy that a 

joint venture may or may not be 

populated (i.e., have its own separate 

employees). Whether a joint venture 

needs to be populated or have separate 

employees depends upon the legal 

structure of the joint venture. If a joint 

venture is a separate legal entity, then 

it must have its own employees. If a 

joint venture merely exists through a 

written agreement between two or more 

individual business entities, then it 

need not have its own separate 

employees and employees of each of the 

individual business entities may 

perform work for the joint venture. 

There has also been confusion as to 

whether this three in two year rule 

applies to the 8(a) BD program. Some 

individuals mistakenly believed that it 

did not apply to joint ventures between 

mentors and prote ́ge ́ firms in the 8(a) BD 

program. This is not the case. Because 

the rule appears in SBA’s size 

regulations, it applies to all of SBA’s 

programs. That is, it applies to all 

situations in which a joint venture seeks 

to qualify as a ‘‘small business 

concern.’’ Because this confusion is 

limited and SBA believes that the size 

regulations clearly apply the three in 

two year rule to all joint venture 

situations, SBA does not believe that a 

regulatory change is necessary to 

specifically apply the rule to the 8(a) BD 

program. 

This proposed rule would also amend 

§ 124.513(e) to clarify the requirement 

that SBA approve 8(a) joint ventures 

prior to award for a second or third 8(a) 

contract award to a specific joint 

venture. The current regulation states 

that SBA must approve a joint venture 

for an 8(a) contract prior to contract 

award. There has been some confusion 

about how this requirement relates to 

the size provision which would now 

allow three contract awards over a two 

year period to a specific joint venture. 

Prior to the first contract award, SBA 

would have to approve the joint 

venture. SBA’s review would examine 

the structure of the joint venture and the 

work each joint venture partner would 

perform on the proposed 8(a) contract. 

For the second (and third) 8(a) contract, 

SBA would not need to examine the 

structure of the joint venture again, but 

would need to determine that the work 

to be done by the joint venture partners 

on the proposed second (or third) 8(a) 

contract meets SBA’s requirements. To 

this end, the 8(a) Participant to the joint 

venture must submit to SBA an 

addendum to the joint venture 

agreement explaining how the work will 

be performed on the contract, specifying 

what resources will be provided by each 

joint venture partner, and providing any 

other information necessary to fulfill the 

requirements set forth in 13 CFR 

124.512(c). If the second (and/or third) 

contract to be awarded to a specific joint 

venture is not an 8(a) contract, the joint 

venture entity would not be required to 

submit an addendum to SBA prior to 

award, but would, as explained in the 

following paragraph, be required to 

meet the general 8(a) joint venture 

requirements. 

Exclusion from Affiliation for Mentor/ 

Prote ́ge ́ Joint Ventures 

The third proposed change to the size 

regulations also pertains to exceptions 

to affiliation. Currently, SBA’s 

regulations authorize an exception to 

affiliation where two firms approved by 

SBA to be a mentor and prote ́ge ́ under 

the 8(a) BD program seek to joint 

venture and perform a contract as a 

small business concern for any Federal 

Government procurement. For a 

procurement to be awarded through the 

8(a) BD program, SBA’s regulations at 

§ 124.513 require SBA to approve the 

joint venture agreement prior to award 

and specify what must be included in 

the joint venture agreement. There has 

been some confusion as to whether the 

requirements for 8(a) joint venture 

agreements apply to non-8(a) 

procurements. SBA believes that any 

joint venture seeking to use the 8(a) 

mentor/prote ́ge ́ status as a basis for an 

exception to affiliation requirements 

must follow the 8(a) requirements (i.e., 

it must meet the content requirements 

set forth in § 124.513(c) and the 

performance of work requirements set 

forth in § 124.513(d)). Although SBA 

does not approve joint venture 

agreements for procurements outside 

the 8(a) program, if the size of a joint 

venture claiming an exception to 

affiliation is protested, the requirements 

of § 124.513(c) and (d) must be met in 

order for the exception to affiliation to 

apply. The reason SBA’s 8(a) regulations 

permit exceptions to affiliation on small 

business contracts outside the 8(a) 

program (e.g., small business set asides, 

HUBZone set asides, service disabled 

veteran owned small business set 

asides) is to further assist prote ́ge ́ 8(a) 

BD Participants in their business 

development. If the requirements 

ensuring control and performance of 

work by the 8(a) prote ́ge ́ firm are not 

enforced, a large business would be able 

to have unchecked and inappropriate 

access to Federal procurements 

intended for small business. While this 

is not a change to how SBA has 

interpreted this regulation, SBA believes 

that it should be spelled out in the 

regulation to avoid any further 

confusion and, thus, clarifying language 

has been added to § 121.103(h)(3)(iii). 

SBA is also considering whether to limit 

the exclusion to affiliation for a joint 

venture that is comprised of a prote ́ge ́

firm and its SBA-approved mentor only 

to 8(a) contracts. If this proposal were 

adopted, mentor/prote ́ge ́ joint ventures 

for small business set aside contracts (or 

other small business contracts) would 

not receive an exclusion from affiliation. 

As such, if the mentor were a large 

business, the joint venture would be 

large and, thus, ineligible for a small 

business set aside contract. Proponents 

of this view believe that benefits for 8(a) 

firms should be limited to contracts 

obtained through the 8(a) program, and 

not extended to other small business 

programs. They believe that it is unfair 

for non-8(a) small business concerns to 

have to compete against a joint venture 

involving a prote ́ge ́ firm and a large 

mentor for small business contracts 

outside the 8(a) program. SBA 

specifically requests comments on 

whether this policy should be changed 

in a subsequent final rule. 

Classification of a Procurement for 

Supplies 

SBA’s current regulations provide that 

acquisitions for supplies must be 

classified under the appropriate 

manufacturing NAICS code, not under a 

wholesale trade NAICS code. The fourth 

proposed change to the size regulations 

would clarify that a procurement for 

supplies also cannot be classified under 

a retail trade NAICS code. 

Application of the Nonmanufacturer 

Rule 

The fifth proposed change to the size 

regulations would provide further 

guidance to the current 

nonmanufacturer rule (i.e., the rule that 

requires, in pertinent part, a firm that is 

not itself the manufacturer of the end 

item being procured to provide the 

product of a small business 

manufacturer). Several procuring 

agencies have misconstrued when to 

apply the nonmanufacturer rule. The 

proposed rule would explicitly state 

that the nonmanufacturer rule applies 

only where the procuring agency has 

classified a procurement as a 

manufacturing procurement by 

assigning the procurement a NAICS 

code under Sectors 31–33. It would also 

clarify that the nonmanufacturer rule 

does not apply to supply contracts that 

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do not involve manufacturing. For 

example, the nonmanufacturer rule 

would not apply to situations where a 

procuring agency is acquiring 

agricultural commodities that are not 

processed or changed and the procuring 

agency classifies the contract as crop 

production under NAICS Subsector 111. 

In addition, the rule applies only to 

the manufacturing or supply component 

of a manufacturing procurement. The 

rule provides two examples to clarify 

SBA’s position regarding the rule. 

Where a procuring agency has classified 

a procurement as a manufacturing 

procurement and is also acquiring 

services, the nonmanufacturer rule 

would apply to the supply component 

of that procurement only. In other 

words, a firm seeking to qualify as a 

small business nonmanufacturer must 

supply the product of a small business 

manufacturer (unless a 

nonmanufacturer waiver applies), but 

need not perform any specific portion of 

the accompanying services. Since the 

procurement is classified under a 

manufacturing NAICS code, it cannot 

also be considered a services 

procurement and, thus, the 50% 

performance of work requirement set 

forth in § 125.6 for services does not 

apply to that procurement. In classifying 

the procurement as a manufacturing/ 

supply procurement, the procuring 

agency must have determined that the 

‘‘principal nature’’ of the procurement 

was supplies. As a result, any work 

done by a subcontractor on the services 

portion of the contract cannot rise to the 

level of being ‘‘primary and vital’’ 

requirements of the procurement, and 

therefore cannot be the basis or 

affiliation as an ostensible 

subcontractor. Conversely, if a 

procuring agency determines that the 

‘‘principal nature’’ of the procurement is 

services, only the requirements relating 

to services contracts apply. The 

nonmanufacturer rule, which applies 

only to manufacturing/supply contracts, 

would not apply. Thus, although a firm 

seeking to qualify as a small business 

with respect to such a contract must 

certify that it will perform at least 50% 

of the cost of the contract incurred for 

personnel with its own employees, it 

need not supply the product of a small 

business manufacturer on the supply 

component of the contract. In order to 

qualify as a nonmanufacturer, a firm 

must be primarily engaged in the retail 

or wholesale trade and normally sell the 

type of item being supplied. We are 

proposing to further define this 

statutory requirement to mean that the 

firm takes ownership or possession of 

the item(s) with its personnel, 

equipment or facilities in a manner 

consistent with industry practice. This 

change is primarily in response to 

situations where SBA has waived the 

nonmanufacturer rule and the prime 

contractor essentially subcontracts all 

services, such as warehousing or 

delivery, to a large business. Such an 

arrangement, where the prime 

contractor can legally provide the 

product of a large business and then 

subcontract all tangential services to a 

large business, is contrary to the intent 

and purpose of the Small Business Act, 

i.e., providing small businesses with an 

opportunity to perform prime contracts. 

Such an arrangement inflates the cost to 

the Government of contract performance 

and inflates the statistics for prime 

contracting dollars awarded to small 

business, which is detrimental to other 

small businesses that are willing and 

able to perform Government contracts. 

Request for Formal Size Determination 

The sixth proposed change to the size 

regulations would amend § 121.1001(b) 

to give the SBA’s Office of Inspector 

General (OIG) the authority to ask for a 

formal size determination. Because the 

OIG is not currently listed in the 

regulations as an individual who can 

request a formal size determination, the 

OIG must currently seek a formal size 

determination through the relevant SBA 

program office. SBA believes that the 

Inspector General should be able to seek 

a formal size determination when 

questions about a concern’s size arise in 

the context of an investigation or other 

review of SBA programs by the Office of 

Inspector General. 

Completion of Program Term 

The first proposed change to SBA’s 

8(a) BD regulations is an amendment to 

the current rule to specify that a firm 

that merely completes its program term 

is not deemed to ‘‘graduate’’ from the 

8(a) program. Pursuant to the Small 

Business Act, a Participant is 

considered to graduate only if it 

successfully completes the program by 

substantially achieving the targets, 

objectives, and goals contained in the 

concern’s business plan, thereby 

demonstrating its ability to compete in 

the marketplace without 8(a) assistance. 

15 U.S.C. 636(j)(10)(H). Sections 124.2, 

124.301 and 124.302 would be amended 

to effect this change. In addition, the 

proposed rule would add a new 

§ 124.112(f) to require SBA to determine 

if a firm should be deemed to graduate 

from the 8(a) BD program at the end of 

its nine-year program term. As part of 

the final annual review performed by 

SBA prior to the expiration of a 

Participant’s nine-year program term, 

SBA would determine whether the firm 

has met the targets and objectives set 

forth in its business plan. 

Definitional Changes 

This rule would amend Section 124.3, 

to add a definition of NAICS code. 

Additionally, the term ‘‘SIC code’’ 

would be changed to ‘‘NAICS code’’ 

everywhere it appears in part 124 to 

take into account the replacement of the 

Standard Industry Classification (SIC) 

code system with the North American 

Industry Classification System. The 

NAICS code system is used to classify 

businesses for size purposes. 

Specifically, the term ‘‘NAICS code’’ 

would replace the term ‘‘SIC code’’ in 

§§ 124.110(c), 124.111(d), 124.502(c)(3), 

124.503(b), 124.503(b)(1), 124.503(b)(2), 

124.503(c)(1)(iii), 124.503(g)(3), 

124.505(a)(3), 124.507(b)(2)(i), 

124.513(b)(1), 124.513(b)(1)(i), 

124.513(b)(1)(ii)(A), 124.513(b)(2), 

124.513(b)(3), 124.514(a)(1), 124.515(d), 

124.517(d)(1), 124.517(d)(2), 

124.519(a)(1), 124.519(a)(2), 

124.1002(b)(1), 124.1002(b)(1)(i), 

124.1002(b)(1)(ii), and 124.1002(f)(3). 

The rule also proposes to amend the 

definition of primary industry 

classification to specifically recognize 

that a Participant may change its 

primary industry classification over 

time. The rule would allow a Participant 

to change its primary industry 

classification from one NAICS code to 

another where it can demonstrate that 

the majority of its revenues during a 

two-year period have evolved from its 

former primary NAICS code to another 

NAICS code. The proposed rule would 

also add a new § 124.112(e) to permit a 

Participant to request a change in its 

primary industry classification with its 

servicing SBA district office where it 

can demonstrate that its revenues have 

in fact evolved from one NAICS code to 

another. 

The rule would also add a definition 

of the term ‘‘regularly maintains an 

office.’’ This definition is important in 

determining whether a participant has a 

bona fide place of business in a 

particular geographic location. While 

the definition proposed is not a change 

in current SBA policy, SBA believes 

that the definition should be added to 

the regulations for clarity purposes. 

Under the proposed rule, a Participant 

would be deemed to regularly maintain 

an office in a particular location if it 

conducts business activities as an ongoing business concern from a fixed 

location on a daily basis. The rule 

would also provide that the best 

evidence of the regular maintenance of 

an office is documentation that shows 

that third parties routinely transact 

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business with a participant at that 

location. Such evidence includes 

advertisements, bills, correspondence, 

lease agreements, land records, and 

evidence that the participant has 

complied with all local requirements 

concerning registering, licensing, or 

filing with the State or County where 

the place of business is located. This 

means that a firm would generally be 

required to have a license to do business 

in a particular location in order to 

‘‘regularly maintain an office’’ there. 

The firm would not, however, be 

required to have a construction license 

or other specific type of license in order 

to regularly maintain an office and thus 

have a bona fide place of business in a 

specific location. SBA’s bona fide place 

of business requirement is met with a 

license to do business generally. 

Whether a firm is or is not able to get 

a specific type of contract because it 

does not possess an additional license is 

not a bona fide place of business issue. 

Size for Primary NAICS Code 

This rule proposes to amend 

§ 124.102(a) to require that a firm 

remain small for its primary NAICS 

code during its term of participation in 

the 8(a) BD program, and 

correspondingly to revise § 124.302 to 

permit SBA to graduate a Participant 

prior to the expiration of its program 

term where the firm exceeds the size 

standard corresponding to its primary 

NAICS code for two successive program 

years. SBA has historically permitted a 

firm to remain in the 8(a) program and 

receive 8(a) contracts in secondary 

NAICS codes as long as it remains small 

for such secondary codes. SBA has 

reexamined this policy and concluded 

that if a firm has grown to be other than 

small in its primary NAICS code, it can 

reasonably be said that the firm has 

achieved its goals and objectives. 

Understanding that the size of a firm 

can vary from year to year based on the 

receipts/number of employees in any 

given year, SBA is proposing that a firm 

be graduated early only where it 

exceeds the size standard for its primary 

NAICS code in two successive program 

years. SBA believes that it would be 

unfair to early graduate a firm from the 

8(a) program where it has one very 

successful program year that may not 

again be repeated. This does not mean 

that a firm cannot change its primary 

NAICS code during its participation in 

the program. As noted in the 

Supplementary Information 

corresponding to the definition of 

primary industry classification in 

§ 124.3, the proposed rule would 

authorize a firm to change its primary 

NAICS code by demonstrating that the 

majority of its revenues during a twoyear period have evolved from its 

former primary NAICS code to another 

NAICS code. As such, SBA may early 

graduate a firm from the 8(a) BD 

program if the firm exceeds the size 

standard corresponding to its primary 

NAICS code (whether its initial primary 

NAICS code or a revised primary NAICS 

code) for two successive program years. 

Economic Disadvantage 

SBA proposes to amend § 124.104 

Who is Economically Disadvantaged? to 

incorporate into the regulations certain 

interpretations and policies that have 

been followed informally by SBA. Some 

of these policies and regulatory 

interpretations are currently set forth in 

SBA’s Standard Operating Procedures 

(SOPs) or in decisions rendered by the 

SBA Office of Hearings and Appeals 

(OHA). A sentence would be added to 

paragraph (b)(2) to clarify that SBA does 

not take community property laws into 

account when determining economic 

disadvantage. This means that property 

that is legally in the name of one spouse 

would be considered wholly that 

spouse’s property, whether or not the 

couple lived in a community property 

state. Since community property laws 

are usually applied when a couple 

separates and since spouses in 

community states generally have the 

freedom to keep their property separate 

while they are married, SBA has 

decided to treat property owned solely 

by one spouse as that spouse’s property 

for economic disadvantage 

determinations. This policy also results 

in equal treatment for applicants in 

community and non-community 

property states. Community property 

laws will continue to be applied in 

§ 124.105(k) for purposes of determining 

ownership of an applicant or Participant 

firm, but they will not be applied for 

any other purpose. Paragraph (b)(2) 

would also be amended to provide that 

SBA may consider a spouse’s financial 

situation in determining an individual’s 

access to capital and credit. This 

addition reflects current practice. 

Paragraph (c)(2) would be amended to 

exempt funds in Individual Retirement 

Accounts (IRAs) and other official 

retirement accounts from the calculation 

of net worth provided that the funds 

cannot currently be withdrawn from the 

account prior to retirement age without 

a significant penalty. Retirement 

accounts are not assets to be currently 

enjoyed, rather they are held for 

purposes of ensuring future income 

when an individual is no longer 

working. SBA believes it is unfair to 

count those assets as current assets. 

Through experience SBA has found that 

the inclusion of IRA’s and other 

retirement accounts in the calculation of 

an individual’s net worth does not serve 

to disqualify wealthy individuals from 

participation in the program; rather, it 

has worked to make middle and lower 

income individuals ineligible to the 

extent they have invested prudently in 

accounts to ensure income at a time in 

their lives that they are no longer 

working. SBA is cognizant of the 

potential for abuse of this proposed 

provision, with individuals attempting 

to hide current assets in funds labeled 

‘‘retirement accounts.’’ Obviously, SBA 

does not believe such attempts to 

remove certain assets from an 

individual’s economic disadvantage 

determination would be appropriate. 

Therefore, it has added the condition 

that in order for funds not to be counted 

in an economic disadvantage 

determination, the funds cannot be 

currently withdrawn from the account 

without a significant penalty. A 

significant penalty would be one equal 

or similar to the penalty assessed by the 

Internal Revenue Service for early 

withdrawal. In order for SBA to 

determine whether funds invested in a 

specific account labeled a ‘‘retirement 

account’’ may be excluded from an 

individual’s net worth calculation, the 

individual must provide to SBA 

information about the terms and 

conditions of the account. SBA is 

interested in hearing from the public 

concerning this proposed revision, and 

specifically requests comments on how 

best to exclude legitimate retirement 

accounts without affording others a 

mechanism to circumvent the economic 

disadvantage criterion. 

SBA is also proposing to amend 

paragraph (c)(2) to exempt income from 

an S Corporation from the calculation of 

both income and net worth to the extent 

such income is reinvested in the firm or 

used to pay taxes arising from the 

normal course of operations of an S 

corporation. Therefore, while the 

income of an S corporation flows 

through and is taxed to individual 

shareholders in accordance with their 

interest in the S corporation for Federal 

tax purposes, SBA will take such 

income into account for economic 

disadvantage purposes only if it is 

actually distributed to the particular 

shareholder. This change would result 

in equal treatment of corporate income 

for C and S corporations. In cases where 

that income is reinvested in the firm or 

used to pay taxes arising from the 

normal course of operations of the S 

corporation and not retained by the 

individual, SBA believes it should be 

treated the same as C corporation 

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income for purposes of determining 

economic disadvantage. In order to be 

excluded, the owner of the S 

corporation would be required to clearly 

demonstrate that he or she paid taxes of 

the S corporation or reinvested certain 

funds into the S corporation within 12 

months of the distribution of income. 

Conversely, the owner of an S 

corporation could not subtract S 

corporation losses from the income paid 

by the S corporation to him/her or from 

the individual’s total income from 

whatever source. S corporation losses, 

like C corporation losses, are losses to 

the company only, not losses to the 

individual, and based upon the legal 

structure of the corporation and the 

protections affording the principals 

through this structure, the individual is 

not personally liable for the debts 

representing any of those liabilities. 

Thus, it is inappropriate to consider 

these personal losses and individuals 

should not be able to use them to reduce 

their personal incomes. 

A new paragraph (c)(3) would be 

added to provide that SBA would 

presume that an individual is not 

economically disadvantaged if his or her 

adjusted gross income averaged over the 

past two years exceeds $200,000. SBA 

considered incorporating into the 

regulation the present policy that an 

individual is not economically 

disadvantaged if his or her adjusted 

gross income exceeds that for the top 

two percent of all wage earners 

according to Internal Revenue Service 

(IRS) statistics. Under the current 

approach, SBA compares the income of 

the individual claiming disadvantage to 

the most currently available final IRS 

income tax return data. In some cases, 

SBA may be comparing IRS information 

relating to one tax year to an 

individual’s income from a succeeding 

tax year because final IRS information is 

not available for that succeeding tax 

year. Although that policy has been 

upheld by SBA’s OHA and the Federal 

courts (see SRS Technologies v. United 

States, 894 F. Supp. 8 (D.D.C. 1995); 

Matter of Pride Technologies, Inc., SBA 

No. 557 (1996) SBA No. MSB–557), SBA 

believes that a straight line numerical 

figure is more understandable, easier to 

implement, and avoids any appearance 

of unfair treatment when statistics for 

one tax year are compared to an income 

level for another tax year. SBA is 

proposing an income level of $200,000 

because that figure closely approximates 

the income level corresponding to the 

top two percent of all wage earners, 

which has been upheld as a reasonable 

indicator of a lack of economic 

disadvantage. Although a $200,000 

income may seem unduly high as a 

benchmark, we note that this amount is 

being used only to presume, without 

more information, that the individual is 

not economically disadvantaged. We 

also note that average income for a small 

business owner is higher than average 

income for the population at large. SBA 

may consider incomes lower than 

$200,000 as indicative of lack of 

economic disadvantage. However, it 

would not presume lack of economic 

disadvantage in that case. It may also 

consider income in connection with 

other factors when determining an 

individual’s access to capital. SBA 

specifically requests comments on both 

the straight line approach proposed and 

the current comparison of income levels 

to the IRS statistics. The rule also 

proposes to establish a two year average 

income level of $250,000 for continued 

8(a) BD program eligibility. SBA 

believes that a higher income level may 

be more appropriate as a firm becomes 

more developed, but does not want to 

sanction too high a level. SBA requests 

comments on the $250,000 level, 

including whether the same $200,000 

level should be used for both initial and 

continued 8(a) BD eligibility and 

whether some other level (e.g., 

$225,000) should be used for continued 

eligibility. 

The proposed regulation would 

permit applicants to rebut the 

presumption of lack of economic 

disadvantage upon a showing that the 

income is not indicative of lack of 

economic disadvantage. For example, 

the presumption could be rebutted by a 

showing that the income was unusual 

(inheritance) and is unlikely to occur 

again or that the earnings were offset by 

losses as in the case of winnings and 

losses from gambling resulting in a net 

gain far less than the actual income 

received. SBA may still consider any 

unusual earnings or windfalls as part of 

its review of total assets. Thus, although 

an inheritance of $5 million, for 

example, may be unusual income and 

excluded from SBA’s determination of 

economic disadvantage based on 

income, it would not be excluded from 

SBA’s determination of economic 

disadvantage based on total assets. In 

such a case, a $5 million inheritance 

would render the individual not 

economically disadvantaged based on 

total assets. This paragraph would also 

provide that S corporation income will 

not be considered in determining an 

individual’s average income if the S 

corporation owner submits evidence 

that such income was reinvested in the 

firm or used to pay corporate taxes 

within 12 months of the distribution of 

income. Again, while the income of an 

S corporation flows through and is 

taxed to individual shareholders in 

accordance with their interest in the S 

corporation, SBA will take such income 

into account only if it is actually 

distributed to the particular 

shareholder. 

This rule also proposes to amend 

§ 124.104(c) to establish an objective 

standard by which an individual can 

qualify as economically disadvantaged 

based on his or her total assets. The 

regulations have historically authorized 

SBA to use total assets as a basis for 

determining economic disadvantage, but 

did not identify a specific level below 

which an individual would be 

considered disadvantaged. The 

regulations also did not spell out a 

specific level of total assets above which 

an individual would not qualify as 

economically disadvantaged. Although 

SBA has used total assets as a basis for 

denying an individual participation in 

the 8(a) BD program based on a lack of 

economic disadvantage, the precise 

level at which an individual no longer 

qualifies as economically disadvantaged 

is not certain. SBA’s findings that an 

individual was not economically 

disadvantaged with total asset levels of 

$4.1 million and $4.6 million have been 

upheld as reasonable. See Matter of 

Pride Technologies, SBA No. 557 (1996), 

and SRS Technologies v. U.S., 843 F. 

Supp. 740 (D.D.C. 1994). Alternatively, 

SBA’s finding that an individual was 

not economically disadvantaged with 

total assets of $1.26 million was 

overturned. See Matter of Tower 

Communications, SBA No. 587 (1997). 

This rule proposes to eliminate any 

confusion as to what level of total assets 

qualifies as economic disadvantage for 

8(a) BD purposes. Under the proposed 

rule, an individual would not be 

considered economically disadvantaged 

if the fair market value of all his or her 

assets exceeds $3 million at the time of 

8(a) application and $4 million for 

purposes of continued 8(a) BD program 

participation. While the proposed rule 

would exclude retirement accounts from 

an individual’s net worth in 

determining economic disadvantage, it 

would not exclude such amounts from 

the individual’s total assets in 

determining economic disadvantage on 

that basis. 

Changes to Ownership Requirements 

SBA is proposing to amend 

§ 124.105(g) governing ownership to 

provide more flexibility in determining 

whether to admit to the 8(a) program 

companies owned by individuals where 

such individuals have immediate family 

members who are owners of current or 

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former 8(a) concerns. The current rule 

provides that ‘‘the individuals 

determined to be disadvantaged for 

purposes of one Participant, their 

immediate family members, and the 

Participant itself, may not hold, in the 

aggregate, more than a 20 percent equity 

ownership interest in any other single 

Participant.’’ Because of the wording of 

that provision, SBA has been forced to 

deny 8(a) program admission to 

companies solely because the owners of 

those firms have family members who 

are disadvantaged owners of other 8(a) 

concerns. In some cases, the two firms 

are in different industries and are 

located in different parts of the country. 

SBA believes that it serves no purpose 

to automatically disqualify a firm 

simply because the individual seeking 

to qualify the firm has an immediate 

family member already participating in 

the program. Although there may be 

situations in which SBA would choose 

to deny admission to a firm based on a 

family member’s program participation, 

such a decision must necessarily be 

made on a case-by-case basis. For 

example, SBA may wish to deny 

admission to the program to a 

construction firm owned by a woman 

whose father owns an 8(a) firm in the 

construction industry where the 

program term of the father’s firm is 

about to end, if it appears that the 

daughter does not have sufficient 

management experience to manage the 

firm and there are indications that the 

applicant is simply a front for the 

current firm. 

In order to prevent disadvantaged 

individuals from using family members 

to extend their program terms and to 

prevent fronts, SBA proposes to amend 

§ 124.105(g) to provide that an 

individual may not use his or her 

disadvantaged status to qualify a firm if 

such individual has an immediate 

family member who has used his or her 

disadvantaged status to qualify another 

firm for participation in the 8(a) BD 

program. However, the proposed rule 

will permit the SBA’s Associate 

Administrator for Business 

Development (AA/BD) to waive this 

prohibition under certain 

circumstances. Those circumstances are 

similar to the clear line of fracture 

exception to the identity of interest rule 

in the size regulations. 

SBA would waive the prohibition 

where there are no or negligible 

connections between the two firms, 

either in the form of ownership, control 

or contractual relations, and where the 

individual seeking to use his or her 

disadvantaged status to qualify the firm 

can demonstrate he or she has sufficient 

management and technical experience 

to operate the firm. If a firm seeking a 

waiver is in the same or similar line of 

business as a current or former 8(a) 

Participant of a family member, there 

would be a presumption against 

granting a waiver. The applicant must 

provide clear and compelling evidence 

that no connection exists between the 

two firms. 

SBA believes that this narrow 

exception to the general prohibition 

against family members owning 8(a) 

concerns in the same or similar line of 

business will permit the Agency 

sufficient flexibility to admit firms 

where they are clearly operating 

separately and independently from the 

relative’s firm. SBA also proposes to add 

a provision specifying that it may 

terminate an 8(a) concern for which it 

had granted a waiver if connections 

between the two firms become apparent 

(e.g., sharing of employees, contractual 

relationships between the two firms) or 

if that firm begins to operate in the same 

or a similar line of business as the 

current or former 8(a) concern owned by 

the disadvantaged immediate family 

member. 

SBA also proposes to amend 

§ 124.105 to add a phrase that was 

inadvertently omitted from the current 

rule. The words ‘‘or a principal of such 

firm’’ were inadvertently omitted from 

§ 124.105(h)(2) after the words ‘‘A nonParticipant concern.’’ That provision 

prohibits concerns in the same or a 

similar line of business as an 8(a) 

concern from owning more than a 10 

percent interest in an 8(a) concern in the 

developmental stage of program 

participation or more than a 20 percent 

interest in a Participant in the 

transitional stage of the program. The 

intent was to also prohibit principals of 

such concerns from owning these same 

percentages. However, the necessary 

language to effect this was inadvertently 

omitted. This omission is made 

particularly evident by the rule 

permitting former Participants and 

principals of former Participants to own 

up to 20 percent of a program 

Participant in the developmental stage 

of program participation and up to 30 

percent of a Participant in the 

transitional stage. The anomalous result 

of the omission was to permit principals 

of non-8(a) concerns to own greater 

percentages of 8(a) firms in the same or 

similar line of business than principals 

of former 8(a) concerns even though the 

clear intent of the rule was to afford 

former 8(a) firms and their principals 

greater ownership rights. SBA has 

corrected that error in this proposed 

rule. 

Changes to Control Requirements 

SBA also proposes to amend 

§ 124.106, which addresses control of an 

8(a) applicant or Participant. SBA 

proposes to add an additional 

requirement to this section that the 

disadvantaged manager of an 8(a) 

applicant or Participant must reside in 

the United States and spend part of 

every month physically present at the 

primary offices of the applicant or 

Participant. This change is being 

proposed in response to a recent Small 

Disadvantaged Business (SDB) 

eligibility appeal before SBA’s Office of 

Hearings and Appeals. In OHA’s 

decision on that case, which was 

vacated on other grounds, the 

Administrative Judge held that a 

disadvantaged owner of a firm seeking 

SDB status controlled the firm from her 

residence in Paris, France. SBA believes 

that an individual seeking to qualify as 

eligible for the SBA’s 8(a) BD program 

must reside in the United States. There 

is a presumption in the regulations for 

such residency, but it is not explicit. 

The regulations require an individual 

seeking 8(a) eligibility to be a citizen of 

the United States and individuals who 

are non-designated group members are 

required to establish their individual 

social disadvantage based on instances 

of bias or discrimination ‘‘in American 

society, not in other countries.’’ In 

addition, SBA believes that in order for 

an individual to exercise the requisite 

degree of control of an 8(a) firm, such 

individual must be physically present at 

the offices of the firm at least part of 

every month. In SBA’s view, the 

potential for negative control is great 

when an individual on-site manager is 

relied on by an absent chief executive. 

The proposed rule would also add a 

conforming change to the general 

requirements for 8(a) BD eligibility 

contained in § 124.104(a) to recognize 

the residency requirement. 

The Agency recognizes that the 21st 

century has created new opportunities 

for off-site management through the 

increased use of e-mail and overnight 

express and decreasing interstate and 

international telephone costs, and that 

these new and improved technologies 

enable managers to maintain control 

over the operations of their businesses 

without the need for a constant or 

consistent physical presence. 

Nevertheless, SBA believes that in order 

to prevent negative control and to 

ensure that the disadvantaged majority 

owner(s) are the true managers of the 

8(a) concern or applicant, the 

disadvantaged manager must generally 

be present in the firm’s primary offices 

at least part of every month and must be 

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able to physically reach the firm in a 

matter of a few hours from his or her 

residence should the need arise. SBA 

considered requiring physical presence 

by the individual(s) claiming 

disadvantaged status in the 

headquarters of the applicant or 

participant firm for a minimum amount 

of time each month (e.g., 10 hours, 20 

hours, or some other higher number of 

hours) and specifically asks for 

comments on whether such a 

requirement makes sense in today’s 

world (and, if so, what should the 

minimum number of hours be) or 

whether control should be determined 

on a case-by-case basis. SBA also 

understands that any provision 

requiring presence in every month may 

be unworkable. With such a strict 

requirement, a disadvantaged owner 

who took a month-long vacation one 

year would be ineligible for continued 

8(a) BD participation. As such, the 

proposed rule has the requirement that 

a disadvantaged owner must 

‘‘generally’’ spend part of every month 

at the firm’s principal office, imposing 

a monthly presence requirement while 

at the same time allowing for unusual 

circumstances in any given month. 

Section 124.106 would also be 

amended by deleting the word ‘‘such’’ 

from the second sentence in the 

preamble of paragraph (e) so as to make 

clear that paragraphs (e)(1) and (e)(2) 

apply to all non-disadvantaged 

individuals and not just to those nondisadvantaged individuals involved in 

the management of an applicant or 

Participant or who are stockholders, 

partners, limited liability members, 

officers, or directors of the applicant or 

Participant. This change is needed to 

correct a misinterpretation of this 

regulation by SBA’s Office of Hearings 

and Appeals (OHA). That decision, In 

the Matter of Avasar Corporation, No. 

209 (August 24, 2004), incorrectly held 

that paragraphs (a)(1), (a)(2), and (a)(3) 

as well as paragraph (g) of § 124.106 

concerning non-disadvantaged control, 

applied only to non-disadvantaged 

individuals involved in the management 

of an applicant or Participant, or 

stockholders, partners, limited liability 

members, officers, and/or directors of 

the applicant or Participant. The result 

of that decision was that under certain 

circumstances, non-disadvantaged 

individuals would be permitted to 

control an 8(a) concern. This is an 

absurd result and contrary to statute. 

The proposed change makes it clear that 

the above paragraphs apply to all nondisadvantaged individuals, regardless of 

their current or former relationship to 

the applicant or Participant. 

The proposed rule would also add a 

new § 124.106(h) regarding control of an 

8(a) BD Participant where a 

disadvantaged individual upon whom 

eligibility is based is a reserve 

component member in the United States 

military who has been called to active 

duty. Currently, there is no statutory or 

regulatory authority to permit such a 

firm to stay in the 8(a) BD program, 

whether on an active or inactive basis, 

while the individual upon whom 

eligibility is based is away from the firm 

for an extended period of time. Some 

have even questioned whether SBA 

should in fact terminate such a firm 

from the 8(a) BD program for failure to 

maintain control by one or more 

disadvantaged individuals. SBA 

believes that termination in these 

circumstances would be inappropriate. 

Specifically, the proposed rule would 

permit a Participant to designate one or 

more individuals to control its daily 

business operations during the time that 

a disadvantaged individual upon whom 

eligibility has been called to active duty 

in the United States military. The 

proposed rule would also amend 

§ 124.305 to authorize the Participant to 

suspend its 8(a) BD participation during 

the active duty call-up period. If the 

Participant elects to designate one or 

more individuals to control the concern 

on behalf of the disadvantaged 

individual during the active duty callup period, the concern will continue to 

be treated as an eligible 8(a) Participant 

and no additional time will be added to 

its program term. If the Participant 

elects to suspend its status as an eligible 

8(a) Participant, the Participant’s 

program term would be extended by the 

length of the suspension when the 

individual returns from active duty. 

Benchmarks 

The proposed rule would remove 

§ 124.108(f), as well as other references 

to the achievement of benchmarks 

contained in §§ 124.302(d), 124.403(d), 

and 124.504(d). When these regulations 

were first implemented, the Department 

of Commerce was supposed to update 

industry codes every few years to 

determine those industries which 

minority contractors were 

underrepresented in the Federal market. 

It is SBA’s view that because these 

industry categories have never been 

revised since the initial publication, 

references to them are outdated and 

should be removed. 

Changes Applying Specifically to 

Tribally-Owned Firms 

The Small Business Act permits 8(a) 

Participants to be owned by ‘‘an 

economically disadvantaged Indian 

tribe (or a wholly owned business entity 

of such tribe).’’ 15 U.S.C. 

637(a)(4)(A)(i)(II). The term Indian tribe 

includes any Alaska Native village or 

regional corporation. 15 U.S.C. 

637(a)(13). Pursuant to the Alaska 

Native Claims Settlement Act, a concern 

which is majority owned by an Alaska 

Native Corporation (ANC) is deemed to 

be both owned and controlled by Alaska 

Natives and an economically 

disadvantaged business. As such, ANCs 

do not have to establish that they are 

‘‘economically disadvantaged.’’ 

Conversely, Indian tribes are not 

afforded the same automatic statutory 

economic disadvantage designation. 

Current § 124.109(b) requires tribes to 

demonstrate their economic 

disadvantage through the submission of 

data, including information relating to 

tribal unemployment rate, per capita 

income of tribal members, and the 

percentage of the tribal population 

below the poverty level. SBA requests 

comments on how best to determine 

whether a tribe should be considered 

‘‘economically disadvantaged.’’ Some 

have advocated a bright line assets or 

net worth test for tribes. SBA is not 

convinced that such a test truly captures 

the economic disadvantage status of a 

tribe. SBA continues to believe that the 

factors set forth in current 

§ 124.109(b)(2) paint a truer picture, but 

specifically requests comments from 

tribes on this issue. The current 

regulation also requires a tribe to 

demonstrate its economic disadvantage 

only once. SBA also requests comments 

regarding whether this one time 

demonstration of economic 

disadvantage makes sense. 

The proposed rule would also amend 

§ 124.109(c)(3)(ii) to more clearly define 

the type of work that a tribally-owned 

firm may perform in the 8(a) program. 

One of the goals of the 8(a) BD program 

is to develop businesses to the point 

where they can be independent, viable 

businesses when they graduate or 

otherwise leave the 8(a) BD program. In 

order to encourage a tribally-owned firm 

to continue to operate as an 

independent business after it leaves the 

8(a) BD program, SBA has prohibited for 

many years a tribally-owned applicant 

from having the same primary NAICS 

code as another firm in the 8(a) BD 

program owned by the same tribe or one 

that has left the program within the last 

two years. It could perform secondary 

work in such a NAICS code, but it could 

not duplicate the primary NAICS code 

of another or recently former triballyowned 8(a) Participant. SBA believed 

that this requirement would encourage 

tribes to expand their business activities 

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by having two or more viable businesses 

doing separate and distinct work. In 

some cases, however, SBA admitted a 

second tribally-owned firm into the 8(a) 

BD program under one primary NAICS 

code and it immediately began to 

perform all or most of its work in a 

NAICS code that was the primary 

NAICS code of a firm owned by the tribe 

that recently graduated from the 8(a) BD 

program. This is not what SBA 

envisioned. Again, the purpose of the 

8(a) BD program is to promote business 

development. Having one business take 

over work previously performed by 

another does not advance the business 

development of two distinct firms. In 

order to further encourage the 

continued, long-term viability of two 

separate businesses, this rule proposes 

that a newly certified tribally-owned 

Participant cannot receive an 8(a) 

contract in a secondary NAICS code that 

is the primary NAICS code of another 

Participant (or former participant that 

has left the program within two years of 

the date of application) owned by the 

tribe for a period of two years from the 

date of admission to the program. SBA 

also considered allowing such 

secondary work on a limited basis (e.g., 

no more than 20% or 30% of its 8(a) 

work could be in a NAICS code that 

was/is the primary NAICS code of a 

former/other tribally-owned 

Participant). SBA seeks comments on 

both approaches. 

SBA also proposes to delete the word 

‘‘disadvantaged’’ in § 124.109(c)(4) to 

make clear that any tribal member may 

participate in the management of a 

tribally-owned firm and need not 

individually qualify as economically 

disadvantaged. Under current rules, a 

tribal member would generally have to 

qualify as economically disadvantaged 

to run the daily business operations of 

a tribally-owned concern. Tribal 

representatives emphasized the need for 

this change to enable them to attract the 

most qualified tribal members to assist 

in running tribal businesses and further 

allow them to assist economic and 

community development through their 

tribally-owned concerns. SBA agrees 

that the current rule is overly restrictive 

and proposes this change. This change 

would also eliminate the requirement 

that directors and officers must submit 

copies of their individual tax returns to 

establish their economic disadvantage. 

If, however, there is a question as to 

whether an individual filed taxes, SBA 

could request proof of payment of taxes 

to satisfy the good character 

requirement. SBA also requests specific 

comments on whether the individuals 

involved in the management of a 

tribally-owned concern should be 

members of the tribe that owns the 

concern or, in the alternative, whether 

membership in any tribe should suffice. 

Currently, the regulations generally 

require management by individuals who 

are members of the tribe that owns the 

concern. SBA requests comments on 

whether that is too restrictive for the 

tribal community. 

This rule also proposes to clarify the 

potential for success requirement for 

tribally-owned applicants contained in 

§ 124.109(c)(6). SBA believes that the 

current regulation does not adequately 

capture the realities of tribally-owned 

firms. In substantial part, the current 

regulation for potential for success 

applicable to tribally-owned firms is the 

same as that applicable to firms owned 

by socially and economically 

disadvantaged individuals. Under the 

current rule, the firm must generally be 

in business for two years and have 

revenues in its primary industry 

classification. A firm that is in business 

for less than two years may be deemed 

to possess the necessary potential for 

success if the individuals who manage 

and control its daily operations have 

substantial technical and managerial 

experience, the applicant has a record of 

successful performance on contracts in 

its primary industry category, and the 

applicant has adequate capital to sustain 

its business operations. SBA believes 

that those two approaches continue to 

be valid ways to find that a triballyowned firm meets the potential for 

success requirement. In addition, SBA 

believes that a third basis to find 

potential for success should be made 

available to tribally-owned firms. It is 

undisputed that a firm owned by a tribe 

may have financial and physical 

resources available to it that a firm 

owned by one or more disadvantaged 

individuals may not have. While a firm 

owned by disadvantaged individuals is 

designed to make a profit and its 

survivability depends on its ability to do 

so, that is not necessarily the case for a 

tribally-owned concern. The purpose of 

a tribally-owned concern may be to 

increase tribal employment, assist in 

tribal community development, or serve 

other tribal needs. If a tribe pledges to 

use the resources of the tribe to support 

an applicant concern and to not allow 

that concern to cease its operations, 

SBA believes that the concern should be 

deemed to meet the potential for success 

requirement. As such, this rule proposes 

to find potential for success where a 

tribe has made a firm written 

commitment to support the operations 

of the applicant concern and the tribe 

has the financial ability to do so. 

The Government Accountability 

Office (GAO) and SBA’s Office of 

Inspector General have recently 

reviewed participation in the 8(a) BD 

program by firms owned by ANCs. 

These reviews questioned certain 

aspects of SBA’s oversight of ANCowned firms. In particular, there was a 

concern that SBA did not adequately 

track the extent to which the benefits of 

the 8(a) BD program reached individual 

Alaska natives or the native community. 

As such, SBA proposes to amend the 

requirements for annual reviews 

contained in § 124.112(b) to require the 

submission of such information. SBA 

also believes that the same reporting 

requirements should apply to 8(a) 

Participants owned by tribes, Native 

Hawaiian Organizations (NHOs), and 

Community Development Corporations 

(CDCs). Specifically, the proposed rule 

would require each Participant owned 

by a tribe, ANC, NHO or CDC to submit 

information showing how its 8(a) 

participation has benefited the tribal or 

native members and/or the tribal, native 

or other community as part of its annual 

review submission. The firm should 

submit information relating to funding 

cultural programs, employment 

assistance, jobs, scholarships, 

internships, subsistence activities, and 

other services to the affected 

community. 

Excessive Withdrawals 

The proposed rule would also amend 

§ 124.112(d) requiring what amounts 

should be considered excessive 

withdrawals, and thus a basis for 

possible termination or early 

graduation. SBA believes that the 

current definition of withdrawal 

unreasonably restricts Participants. For 

example, by including the income of all 

officers and all bonuses, a Participant is 

hampered in its ability to recruit and 

retain key employees or to pay fair 

wages to its officers. Under the current 

regulation, if the income of all officers 

in the aggregate exceeds $300,000 for a 

multimillion dollar firm, the income 

alone would be deemed ‘‘excessive’’ and 

could be a basis for termination or early 

graduation. SBA believes that this does 

not make sense, particularly in light of 

the income level permitted in 

determining economic disadvantage. In 

determining whether an individual is 

economically disadvantaged, SBA has 

determined that individuals claiming 

disadvantage may earn income of up to 

$200,000 without jeopardizing their 

economic disadvantage status for initial 

eligibility, and as noted above, up to 

$250,000 for continued 8(a) BD program 

eligibility. As such, a firm could pay 

two officers $175,000 each and those 

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officers would be deemed economically 

disadvantaged under the regulations, 

but in doing so, the firm would also be 

deemed to have made excessive 

withdrawals to those two individuals 

and be a possible basis for termination 

or early graduation. SBA also believes 

that the definition of withdrawal 

restricts a Participant from exercising 

business judgment in the operation of 

the concern. SBA’s intent when the 

definition was initially promulgated 

was to prevent a ‘‘cashing out’’ of 

earnings from the Participant by its 

owners or managers. Thus, this rule 

proposes to modify the definition of 

withdrawal to generally eliminate the 

inclusion of officers’ salaries within the 

definition of the term withdrawal. The 

rule also proposes to generally exclude 

other items currently included within 

the definition of withdrawal. SBA 

acknowledges, however, that some firms 

may try to circumvent the excessive 

withdrawal limitations through the 

distribution of salary or by other means. 

To take that possibility into account, the 

proposed rule would authorize SBA to 

look at the totality of the circumstances 

in determining whether to include a 

specific amount as a ‘‘withdrawal.’’ If 

SBA believes that a firm is attempting 

to get around the excessive withdrawal 

limitations though the payment of 

officers’ salaries, SBA would count 

those salaries as withdrawals in such a 

situation. 

The rule also would amend 

§ 124.112(d)(3) pertaining to withdrawal 

thresholds for purposes of determining 

whether the withdrawal is in fact 

excessive. The proposed rule would 

amend § 124.112(d)(3) to increase the 

current ‘‘excessive’’ amounts by $50,000 

at the two lower levels, and by $100,000 

for the highest level. Thus, for firms 

with sales of less than $1,000,000 the 

excessive withdrawal amount would be 

$200,000 instead of $150,000, for firms 

with sales between $1,000,000 and 

$2,000,000 the excessive withdrawal 

amount would be $250,000 instead of 

$200,000, and for firms with sales 

exceeding $2,000,000 the excessive 

withdrawal amount would be $400,000 

instead of $300,000. SBA also asks for 

comments as to whether the excessive 

withdrawal level for higher revenue 

firms should be tied to each owner or 

officer of the firm instead of to the firm 

as a whole, and, if so, what level should 

be deemed excessive for an individual. 

Applications to the 8(a) BD Program 

The proposed rule would make minor 

changes to §§ 124.202, 124.203, 124.204 

and 124.205 to emphasize SBA’s 

preference that applications for 

participation in the 8(a) BD program be 

submitted in an electronic format. The 

use of the electronic application not 

only reduces the administrative burden 

on SBA, but is reflective of a 

government-wide shift to use electronic 

applications and forms whenever 

possible. Entering the application online 

is the most efficient method to apply for 

8(a) BD program participation since it 

allows SBA to promptly process the 

application once the supporting 

documentation is received. Most 

importantly, prior to entering the 

information into the online 8(a) BD 

application, the system reminds the 

applicant to enter/update the firm’s 

Central Contractors Registration (CCR) 

and Dynamic Small Business Search 

(DSBS) profiles. The information in 

these databases ensures that the firm’s 

capabilities are advertised to any 

Federal, State or local government, 

prime contractor, or other business 

organization looking for the capabilities 

the firm offers. The proposed rule 

permits a concern that does not have 

access to the electronic format or does 

not wish to file an electronic application 

to request a hard copy application from 

the AA/BD. The rule also clarifies that 

in all cases (whether an electronic or 

hard copy application is filed) those 

individuals claiming disadvantage 

status must submit wet signatures as 

part of the application. 

The proposed rule would also change 

the location for SBA’s initial review of 

applications from ANC-owned firms. 

The current regulation specifies that 

SBA’s Anchorage, Alaska District Office 

would initially review all applications 

from ANC-owned applicants. SBA 

believes that the San Francisco DPCE 

unit is better suited to receive and 

review applications from ANC-owned 

applicants because it has more 

knowledge of SBA’s eligibility 

requirements, in addition to having 

knowledge of issues specific to ANCowned firms. As such, the proposed rule 

would provide that applications for 8(a) 

BD certification from ANC-owned firms 

will be reviewed and processed by the 

San Francisco DPCE unit. SBA would 

have the discretion to require an ANCowned applicant to submit its 

application to the Philadelphia DPCE 

unit in appropriate circumstances, such 

as where there is an uneven distribution 

of applications and the San Francisco 

DPCE unit as a backlog of cases while 

the Philadelphia DPCE unit does not. 

SBA is also proposing to add a new 

paragraph to § 124.204, which governs 

application processing, to clarify that 

the burden of proof to demonstrate 

eligibility for participation in the 8(a) 

BD program is on the applicant and to 

permit SBA to presume that information 

requested but not submitted would be 

adverse. Under the proposed regulation, 

if SBA makes a specific request for 

relevant information and that 

information is not provided, SBA may 

presume that the information would be 

adverse to the firm and conclude that 

the firm has not demonstrated eligibility 

in the area to which the information 

relates. A similar provision has existed 

as part of SBA’s size regulations for 

many years and is cited regularly in 

SBA size determinations. 

Graduation 

Section 124.301 and 124.302 would 

be amended to utilize the terms ‘‘early 

graduation’’ and ‘‘graduation’’ in a way 

that matches the statutory meaning of 

those terms. See amendment to § 124.2, 

explained above. 

Termination From the 8(a) BD Program 

The proposed rule would amend three 

paragraphs in § 124.303 regarding 

termination from the 8(a) BD program. 

Section 124.303(a)(2) would be 

amended to specifically clarify that a 

Participant could be terminated from 

the program where an individual owner 

or manager exceeds any of the 

thresholds for economic disadvantage 

(i.e., net worth, personal income or total 

assets), or is otherwise determined not 

to be economically disadvantaged, 

where such status is needed for the 

Participant to remain eligible, and 

where the Participant has not met the 

targets and objectives set forth in its 

business plan. This regulatory change is 

needed to rectify a decision made by 

SBA’s OHA in the case of Digital 

Management, Inc., SBA No. BDP–288 

(2008). The Small Business Act 

provides, in pertinent part, that ‘‘[i]f the 

[SBA] determines * * * that a Program 

Participant and its disadvantaged 

owners are no longer economically 

disadvantaged for the purpose of 

receiving assistance * * * the Program 

Participant shall be graduated’’ from the 

8(a) BD program. 15 U.S.C. 

637(a)(6)(C)(ii). In addition, as noted 

above, the Small Business Act provides 

that ‘‘the term ‘graduated’ or 

‘graduation’ means that the Program 

Participant is recognized as successfully 

completing the program by substantially 

achieving the targets, objectives, and 

goals contained in the concern’s 

business plan thereby demonstrating its 

ability to compete in the marketplace 

without assistance * * *’’ 15 U.S.C. 

636(j)(10)(H). In Digital Management, 

the individual upon whom 8(a) BD 

eligibility was based no longer qualified 

as economically disadvantaged. Because 

the Participant firm had not yet met the 

targets, objectives, and goals contained 

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in its business plan, SBA did not believe 

that early ‘‘graduation’’ was required, 

and instead commenced proceedings to 

terminate the Participant from the 8(a) 

BD program. The basis for the 

termination action was the Participant’s 

failure to maintain its eligibility for 

program participation, as set forth in 

current § 124.303(a)(2). OHA ruled that 

termination was inappropriate and that 

the SBA should have utilized the early 

graduation procedures. SBA believes 

that early graduation was not mandated 

under 15 U.S.C. 637(a)(6)(C)(ii) because 

SBA had not determined that both the 

Program Participant and its 

disadvantaged owners were no longer 

economically disadvantaged, but rather 

that only the disadvantaged owner was 

no longer economically disadvantaged. 

The SBA’s early graduation regulations 

at § 124.302(a)(2) authorize early 

graduation where one or more 

disadvantaged owners upon whom 

eligibility is based are no longer 

economically disadvantaged, but do not 

require it. While SBA must early 

graduate a firm from the 8(a) BD 

program where one or more 

disadvantaged individuals upon whom 

eligibility is no longer economically 

disadvantaged and where the firm has 

met the targets, objectives and goals set 

forth in its business plan, SBA believes 

that it has the discretion to either 

terminate or early graduate a firm where 

one or more owners claiming 

disadvantaged status are no longer 

economically disadvantaged, but the 

firm has not met the targets, objectives 

and goals set forth in its business plan. 

This proposed change would more 

clearly provide for that discretion. 

Section 124.303(a)(13) would be 

amended to be consistent with the 

proposed changes to § 124.112(d)(13) 

regarding excessive withdrawals being a 

basis for termination. 

Section 124.303(a)(16) would be 

amended to remove the reference to part 

145, a regulatory provision that 

addresses nonprocurement debarment 

and suspension that was moved to 2 

CFR parts 180 and 2700. 

Effect of Early Graduation or 

Termination 

SBA also proposes to amend 

§ 124.304(f) regarding the effect an early 

graduation or termination would have. 

When SBA early graduates or terminates 

a firm from the 8(a) BD program, 

proposed § 124.304(f)(2) would 

generally not permit the firm to self 

certify that it qualifies as an SDB for 

future procurement actions. If the firm 

believes that it does qualify as an SDB 

and seeks to certify itself as an SDB, the 

firm must notify the contracting officer 

that SBA early graduated or terminated 

the firm from the 8(a) BD program. The 

firm must also demonstrate either that 

the grounds upon which the early 

graduation or termination was based do 

not affect its status as an SDB, or that 

the circumstances upon which the early 

graduation or termination was based 

have changed and the firm would now 

qualify as an SDB. For example, if SBA 

terminates a firm from the 8(a) BD 

program for a persistent pattern of 

failing to provide required financial 

information, the reason for termination 

would not be connected to ownership, 

control, social disadvantage or 

economic disadvantage. As such, the 

firm could continue to qualify as an 

SDB, without making any changes to its 

business structure or management. 

Whenever a firm notifies a contracting 

officer that it has been terminated or 

early graduated by SBA along with its 

SDB certification, the contracting officer 

must protest the SDB status of the firm 

so that SBA can make a formal 

eligibility determination. 

Suspensions for Call-Ups to Active Duty 

As noted above, the proposed rule 

would amend § 124.305 to permit SBA 

to suspend an 8(a) Participant where the 

individual upon whom eligibility is 

based can no longer control the day-today operations of the firm because the 

individual is a reserve component 

member in the United States military 

who has been called to active duty. 

Suspension in these circumstances is 

intended to preserve the firm’s full term 

in the program by adding the time of the 

suspension to the end of the 

Participant’s program term when the 

individual returns to control its daily 

business operations. Suspension would 

not be needed where one or more 

additional disadvantaged individuals 

remain to control the Participant after 

the reservist’s call-up to active duty, or 

where the Participant elects to designate 

a non-disadvantaged individual to 

control the concern during the call-up 

period pursuant to proposed 

§ 124.106(h). In such a case, the firm 

would remain an active Participant in 

the 8(a) BD program and could continue 

to receive new 8(a) contracts and other 

program assistance. 

Task and Delivery Order Contracts 

SBA is proposing to amend 

§ 124.503(h), which addresses task and 

delivery order contracts. Agencies are 

increasingly reserving prime contract 

awards for small business concerns 

under multiple award solicitations that 

are competed on a full and open basis. 

Agencies are also awarding multiple 

award contracts that provide that 

competition for certain orders will be 

limited based on socio-economic status, 

including status as an 8(a) concern. 

Historically, agencies could count an 

order towards their 8(a) prime 

contracting goals only if the contract 

under which the order was placed was 

awarded either sole source or based on 

competition limited exclusively to 8(a) 

concerns. Over the years, the 8(a) BD 

program office has received numerous 

requests from procuring agencies to 

receive 8(a) credit for orders awarded to 

8(a) concerns under contracts that were 

not set aside for exclusive competition 

among 8(a) concerns. On June 7, 2000, 

SBA entered into a Memorandum of 

Understanding (MOU) with the General 

Services Administration which allowed 

ordering agencies to receive 8(a) credit 

for orders awarded to 8(a) concerns 

under full and open Multiple Award 

Schedule contracts. That MOU expired 

on September 30, 2003. SBA had 

concerns with renewing the MOU as 

written because it did not provide for 

competition solely among eligible 8(a) 

firms as required by the Small Business 

Act for 8(a) competitive awards. SBA 

has also authorized other agencies to 

take 8(a) credit for orders placed with 

8(a) concerns under full and open 

multiple award contracts, based on the 

procedures applicable to the particular 

multiple award procurement. In order to 

help 8(a) concerns compete in the 

current multiple-award contracting 

environment, SBA is proposing to 

amend § 124.503(h) to allow agencies to 

receive 8(a) credit for orders placed with 

8(a) concerns under contracts that were 

not set aside for 8(a) concerns as long as 

the order is offered to and accepted for 

the 8(a) BD program and competed 

exclusively among eligible 8(a) 

concerns, and as long as the limitations 

on subcontracting provisions apply to 

the individual order. To be an ‘‘eligible’’ 

8(a) concern, the firm must be a current 

Participant in the 8(a) BD program as of 

the date specified for receipt of offers 

contained in the solicitation for the 

order and otherwise meet the 

requirements set forth in § 124.507(b)(2). 

This proposed change would merely 

allow contracting officers the discretion 

to reserve orders for 8(a) concerns if 

they so choose. This rule would not 

require any contracting officer to make 

such a reservation. If a contracting 

officer chose not to reserve a specific 

order for 8(a) concerns (e.g., if a 

contracting officer went to an 8(a) firm, 

a small business, and a large business 

off a schedule or otherwise competed an 

order among 8(a) and one or more non8(a) concerns), the contracting officer 

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could continue to take SDB credit for 

the award of an order to an 8(a) firm. 

Barriers to Acceptance and Release 

From the 8(a) BD Program 

Current § 124.504(a) provides that 

SBA will not accept a procurement for 

award through the 8(a) BD program 

where a procuring activity has issued a 

solicitation for or otherwise expressed 

publicly a clear intent to reserve the 

procurement as a small business or SDB 

set-aside prior to offering the 

requirement to SBA for award as an 8(a) 

contract. This regulation was written 

prior to legislation authorizing 

HUBZone and service disabled veteranowned (SDVO) small business contracts, 

either through set-asides or where 

appropriate on a sole source basis. As 

such, this rule proposes to add a 

provision limiting SBA’s ability to 

accept a requirement for the 8(a) BD 

program where a procuring agency 

expresses a clear intent to make a 

HUBZone or SDVO small business 

award. In addition, the reference to SDB 

set-asides would be eliminated as that 

provision is no longer applicable. 

This rule also proposes to amend 

§ 124.504(e), regarding the release of 

follow-on procurements from the 8(a) 

BD program. It has always been SBA’s 

policy, and implicit in the regulations, 

that once a requirement is awarded as 

an 8(a) contract, any follow-on 

procurement should generally also be 

awarded as an 8(a) contract. SBA’s 

regulations for both the HUBZone and 

service disabled veteran-owned small 

business programs address the release of 

requirements from the 8(a) BD program 

to those programs where no 8(a) firm 

can currently perform the contract. The 

8(a) BD regulations did not specifically 

address release of requirements other 

than those where a firm is graduating 

from the program and needs the followon contract to further its business 

development. As such, the proposed 

rule would require that follow-on or 

repetitive 8(a) procurements would 

generally remain in the 8(a) BD program 

unless SBA agrees to release them for 

non-8(a) competition. If a procuring 

agency would like to fulfill a follow-on 

or repetitive acquisition outside of the 

8(a) BD program, it must make a written 

request to and receive the concurrence 

of the AA/BD to do so. Release may be 

based on an agency’s achievement of its 

SDB goal, but failure to achieve its 

HUBZone or SDVO goal, where the 

requirement is not critical to the 

business development of the 8(a) 

Participant that is currently performing 

the requirement or another 8(a) BD 

Participant. The requirement that a 

follow-on procurement must be released 

from the 8(a) BD program in order for 

it to be fulfilled outside the 8(a) BD 

program would not apply to orders 

offered to and accepted for the 8(a) BD 

program pursuant to § 124.503(h). 

Competitive Threshold Amounts 

SBA is also proposing to amend 

§ 124.506. That regulation addresses the 

dollar threshold for competing 8(a) 

procurements among eligible 

Participants and provides generally that 

a procurement offered and accepted for 

award through the 8(a) BD program 

must be competed among eligible 

Program Participants if the anticipated 

award price of the contract, including 

options, will exceed $5,000,000 for 

manufacturing contracts and $3,000,000 

for all other contracts. In 2004, Congress 

passed new legislation requiring an 

inflationary adjustment of statutory 

acquisition-related dollar thresholds 

every five years. See 41 U.S.C. § 431a. 

On September 28, 2006, the Federal 

Acquisition Regulation (FAR) Council 

published in the Federal Register a final 

rule implementing 41 U.S.C. § 431a 71 

Fed. Reg. 57363. With respect to the 8(a) 

BD competitive threshold, the final rule 

amended FAR § 19.805–1 by ‘‘removing 

from paragraph (a)(2) ‘$5,000,000’ and 

‘$3,000,000’ and adding ‘$5.5 million’ 

and ‘$3.5 million’, respectively, in their 

place.’’ This rule would incorporate the 

FAR changes into SBA’s regulations, so 

that the revised SBA regulation would 

also set the competitive threshold 

amounts at $5,500,000 and $3,500,000, 

respectively. 

Based on statute, the regulation 

further provides an exemption from the 

competition requirement for 8(a) 

Participants owned and controlled by 

Indian tribes and Alaska Native 

Corporations (ANCs). Contracts may be 

awarded through the 8(a) BD program 

on a sole source basis to tribally or 

ANC-owned concerns above the 

competitive threshold amounts if the 

procuring agency believes the firm is 

responsible to perform the contract and 

SBA has not already accepted the 

requirement into the 8(a) program as a 

competitive procurement, and adverse 

impact analyses, as appropriate, have 

been conducted. See 13 CFR 124.506(b). 

Historically, SBA has permitted sole 

source 8(a) contracts above the 

competitive threshold amounts both 

directly to 8(a) Participants owned and 

controlled by tribes or ANCs and to joint 

ventures with one or more tribally or 

ANC-owned 8(a) Participants. There 

have been complaints that non-8(a) 

firms have received substantial benefits 

through the performance of large sole 

source 8(a) contracts as joint venture 

partners with tribally-owned and ANCowned 8(a) firms. The perception of 

impropriety has been even greater 

where the joint venture partner is a large 

business that performs a significant 

portion of the 8(a) contract. Under 

SBA’s regulations, a joint venture 

between an 8(a) firm and any business 

that SBA has approved as the 8(a) firm’s 

‘‘mentor’’ is considered to be small for 

a particular contract opportunity if the 

8(a) firm (i.e., the prote ́ge ́) qualifies as 

small for the size standard 

corresponding to the requirement. Thus, 

a joint venture between a large business 

mentor and an 8(a) prote ́ge ́ is 

considered to be a small business for 

any contract for which the prote ́ge ́

qualifies as small. This provision 

currently applies to all Government 

contracts, including sole source 8(a) 

contracts above the competitive 

threshold amounts where the prote ́ge ́

firm is a tribally-owned or ANC-owned 

concern. 

In addition, pursuant to SBA’s current 

regulations, where SBA approves a joint 

venture for a particular 8(a) contract, the 

joint venture, and not the individual 

8(a) Participant(s), must meet the 

applicable performance of work 

requirement (e.g., the joint venture as a 

whole must perform at least 50% of the 

contract), and the 8(a) Participant(s) 

must perform ‘‘a significant portion’’ of 

the contract. In the context of a joint 

venture between a tribally-owned or 

ANC-owned prote ́ge ́ and its large 

business mentor for a sole source 

contract above the competitive 

threshold amounts, there is a perception 

that large businesses may be unduly 

benefiting from the 8(a) program where 

the large business is performing a 

significant amount of work under the 

contract. This is particularly true where 

a large business mentor also acts as a 

subcontractor to the prime joint venture 

contractor in addition to its role as joint 

venture partner. In such a case, a joint 

venture between a prote ́ge ́ firm and its 

large business mentor could agree to 

perform 50% of the work through the 

joint venture entity (with the 8(a) 

prote ́ge ́ firm performing close to half of 

that work) and then subcontract the 

remaining 50% to the large business 

mentor in its individual capacity. In this 

scenario, a large business would be 

performing 70–80% of a large 8(a) 

contract, while the prote ́ge ́ firm would 

be performing somewhere in the 20– 

30% range of the contract. Even though 

that 20–30% could be a significant 

amount of work for a developing prote ́ge ́

firm, SBA does not believe that it is 

appropriate for a large business to 

benefit to such an extent through an 8(a) 

contract, particularly where that 

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contract is awarded on a sole source 

basis. 

SBA recognizes that the mentor/ 

prote ́ge ́ aspect of the 8(a) BD program 

can be an important component to the 

overall business development of 8(a) 

small businesses. However, SBA does 

not believe that non-8(a) businesses, 

particularly non-8(a) large businesses, 

should benefit more from an 8(a) 

contract than 8(a) prote ́ge ́ firms 

themselves. As such, this rule proposes 

that non-8(a) joint venture partners to 

8(a) sole source contracts cannot also be 

subcontractors under the joint venture 

prime contract. If a non-8(a) joint 

venture partner seeks to perform more 

work under the contract, then the 

amount of work done by the 8(a) partner 

to the joint venture must also increase. 

Because of the proposed change to 

§ 124.513(d) contained in this rule 

(which would require the 8(a) partner(s) 

to a joint venture to perform at least 

40% of the work performed by the joint 

venture), the additional amount of work 

required to be performed by the 8(a) 

partner(s) to a joint venture would be 

spelled out. 

The proposed change to disallow 

subcontracts to non-8(a) joint venture 

partners is not meant to penalize tribal 

and ANC 8(a) firms, but, rather, to 

ensure that the benefits of the program 

flow to its intended beneficiaries. SBA 

consulted with ANC and tribal groups, 

both informally and formally, in 

drafting this proposal. These groups felt 

that both the 8(a) program generally and 

tribal and ANC-owned Participants in 

particular had received unfair criticism, 

but understood the negative perception 

surrounding the performance of 8(a) 

contracts where the majority of the 

contract is ultimately performed by a 

non-8(a), large business. While they 

supported some change to eliminate 

abuse in the program, they felt strongly 

that the mentor/prote ́ge ́ joint venture 

program served an important function. 

They believed that prote ́ge ́ firms gained 

invaluable developmental assistance 

through this program and did not want 

to see it unduly restricted or eliminated. 

SBA considered several other 

alternatives to this proposal, including 

eliminating joint ventures on sole 

source awards above the competitive 

threshold amounts, requiring a majority 

of subcontract dollars under a sole 

source 8(a) joint venture contract 

between a prote ́ge ́ firm and its mentor 

to be performed by small businesses, 

and allowing sole source joint venture 

contracts above the competitive 

threshold amounts only where the 8(a) 

partner(s) to the joint venture performed 

a specified percent (e.g., 40%) of the 

entire contract itself. SBA has attempted 

to address the perceived abuse without 

unduly limiting this important business 

development tool. SBA specifically 

requests comments on how best to limit 

sole source awards to ensure that 

program benefits flow to the intended 

beneficiaries, including comments on 

each of the three identified alternatives. 

SBA also requests comments on 

whether it should extend the 

prohibition against non-8(a) joint 

venture partners from also being 

subcontractors under the joint venture 

prime contract beyond sole source 

contracts and whether it should be 

applied to all 8(a) contracts awarded to 

any joint venture. 

SBA proposes to further amend 

§ 124.506(b) to implement a provision 

contained in § 8021 of the Department 

of Defense (DoD) appropriations act for 

fiscal year (FY) 2004. That provision 

gave DoD agencies the authority to make 

sole source awards for 8(a) contracts 

above the competitive threshold 

amounts to 8(a) concerns owned and 

controlled by Native Hawaiian 

Organizations (NHOs). See Public Law 

108–87, 117 Stat. 1054. However, the 

statute limited the exemption to 

contracts issued by DoD. This authority 

was initially tied to specific 

appropriations, and hence limited in 

duration. The words ‘‘and hereafter’’ 

were included in Section 8020 of the 

DoD Emergency Supplemental 

Appropriation to Address Hurricanes in 

the Gulf of Mexico, and Pandemic 

Influenza Act, 2006, Pub. L. 109–148, 

119 Stat. 2680, 2702, making this 

authority permanent. The proposed 

addition to § 124.506(b) implements the 

statutory authority. 

Bona Fide Place of Business 

The proposed rule would also amend 

the bona fide place of business 

requirements set forth in § 124.507. 

Certain 8(a) contracts are restricted to 

8(a) Participants having a ‘‘bona fide 

place of business’’ within a particular 

geographic location. There has been 

some confusion regarding the 

procedures a Participant must follow to 

establish a bona fide place of business 

in a new location. This rule clarifies that 

a Participant must first submit its 

request to be recognized as having a 

bona fide place of business in a different 

location to the SBA district office that 

normally services it. This will ensure 

that there is proper coordination 

between the two SBA district offices. 

The servicing district office will forward 

the request to the SBA district office 

serving the geographic area of the 

particular location for processing. The 

SBA district office in the geographic 

location of the purported bona fide 

place of business will then contact the 

Participant and may ask for further 

information in support of the 

Participant’s claim. In order for a 

Participant to establish a bona fide place 

of business in a particular geographic 

location, the SBA district office serving 

the geographic area of that location must 

determine if that location in fact 

qualifies as a bona fide place of business 

under SBA’s requirements. A 

Participant cannot submit an offer for an 

8(a) procurement limited to a specific 

geographic area unless it has received 

from SBA a determination that it has a 

bona fide place of business within that 

area. In other words, eligibility in terms 

of having a bona fide place of business 

in a particular geographic location will 

be determined at the time a Participant 

submits its offer. This coincides with 

the time at which size status is 

determined. 

Competitive Business Mix 

Section 124.509(a)(1) would also be 

amended to clarify that work performed 

by an 8(a) Participant for any Federal 

department or agency other than 

through an 8(a) contract, including work 

performed on orders under the General 

Services Administration (GSA) Multiple 

Award Schedule program, and work 

performed as a subcontractor, including 

work performed as a subcontractor to 

another 8(a) Participant on an 8(a) 

contract, qualifies as work performed 

outside the 8(a) BD program. Several 

8(a) Participants specifically questioned 

whether orders off the GSA Schedule 

and subcontracts on 8(a) contracts 

counted against their competitive 

business mix requirement. SBA believes 

that the current regulation clearly 

provides that only 8(a) contract awards 

count against a Participant’s competitive 

business mix. Nevertheless, to avoid any 

confusion, SBA has clarified that all 

Federal contracts other than 8(a) 

contracts, and any subcontract to a 

Federal contract, including a 

subcontract to an 8(a) contract, do not 

count against the firm’s competitive 

business mix. Such revenue is not an 

8(a) award to the Participant and, thus, 

cannot act to limit further sole source 

8(a) awards. 

Administration of 8(a) Contracts 

The proposed rule would also add 

clarifying language to § 124.512. 

Administration of 8(a) contracts has 

been delegated to procuring agencies. 

The current regulation specifies that the 

procuring activity is accountable for ‘‘all 

responsibilities for administering an 8(a) 

contract.’’ Despite this broad language, 

the Government Accountability Office 

(GAO) and others have asked what role 

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SBA plays in tracking whether an 8(a) 

firm has met the performance of work 

requirements set forth in § 124.510 

throughout the life of an 8(a) contract. 

As part of contract administration, 

compliance with the performance of 

work requirements is a responsibility of 

the procuring activity. While SBA 

believed that was clear from the current 

broad regulatory language, the proposed 

rule would specifically recognize that 

tracking compliance with the 

performance of work requirements is a 

contract administration function which 

is performed by the procuring activity. 

Also included within the delegation of 

contract administration is the authority 

to exercise priced options and issue 

appropriate modifications. The 

regulation has required contracting 

officers who issued modifications or 

exercised options on 8(a) contracts to 

notify SBA of these actions. Because 

there was no clear guidance as to when 

SBA must be notified, there was often 

a delay between the issuance of a 

modification (or exercise of an option) 

and notification being supplied to SBA. 

This proposal would require contracting 

officers to submit copies of 

modifications and options to SBA 

within 10 days of their issuance or 

exercise. If SBA has a question 

regarding whether a particular 8(a) 

contractor has complied with applicable 

regulatory requirements, the proposed 

rule would specifically authorize SBA 

to review the procuring activity’s 8(a) 

contracting files. 

Changes to Joint Venture Requirements 

This rule would also amend 

§ 124.513(c)(3) to provide that the 8(a) 

Participant(s) to an 8(a) joint venture 

must receive profits from the joint 

venture commensurate with the work 

performed by the 8(a) Participant(s). 

Currently, SBA’s regulations provide 

that the 8(a) Participant(s) must receive 

at least 51% of the net profits of the 

joint venture. SBA believes that such a 

requirement may be untenable where 

more work is done by a non-8(a) joint 

venture partner than the 8(a) Participant 

partner(s). Under current regulations, 

the joint venture must perform at least 

50% of an 8(a) contract and the 8(a) 

Participants must perform a significant 

portion of the amount performed by the 

joint venture. If, for example, a joint 

venture will perform 60% of an 8(a) 

contract, with the 8(a) partner 

performing 25% of the contract and the 

non-8(a) partner performing 35% of the 

contract, it does not make sense that the 

8(a) partner should receive at least 51% 

of the net profits of the joint venture 

where it is performing less than the non8(a) firm on the contract. SBA 

understands the concern that 8(a) firms 

should receive their fair share of the 

profits from such a joint venture, and 

believes that profits commensurate with 

the work performed should ensure this 

result. 

SBA also proposes to amend the 

requirement setting forth the amount of 

work that an 8(a) Participant must 

perform as part of a joint venture. 

Sections 124.510 and 125.6 of SBA’s 

regulations require that the 8(a) 

Participant being awarded an 8(a) 

contract must perform a specific amount 

of work on the contract (generally at 

least 50%). For a joint venture on an 

8(a) contract, § 124.513(d) requires that 

the joint venture perform the applicable 

percentage of work set forth in § 124.510 

and that the 8(a) Participant(s) to the 

joint venture must perform a 

‘‘significant portion’’ of the contract. 

The term ‘‘significant portion’’ was not 

defined in SBA’s regulations. As such, 

various procuring agencies and SBA 

field offices interpreted this requirement 

differently. This rule proposes to 

impose a more objective requirement. 

Specifically, the rule proposes that the 

8(a) Participant(s) to a joint venture for 

an 8(a) contract must perform at least 

40% of the work done by the joint 

venture. So, for example, if the joint 

venture proposes to perform 50% of the 

contract, the 8(a) Participant(s) must 

perform at least 40% of the 50% or at 

least 20% of the entire contract. 

The proposed rule would also add a 

new paragraph 124.513(i) to require 8(a) 

firms that joint venture to perform an 

8(a) contract to report on contract 

performance at the conclusion of the 

contract. Specifically, each 8(a) firm that 

performs an 8(a) contract through a joint 

venture would be required to report to 

SBA how the performance of work 

requirements (i.e., that the joint venture 

performed at least 50% of the work of 

the contract and that the 8(a) participant 

to the joint venture performed at least 

40% of the work done by the joint 

venture) were met on the contract. This 

requirement is needed to reinforce the 

performance of work requirements. 

Several audits performed by SBA’s 

Office of Inspector General have 

revealed that the performance of work 

requirements are not always met. SBA 

needs to know when and why the 

requirements are not met. This could 

affect the firm’s future responsibility to 

perform additional contracts and, 

depending upon the circumstance, 

could be cause for termination from the 

8(a) BD program. 

Sole Source Limits for NHO-Owned 

Concerns 

SBA proposes to amend § 124.519, 

which imposes limits to the amount of 

8(a) contract dollars a Participant may 

receive on a sole source basis. The 

current rule exempts ANC and tribally 

owned concerns from the limitations set 

forth in the rule. The amendment would 

add NHO-owned concerns to the list of 

8(a) concerns exempted from the 

limitations. SBA believes that all three 

of these types of firms should be treated 

consistently, and the failure to include 

NHO-owned concerns in the exemption 

in the current regulation was an 

inadvertent omission. The proposed 

rule would also change the SBA official 

authorized to waive the requirement 

prohibiting a Participant from receiving 

sole source 8(a) contracts in excess of 

the dollar amount set forth in § 124.519. 

Under the current regulations, only the 

SBA Administrator, on a non-delegable 

basis, may grant such a waiver. SBA 

believes that such waivers have been 

requested and acted on sparingly 

because of the high level approval 

required. While SBA continues to 

believe that such waivers should not be 

commonplace, SBA does believe that a 

change from the Administrator to the 

AA/BD is warranted in order to 

facilitate waivers where appropriate. 

Changes to Mentor/Prote ́ge ́ Program 

The proposed rule would make 

several changes to § 124.520, governing 

SBA’s mentor/prote ́ge ́ program. The rule 

would specifically require that 

assistance to be provided through a 

mentor/prote ́ge ́ relationship be tied to 

the prote ́ge ́ firm’s SBA-approved 

business plan. Although SBA believed 

that this was implicit in the current 

regulations, SBA feels that it is 

important to reinforce that the mentor/ 

prote ́ge ́ program is but one tool that can 

be used to help the business 

development of 8(a) Participants in 

accordance with their business plans. 

Section 125.520(b)(2) would be 

amended to provide for an absolute 

limit of three prote ́ge ́s per mentor. SBA 

is proposing this rule to prevent mentor 

firms from being able to take advantage 

of the program by collecting prote ́ge ́s in 

order to benefit from 8(a) contracts. SBA 

is interested in hearing from the public 

on this proposed limitation. In addition, 

§ 124.520(b)(3) would be amended to 

allow a firm seeking to be a mentor to 

submit Federal income tax returns or 

audited financial statements, including 

any notes, or other evidence from the 

mentor in order to demonstrate the 

firm’s favorable financial health. The 

current regulation requires the 

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submission of Federal tax returns only. 

SBA believes that it may be unnecessary 

in all cases to require the Federal tax 

returns of the proposed mentor, 

provided the firm submits audited 

financial statements, including any 

notes, or in the case of publicly traded 

concerns the filings required by the 

Securities and Exchange Commission 

(SEC) for the past three years, or other 

relevant documentation to SBA for 

review. SBA’s concern is to ensure that 

the firm seeking to be a mentor 

evidences its financial wherewithal. 

SBA is also considering amending 

who may be a mentor under the 8(a) BD 

mentor/prote ́ge ́ program. SBA’s current 

regulation states that a mentor can be 

‘‘[a]ny concern that demonstrates a 

commitment and the ability to assist 

developing 8(a) Participants * * *’’ 

Section 121.105 of SBA’s size 

regulations defines the word ‘‘concern’’ 

to be a for profit entity. As such, nonprofit businesses have not been eligible 

to be mentors under the mentor/prote ́ge ́

program. SBA is considering making a 

change to § 124.520(b) to specifically 

allow non-profit business entities to be 

mentors, and seeks public comment on 

this issue. 

Section 124.520(c)(1) would be 

amended for clarity purposes. There 

appears to be some confusion regarding 

the use of the conjunction ‘‘or’’ at the 

end of paragraph (ii) in SBA’s current 

regulation. Some have questioned 

whether the current regulation requires 

a firm to be in the developmental stage 

of program participation in all instances 

and either have never received an 8(a) 

contract or have half the applicable size 

standard. That was not SBA’s intent. 

The intent of the 8(a) mentor/prote ́ge ́

program is to assist Participants that are 

in the early stages of the 8(a) BD 

program (i.e., thus, paragraph (i) allows 

any firm in the developmental stage of 

program participation to be a prote ́ge ́) or 

need additional assistance in their 

business development (i.e., paragraphs 

(ii) and (iii) allow a firm that has never 

received an 8(a) contract or one that has 

a size standard that is less than half the 

size standard corresponding to its 

primary NAICS code to be a prote ́ge ́, 

respectively). A firm that has never 

received an 8(a) contract or has a size 

standard less than half the size standard 

corresponding to its primary NAICS 

code may need developmental 

assistance regardless of the number of 

years it has spent in the 8(a) BD 

program. In fact, a firm that is in the 

transitional stage of program 

participation that has never received an 

8(a) contract may very well need greater 

assistance than a similar firm in the 

developmental stage of program 

participation. Thus, the regulation 

would be amended to make clear that a 

firm may qualify as a prote ́ge ́ if it is in 

the developmental stage of program 

participation, or has never received an 

8(a) contract, or has a size standard that 

is less than half the size standard 

corresponding to its primary NAICS 

code. 

This rule would also add clarifying 

language to § 124.520(c)(2) to make it 

clear that the benefits derived from the 

mentor/prote ́ge ́ relationship end once 

the prote ́ge ́ firm graduates from or 

otherwise leaves the 8(a) BD program. 

While this is implicit in the current 

regulations which provide that ‘‘[o]nly 

firms that are in good standing in the 

8(a) BD program * * * may qualify as 

a prote ́ge ́,’’ SBA wanted to specifically 

make clear that the exclusion from 

affiliation enjoyed by joint ventures 

between prote ́ge ́s and their mentors 

generally ends when the prote ́ge ́ leaves 

the 8(a) BD program. Of course, a joint 

venture between a mentor and prote ́ge ́

would be expected to complete any 

contract awarded to the joint venture 

while the prote ́ge ́ was a Participant in 

the 8(a) BD program and a contracting 

officer could continue to count such 

contract as an award to an 8(a) or small 

business concern, as the case may be. 

Section 124.520(c)(3) currently 

provides that a prote ́ge ́ firm can have 

only one mentor. As part of SBA’s tribal 

consultation under Executive Order 

13175, Consultation and Coordination 

with Tribal Governments, SBA received 

comments that this provision was too 

restrictive, not just for tribally owned 

8(a) firms, but for all 8(a) firms. While 

SBA continues to believe that the norm 

should continue to be one mentor for 

any given prote ́ge ́ firm, SBA concedes 

that there may be unusual 

circumstances where a second mentor/ 

prote ́ge ́ relationship is warranted. This 

proposed rule would allow the AA/BD 

to approve a second mentor for a 

prote ́ge ́ firm in limited circumstances. 

Specifically, a second mentor may be 

approved where the prote ́ge ́ firm 

demonstrates that the second 

relationship pertains to an unrelated, 

secondary NAICS code, the first mentor 

does not possess the specific expertise 

that is the subject of the mentor/prote ́ge ́

agreement with the second mentor, and 

the two relationships will not compete 

or otherwise conflict with each other. 

Section 124.520 would also be 

amended to preclude 8(a) firms from 

being mentors and prote ́ge ́s at the same 

time. The amendment would provide 

that an 8(a) concern must give up its 

status as a prote ́ge ́ if it becomes a 

mentor. SBA believes that if an 8(a) 

concern has the expertise and 

experience to be a mentor, it no longer 

has the need for a mentor itself. This 

amendment is intended to reduce the 

risks of questionable mentor/prote ́ge ́

relationships entered into solely to 

enable mentors to take advantage of 8(a) 

contracts. 

The proposed rule would also add a 

new § 124.520(c)(5), which would 

prohibit SBA from approving a mentor/ 

prote ́ge ́ agreement if the proposed 

prote ́ge ́ firm has less than one year 

remaining in its program term. Recently, 

SBA received a request to approve a 

mentor/prote ́ge ́ agreement for a firm 

whose program term was ending within 

weeks. It appeared that the real reason 

that the mentor/prote ́ge ́ relationship 

was proposed was to pursue a particular 

8(a) contract for which the prote ́ge ́

sought to joint venture with the 

proposed mentor. With the firm’s 

program term and SBA’s oversight of the 

firm ending, there was no assurance that 

the prote ́ge ́ firm would ever receive the 

business development assistance 

identified in the mentor/prote ́ge ́

agreement. In such a case, the mentor/ 

prote ́ge ́ relationship becomes more of a 

convenient contracting tool (by which 

the mentor can largely benefit) than a 

business development tool. To ensure 

that prote ́ge ́ firms actually receive 

identified business development 

assistance, SBA is proposing not to 

approve any mentor/prote ́ge ́ agreement 

where the proposed prote ́ge ́ has less 

than one year remaining on its program 

term. SBA asks for comments as to what 

the appropriate length of time before the 

end of a firm’s program term should be 

for SBA not to permit new mentor/ 

prote ́ge ́ agreements (e.g., 6 months, 9 

months, 1 year, 18 months). 

The proposed rule would amend 

§ 124.520(d)(1) to allow a joint venture 

between a mentor and prote ́ge ́ to be 

small for Federal subcontracts. A similar 

change would also be made to 

§ 121.103(h)(3)(iii) of SBA’s size 

regulations to ensure consistent 

implementation throughout SBA’s 

regulations. Currently, SBA’s 

regulations permit such a joint venture 

to be small for any ‘‘government 

procurement.’’ This provision has been 

interpreted as applying solely to Federal 

prime contracts. SBA believes that if 

this benefit applies to all Federal 

contracts it should also be available 

with respect to subcontracts. SBA 

believes that the current interpretation 

is particularly onerous for the 

Department of Energy (DOE), which has 

a significant amount of contracting 

activity go through government owned 

contractor operated (GOCO) facilities, 

and the contracts between the GOCO 

and a contractor technically are 

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government subcontracts for which the 

exclusion from affiliation for a mentor/ 

prote ́ge ́ joint venture do not apply. SBA 

initially considered allowing mentor/ 

prote ́ge ́ joint ventures to qualify as small 

businesses only for DOE subcontracts, 

but felt that the business development 

afforded to prote ́ge ́s would be beneficial 

government-wide. SBA specifically 

requests comments on both the 

proposed language and a provision 

which would limit its applicability 

solely to DOE subcontracts. SBA also 

understands concerns raised with 

applying the exclusion from affiliation 

for mentor/prote ́ge ́ joint ventures to 

contracts that are not Federal contracts 

and seeks input as to whether an 

extension of the affiliation exclusion is 

appropriate. In addition, as mentioned 

in the supplementary information 

regarding changes to § 121.103(h)(3), 

SBA is also considering allowing an 

exclusion to affiliation only for mentor/ 

prote ́ge ́ joint ventures for 8(a) contracts. 

SBA specifically requests comments on 

such a proposal. 

SBA also proposes to clarify that if a 

mentor and a prote ́ge ́ joint venture on a 

procurement, in order to take advantage 

of the special exception to the size 

requirements for that procurement, the 

mentor/prote ́ge ́ agreement must be 

approved by SBA prior to the 

submission of the bid or offer on the 

procurement. One of the benefits of the 

mentor/prote ́ge ́ relationship is that 

mentors and prote ́ge ́s are permitted to 

joint venture on 8(a) procurements and 

procurements set aside for small 

business as long as the prote ́ge ́ qualifies 

as small for the procurement. This 

change clarifies that the mentors and 

prote ́ge ́s may take advantage of this size 

advantage only if the mentor/prote ́ge ́

agreement is approved by SBA prior to 

the submission of the bid or offer on the 

procurement. Although this is the 

current practice, SBA felt it was useful 

to make this practice clear in its 

regulations, as some companies have 

mistakenly assumed that, like joint 

ventures between mentors and prote ́ge ́s 

on 8(a) procurements, a mentor/prote ́ge ́

agreement could be approved after 

submission of an offer as long as it was 

approved prior to the date of award. 

This is not the case. Joint ventures are 

tied to procurements and often there is 

insufficient time to obtain SBA’s 

approval between the issuance of a 

solicitation and the submission of an 

offer. Therefore, SBA has permitted 

joint ventures to be approved on 8(a) 

procurements after the submission of 

offers, as long as the approval takes 

place prior to the actual award. Unlike 

joint ventures, mentor/prote ́ge ́

agreements should not be specifically 

connected with procurements. Size 

benefits for purposes of joint ventures 

are a benefit of engaging in a mentor/ 

prote ́ge ́ agreement, not the reason for 

the relationship. Therefore, there are no 

strict time limitations at issue. Because 

it is possible that SBA might not 

approve a mentor/prote ́ge ́ agreement in 

a given situation, it believes that it is 

important that approval occur prior to a 

joint venture’s submission of its bid or 

offer. 

Under SBA’s size regulations, size is 

determined at a fixed point in time (i.e., 

as of the date of the initial offer, 

including price). See 13 CFR 121.504. If 

the entity submitting an offer is small as 

of that date, it will qualify as small for 

the procurement even if it grows to be 

other than small at the date of award. If 

the entity submitting an offer does not 

qualify as small as of the date it submits 

its initial offer, it cannot later come into 

compliance and qualify as small for that 

procurement. Thus, in order for a joint 

venture to be eligible as a small 

business, it must be small at the time it 

submits its offer including price. 

Generally, the revenues or employees of 

joint venture partners are aggregated 

when determining whether a joint 

venture qualifies as small. However, 

where there is an SBA-approved 8(a) 

mentor/prote ́ge ́ relationship, the 

receipts or revenues of the two joint 

venture partners are not aggregated. In 

such a case, size for the joint venture 

depends on the size of the prote ́ge ́ firm 

by itself. It seems obvious to SBA that 

if SBA has not yet approved a mentor/ 

prote ́ge ́ agreement, a joint venture 

between proposed prote ́ge ́ and mentor 

firms is not entitled to receive the 

benefits of the 8(a) mentor/prote ́ge ́

program, including the exclusion from 

affiliation. 

In addition, the proposed rule would 

add a provision making it clear that in 

order to receive the exclusion from 

affiliation for both 8(a) and non-8(a) 

procurements, the joint venture must 

comply with the requirements set forth 

in § 124.513(a). This has been SBA 

policy, but may not have been as clearly 

identified as SBA had hoped. There 

never has been any doubt or confusion 

as to the application of § 124.513(a) to 

8(a) contracts. Unfortunately, not all 

contracting officers and 8(a) Participants 

understood that the § 124.513(a) joint 

venture requirements applied to non8(a) contracts as well. It is SBA’s view 

that in order to obtain a benefit derived 

from the 8(a) program (i.e., the exclusion 

from affiliation for joint ventures 

between approved prote ́ge ́s and 

mentors), the same restrictions that are 

applicable to 8(a) contracts apply to 

non-8(a) contracts. For example, the 

performance of work requirement (i.e., 

50% rule) applies equally to small 

business set-aside and 8(a) contracts. 

SBA believes that it would not make 

sense for the requirement that the 

prote ́ge ́ firm perform a ‘‘significant 

portion’’ of the procurement not apply 

to small business set-aside contracts. 

The whole purpose of the mentor/ 

prote ́ge ́ program is to help prote ́ge ́ firms 

develop so that they can better compete 

for future contracts on their own. If they 

are not required to perform a significant 

portion of or be the project manager on 

a contract, the development purposes of 

the mentor/prote ́ge ́ program would not 

be served. 

The proposed rule would also clarify 

procedures for requesting 

reconsideration of SBA’s decision to 

deny a proposed mentor/prote ́ge ́

agreement. Where SBA declines to 

approve a specific mentor/prote ́ge ́

agreement, the prote ́ge ́ may request the 

AA/BD to reconsider the Agency’s 

initial decline decision by filing a 

request for reconsideration with its 

servicing SBA district office within 45 

calendar days of receiving notice that its 

mentor/prote ́ge ́ agreement was declined. 

The prote ́ge ́ should revise its mentor/ 

prote ́ge ́ agreement to more fully detail 

the business development assistance 

that the mentor will provide and 

provide any additional information and 

documentation pertinent to overcoming 

the reason(s) for the initial decline. If 

the AA/BD declines to approve the 

mentor/prote ́ge ́ agreement on 

reconsideration, the 8(a) firm seeking to 

become a prote ́ge ́ could not submit a 

new mentor/prote ́ge ́ agreement with 

that same mentor for one year. It may, 

however, submit a proposed mentor/ 

prote ́ge ́ agreement with a different 

proposed mentor at any time after the 

SBA’s final decline decision. 

The rule also proposes to add a new 

§ 124.520(h) which would set forth 

consequences for a mentor that fails to 

provide the assistance it agreed to 

provide in its mentor/prote ́ge ́

agreement. This recommendation was 

also received in response to SBA’s tribal 

consultations to ensure that prote ́ge ́

firms do obtain beneficial business 

development assistance through their 

mentor/prote ́ge ́ relationships. Under the 

proposal, where SBA determines that a 

mentor has not provided to the prote ́ge ́

firm the business development 

assistance set forth in its mentor/prote ́ge ́

agreement, SBA will afford the mentor 

an opportunity to respond. The 

response must explain why the 

assistance set forth in the mentor/ 

prote ́ge ́ agreement has not been 

provided to date and must set forth a 

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definitive plan as to when it will 

provide such assistance. If the mentor 

fails to respond, does not supply 

adequate reasons for its failure to 

provide the agreed upon assistance, or 

does not set forth a definite plan to 

provide the assistance SBA will 

recommend to the relevant procuring 

agency to issue a stop work order for 

each Federal contract for which the 

mentor and prote ́ge ́ are performing as a 

small business joint venture and 

received the exclusion from affiliation 

authorized by § 124.520(d)(1). The stop 

work order could be withdrawn when 

SBA is satisfied that the assistance has 

been or will be provided to the prote ́ge ́. 

If the work is critical to and any delay 

in contract performance would harm the 

procuring activity, SBA may request 

that another Participant be substituted 

for the joint venture to continue 

performance. Where SBA terminates a 

mentor/prote ́ge ́ agreement because the 

mentor has failed to provide the agreed 

upon developmental assistance, the firm 

would be ineligible to again act as a 

mentor for a period of two years from 

the date SBA terminates the mentor/ 

prote ́ge ́ agreement. If SBA believes that 

the mentor entered into the mentor/ 

prote ́ge ́ relationship solely to obtain one 

or more Federal contracts as a joint 

venture partner with the prote ́ge ́ and 

had no intent to provide developmental 

assistance to the prote ́ge ́, SBA could 

initiate proceedings to debar the mentor 

from Federal contracting. Similarly, if 

SBA believes that a prote ́ge ́ firm entered 

a mentor/prote ́ge ́ agreement in order to 

be awarded joint venture contracts with 

its mentor knowing that it would bring 

little or no value to the joint venture, 

SBA could initiate proceedings to 

terminate the firm from 8(a) 

participation or debar the firm from 

Federal contracting. 

Reporting Requirement and Submission 

of Financial Statements 

The proposed rule would also amend 

§ 124.601, which addresses a statutorily 

required reporting requirement for 8(a) 

Participants. Small business concerns 

participating in the 8(a) BD program are 

required by statute to semiannually 

submit a written report to their assigned 

BDS that includes a listing of any 

agents, representatives, attorneys, 

accountants, consultants and other 

parties (other than employees) receiving 

fees, commissions, or compensation of 

any kind to assist such participant in 

obtaining a Federal contract. The listing 

must indicate the amount of 

compensation paid and a description of 

the activities performed for such 

compensation. The current regulation 

incorrectly required this report to be 

submitted annually. This change is 

needed in order to bring the regulation 

into compliance with the statutory 

requirement. 

The proposed rule would also amend 

§ 124.602 regarding the submission of 

audited and reviewed financial 

statements. As the cost for audited and 

reviewed financial statements increases, 

those costs are becoming more of a 

burden on developing disadvantaged 

small businesses. As such, SBA believes 

that audited financial statements should 

be required only for larger firms. SBA 

proposes to raise the level above which 

audited financial statements are 

required from Participants with gross 

annual receipts of more than $5,000,000 

to Participants with gross annual 

receipts of more than $10,000,000. 

Reviewed financial statements would be 

required of all Participants with gross 

annual receipts between $2,000,000 and 

$10,000,000, instead of between 

$1,000,000 and $5,000,000. SBA 

requests comments as to whether these 

levels are appropriate. Specifically, SBA 

considered changing the level above 

which audited financial statements are 

required to Participants with gross 

annual receipts in excess of $6,000,000 

or $7,500,000, and requests comments 

on those alternatives vis a vis the 

$10,000,000 level contained in the 

proposed rule. 

Requirements Relating to SDBs 

Finally, SBA is proposing to amend 

§ 124.1002, which defines what is an 

SDB. SBA first proposes to add a 

provision to § 124.1002(d) to make it 

clear that the ‘‘other eligibility 

requirements’’ set forth in § 124.108 for 

8(a) BD program participation do not 

apply to SDBs. As part of an SDB 

protest, SBA would merely be 

determining whether a concern is 

owned and controlled by one or more 

individuals who qualify as socially and 

economically disadvantaged. SBA 

would not consider whether the concern 

is a responsible business for the 

particular contract. As such, issues such 

as good character and failure to pay 

Federal financial obligations should not 

be part of SBA’s determination as to 

whether a firm qualifies as an SDB. If a 

firm does not have good character, for 

example, a procuring agency should 

take that into account as an issue of 

responsibility prior to contract award. 

SBA is also proposing to add a new 

paragraph to § 124.1002 to define full 

time management as it applies to the 

SDB program. Since the SDB program is 

a contracts program and not a business 

development program, and since there 

is no good policy reason to exclude parttime companies from the SDB program, 

SBA proposes to permit SDB owners to 

devote fewer than 40 hours per week to 

their SDB firms provided that the 

disadvantaged manager works for the 

firm during all the hours that the firm 

operates. For example, if a firm is only 

in operation 20 hours per week, the 

disadvantaged manager of the firm 

would be considered to devote full time 

to the firm if the individual was 

available and working for the firm 

during the 20 hours the firm was 

operating. This definition is not being 

extended to 8(a) firms as those firms are 

expected to operate 40 or more hours 

per week. SBA is interested in the 

public’s comments on this proposed 

change. 

Compliance with Executive Orders 

12866, 12988, 13175, and 13132, the 

Regulatory Flexibility Act (5 U.S.C. 601– 

612), and the Paperwork Reduction Act 

(44 U.S.C., Ch. 35). 

Executive Order 12866 

The Office of Management and Budget 

(OMB) has determined that based on the 

revision to § 124.506(b)(4), this rule 

constitutes a significant regulatory 

action for purposes of Executive Order 

12866, and as a result a regulatory 

impact analysis is required. 

Regulatory Impact Analysis 

Is there a need for the regulation action? 

As stated above, the revision to 

§ 124.506 would limit the amount of 

work that a non-8(a) business, 

particularly a non-8(a) large business in 

the context of a mentor/prote ́ge ́

relationship, could perform on an 8(a) 

sole source contract above the 

competitive threshold amounts. 

Specifically, a joint venture between a 

tribally or ANC-owned concern and a 

non-8(a) business concern could be 

awarded a sole source contract above 

the applicable competitive threshold 

amount only where the non-8(a) joint 

venture partner does not receive any 

work on the contract as a subcontract to 

the joint venture prime contractor. 

SBA believes this rule is needed to 

prevent large businesses as well as other 

non-8(a) firms from being able to reap 

the benefits of sole source contracts 

intended for tribally-owned or ANCowned 8(a) Participants. When these 

large contracts are awarded on a sole 

source basis to joint ventures, the 

contracts are not available for 

competition among other 8(a) firms. 

Thus, large firms and other non-8(a) 

firms joint venturing with tribally 

owned or ANC owned firms are 

realizing the benefits of sole source 8(a) 

contracts to the detriment of 8(a) firms 

who might otherwise compete for these 

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contracts. This is particularly true when 

the non-8(a) joint venture partner is also 

a subcontractor on the same 8(a) 

contract. In such a case, a non-8(a) 

concern could conceivably be 

performing 70–80% of the entire 

contract. SBA believes that such an 

outcome should not be possible under 

the 8(a) program. 

Other proposed changes in this rule 

are needed to clarify SBA’s 

requirements and remove confusion. For 

example, the proposed change to 

§ 121.103(h) to permit a specific joint 

venture to be formed for three contract 

awards over a two-year period, instead 

of an entity that can seek three contract 

opportunities over a two-year period, is 

proposed because the current 

requirement has caused confusion and 

resulted in some firms being ineligible 

for certain small business awards due to 

that confusion. Similarly, the proposed 

change to § 124.104(c)(2) to exempt 

income from an S corporation from the 

calculation of both the individual 

owner’s income and net worth to the 

extent such income is reinvested in the 

firm or used to pay corporate taxes is 

designed to treat an individual owner of 

an S corporation the same as an 

individual owner of a C corporation. 

The current rule has caused confusion 

as to whether such income should be 

included in an individual’s income or 

net worth for purposes of determining 

economic disadvantage. 

Finally, several changes in this rule 

are being proposed to eliminate or ease 

restrictions that SBA believes are 

unnecessary. For example, the proposed 

change to § 124.105(g) would provide 

more flexibility in determining whether 

to admit to the 8(a) program companies 

owned by individuals where such 

individuals have immediate family 

members who are owners of current or 

former 8(a) concerns. SBA believes that 

the current rule, which broadly 

prohibits such ownership, is too strict 

and needs to be revised to recognize 

separate business ownership in more 

than one immediate family member. In 

addition, SBA believes that the 

proposed change to § 124.104(c)(2) to 

exempt funds in Individual Retirement 

Accounts (IRAs) and other official 

retirement accounts from the calculation 

of an individual’s net worth in 

determining his or her economic 

disadvantage is needed so that those 

individuals who have wisely invested in 

retirement accounts should not be 

penalized. 

What are the potential benefits and 

costs of this regulatory action? 

During the past five years, an 

estimated 62 joint ventures between 

tribally owned or ANC-owned firms and 

firms which are not tribally owned or 

ANC owned were awarded contracts 

above the competitive threshold 

amounts based on the current 

application of the statutory exception. 

The dollar amounts of these contracts 

ranged from $3 million to $600 million 

and the total contract dollars awarded 

was approximately $2.5 billion. It is 

estimated based on past experience that 

each joint venture partner performs 

approximately one half of the contract 

awarded the joint venture, with the 8(a) 

concern performing slightly more based 

on regulatory requirements that more 

than half the profits from the contract be 

distributed to the 8(a) firm. See 13 CFR 

124.513(c)(3). Thus, under this 

assumption, in the past five years an 

estimated $1.25 billion has been 

awarded to firms that are not triballyowned or ANC-owned as a result of the 

current regulatory scheme and 

approximately $1.25 billion was 

awarded to tribally or ANC-owned 

firms. (Contracts awarded to joint 

ventures between tribally owned 

concerns and other tribally owned 

concerns were not counted as these 

contracts would still be allowed under 

the proposed rule.) Under the above 

assumptions and based on the data 

compiled approximately $500 million 

(approximately half of 25 contracts) 

went to large businesses and $750 

million (approximately half of 37 

contracts) went to small businesses not 

tribally or ANC-owned. We also believe 

that a significant percentage of non-8(a) 

joint venture partners also acted as 

subcontractors on the same 8(a) 

contracts for which they were joint 

venturers. If non-8(a) joint venture 

partners can no longer act as 

subcontractors, the only way for them to 

perform additional work on an 8(a) 

contract is to increase the percentage of 

work performed by the joint venture. 

This will necessarily have the beneficial 

effect of increasing the amount of work 

performed by tribally and ANC-owned 

8(a) firms. This change, in concert with 

the change to require the 8(a) partner(s) 

to a joint venture on an 8(a) contract to 

perform at least 40% of the work 

performed by the joint venture, should 

enable 8(a) joint venture partners to 

perform not only more work, but more 

meaningful work on 8(a) joint venture 

contracts. 

If this change dissuades large mentors 

from participating as joint venture 

partners with tribally or ANC-owned 

firms on sole source 8(a) contracts, 

many of these contracts may not be 

offered to the 8(a) program at all. These 

contracts would then be either 

competed among all small businesses, 

or competed among all firms on an 

unrestricted basis. 

It is difficult to estimate the costs and 

benefits to the various classes of firms 

as it is impossible to foresee which 

future contracts above the competitive 

thresholds would be awarded based on 

the various options (sole source to 

tribally-owned or ANC-owned firms, 

competition among 8(a) firms, 

competition among small businesses, 

unrestricted competition). It is likely 

that large firms and firms not in the 8(a) 

program will get smaller proportionate 

shares of these contracts; however, we 

note that Congress clearly intended the 

exception from the competition 

requirements to be for the benefit of 

ANC-owned and tribally-owned firms 

and not to large and non-8(a) firms. 

Therefore, any impact on large or non8(a) firms is of little consequence for 

purposes of this rule. The benefits to 

large and non-8(a) firms are incidental 

to the purpose of the rule and are 

arguably at the expense of other 8(a) 

firms. 

Although ANC-owned and triballyowned 8(a) firms may receive fewer 

contract dollars if mentors are 

dissuaded from participating as joint 

venture partners under the proposed 

rule, we note that those firms will 

nevertheless be permitted to bid on all 

the contracts that are no longer available 

to them on a sole source basis as joint 

venture partners. We also note that 

these firms may still be awarded these 

contracts as prime contractors bidding 

alone or as joint venture partners with 

other tribally or ANC-owned firms, and 

that such firms will still be able to 

subcontract substantial portions of the 

contracts to other non-8(a) firms. We 

also reference the recent report issued 

by the GAO entitled ‘‘CONTRACT 

MANAGEMENT Increased Use of 

Alaska Native Corporations’ Special 8(a) 

Provisions Calls for Tailored Oversight’’, 

GAO–06–399, April 2006 (‘‘GAO 

Report’’). That report noted that 8(a) 

obligations to firms owned by ANCs 

increased from $265 million in FY 2000 

to $1.1 billion in 2004 and that in FY 

2004, obligations to ANC firms 

represented 13 percent of total 8(a) 

dollars (GAO Report, p. 6). This sharp 

increase in 8(a) dollars awarded to ANC 

firms from 2000 to 2004 draws into 

question the need for such firms to 

utilize joint venture vehicles to take 

advantage of 8(a) sole source 

opportunities above the competitive 

threshold amounts. 

Finally, SBA notes that the rule 

requiring the 8(a) member of a joint 

venture to receive the majority of the 

joint venture’s profits is easily 

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manipulated and difficult to monitor. 

Thus, it would not be difficult for a joint 

venture to manipulate its numbers so 

that less than 51 percent of the actual 

profits from a contract in fact go to the 

tribally-owned or ANC-owned 8(a) 

concern. On the other hand, 

performance of work is more easily 

measured and thus easier to monitor. If 

a contract is awarded to an ANC-owned 

or tribally-owned firm and more than 

the allowed percentage is subcontracted, 

this fact is more difficult to hide and 

easier to track. Therefore, it is expected 

that instances of abuse and the use of 

fronts will decrease as a result of the 

proposed change. 

For all of the reasons listed above, 

SBA believes that the benefits of the 

proposed rule far exceed its costs and 

far exceed the benefits of continuing the 

status quo. 

Regarding other proposed changes set 

forth in this rule, SBA believes that 

increased clarity and easing of 

restrictions is overall beneficial to 8(a) 

applicants and Participants. 

Alternatives to the Regulatory Action 

SBA has considered a number of 

alternatives to the proposed rule and is 

interested in hearing from the public 

concerning these alternatives. One 

alternative SBA has considered is to 

continue to allow joint ventures on 

contracts above the competitive 

thresholds between ANC or triballyowned concerns and other concerns 

with the condition that the ANC or 

tribally owned concern be required to 

meet the performance of work 

requirements set forth in 13 CFR 

124.510 with its own workforce. Also 

see 13 125.6. Section 13 CFR 124.510 

requires a prime contractor on an 8(a) 

contract to perform certain percentages 

of work with its own workforce (50 

percent for service and manufacturing 

contracts, 15 percent for general 

construction and 25 percent for special 

trades). Another alternative being 

considered is to permit joint ventures 

above the threshold amounts with other 

8(a) concerns or with other small 

businesses, but not with large 

businesses. Finally, SBA also 

considered disallowing any joint 

ventures on 8(a) sole source contracts 

above the competitive threshold 

amounts. Under this approach, ANC 

and tribally-owned Participants could 

still receive 8(a) sole source contracts 

above the competitive threshold 

amounts, they just could not perform 

those contracts through a joint venture. 

This would force ANC and triballyowned Participants to be the prime 

contractor and meet the performance of 

work (i.e., 50%) requirement with their 

own workforce. The first alternative is 

not being proposed because of the 

difficulty of enforcing the performance 

of work requirements. It is not clear 

whether a firm is meeting the required 

percentages of work requirements until 

the firm (or joint venture) is well along 

in the performance of the contract. It is 

difficult to enforce these provisions at 

this point and often the only recourse if 

the requirements are not met is to 

terminate the contract, a solution that 

creates numerous problems for the 

procuring activity. The second 

alternative is not being proposed at this 

time because it would still result in 

granting a significant portion of an 8(a) 

contract to a non-8(a) concern. Finally, 

the elimination of all joint ventures 

above the competitive thresholds 

approach is not being proposed because 

SBA was persuaded by tribal and ANC 

representatives that joint ventures serve 

an important function in the overall 

business development of ANC and 

tribally-owned Participants. 

SBA is very interested in comments 

from the public on these issues. 

Executive Order 12988 

This action meets applicable 

standards set forth in Sec. 3(a) and 

3(b)(2) of Executive Order 12988, Civil 

Justice Reform, to minimize litigation, 

eliminate ambiguity, and reduce 

burden. The action does not have 

retroactive or preemptive effect. 

Executive Order 13132 

This rule does not have federalism 

implications as defined in Executive 

Order 13132, Federalism. It will not 

have substantial direct effects on the 

States, on the relationship between the 

national government and the States, or 

on the distribution of power and 

responsibilities among the various 

levels of government, as specified in the 

Executive Order. As such it does not 

warrant the preparation of a Federalism 

Assessment. 

Executive Order 13175, Tribal 

Summary Impact Statement 

For the purposes of Executive Order 

13175, Consultation and Coordination 

with Indian Tribal Governments, the 

SBA’s General Counsel has determined 

that the requirements of this order have 

been met in a meaningful and timely 

manner. This rule complies with the 

standards set forth in the Executive 

Order and SBA has provided the tribal 

officials with an opportunity to provide 

meaningful and timely input on 

regulatory policies that have tribal 

implications. 

In drafting this proposed rule, SBA 

consulted with representatives of Alaska 

Native Corporations (ANCs) and Indian 

tribes, both informally and formally, 

pursuant to Executive Order 13175, 

primarily to discuss potential changes to 

the mentor/prote ́ge ́ requirements. SBA 

met informally with tribal and ANC 

representatives in Washington, DC on 

July 19, 2007, and more formally in 

Fairbanks, Alaska on October 24, 2007, 

72 FR 57889, and in Denver, Colorado 

on November 11, 2007, 72 FR 60702. A 

vast majority of the comments received 

from these discussions were concerned 

that SBA would overreact to negative 

publicity regarding one or two 8(a) 

Participants and would change the 

mentor/prote ́ge ́ program in a way that 

would take away an important business 

development tool to tribal and ANCowned firms. Tribal representative after 

tribal representative talked about the 

importance of the 8(a) BD program to 

the tribal and ANC communities. They 

stressed that the 8(a) BD program works, 

providing the government with a 

contracting option that is efficient and 

cost effective while permitting the 

government to achieve its policy of 

supporting disadvantaged small 

businesses and providing benefits to 

some of the most underemployed 

people in America. They explained that 

they have been trying to dispel program 

misperceptions caused by 

unsubstantiated allegations of 

misconduct and abuse, when they 

would rather be devoting their efforts to 

business and community development. 

Several tribal representatives felt that 

relatively few tribes have realized the 

benefits of the mentor/prote ́ge ́

component of the 8(a) program, and 

were concerned that SBA would be 

closing this business development 

option just as they are getting to the 

point where they would use it. 

Representatives also were concerned 

that SBA would propose changes that 

would restrict the participation of 

mentors in the program. That is not 

SBA’s intent. SBA too believes that the 

8(a) BD program is a much-needed and 

beneficial program, and that the tribal 

and ANC component of the program 

serves a valuable economic and 

community development purpose in 

addition to its business development 

purpose. It is not SBA’s intent to shut 

down any component of the 8(a) 

program that truly assists the 

development of any small 

disadvantaged businesses. Specifically, 

SBA is not proposing to close this 

business development option to tribes 

and ANCs as some tribal representatives 

were concerned. SBA does not seek to 

make it more difficult for tribally-owned 

and ANC-owned firms to participate in 

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the 8(a) BD program, and merely looks 

for ways to help ensure that the benefits 

of the program flow to those who are 

truly eligible to participate. SBA has 

carefully reviewed both the testimony 

given at the tribal consultation meetings 

and the formal comments submitted in 

response thereto. SBA welcomes the 

opportunity to discuss its proposals 

with the tribal and ANC communities in 

more detail during the public comment 

period. 

Initial Regulatory Flexibility Analysis 

This rule, if finalized, may have a 

significant impact on a substantial 

number of small entities within the 

meaning of the Regulatory Flexibility 

Act, 5 U.S.C. 601–612. As such, SBA 

sets forth an initial regulatory flexibility 

analysis (IRFA) of this proposed rule 

addressing the following questions: (1) 

What is the need for and objective of the 

rule, (2) what is SBA’s description and 

estimate of the number of small entities 

to which the rule will apply, (3) what 

is the projected reporting, record 

keeping, and other compliance 

requirements of the rule, (4) what are 

the relevant Federal rules which may 

duplicate, overlap or conflict with the 

rule, and (5) what alternatives will 

allow the Agency to accomplish its 

regulatory objectives while minimizing 

the impact on small entities? SBA will 

specifically address six provisions of the 

proposed rule which may have a 

significant impact on a substantial 

number of small businesses. They are: 

(1) The provisions relating to joint 

ventures between prote ́ge ́ firms and 

their SBA-approved mentors; (2) the 

requirement that the disadvantaged 

manager of an 8(a) applicant or 

Participant must reside in the United 

States and spend part of every month 

physically present at the primary offices 

of the applicant or Participant; (3) the 

provision excluding qualified 

individual retirement accounts from an 

individual’s net worth in determining 

economic disadvantage; (4) the 

provisions establishing objective criteria 

for determining economic disadvantage 

in terms of income and total assets; (5) 

the provision requiring SBA to early 

graduate a firm from the 8(a) program if 

the firm becomes large for the size 

standard corresponding to its primary 

NAICS code; and (6) the provisions 

relating to what size 8(a) Participants 

must annually submit either audited or 

reviewed financial statements to SBA. 

1. What is the need for and objective 

of the rule? The need for and objective 

of the provisions relating to joint 

ventures between prote ́ge ́ firms and 

their SBA-approved mentors is set forth 

in detail in the Regulatory Impact 

Analysis above. 

SBA believes that the proposed 

requirement that the disadvantaged 

manager of an 8(a) applicant or 

Participant must reside in the United 

States and spend part of every month 

physically present at the primary offices 

of the applicant or Participant is needed 

to reduce the potential abuse of ‘‘front’’ 

companies in which a nondisadvantaged individual actually runs 

the day-to-day operations of the 

business. 

SBA believes that a change is needed 

to exclude qualified individual 

retirement accounts from the calculation 

of an individual’s net worth when 

considering economic disadvantage. As 

noted in the supplementary information 

above, SBA has found that the inclusion 

of individual retirement accounts in the 

calculation of an individual’s net worth 

does not serve to disqualify wealthy 

individuals from participation in the 

program, but has worked to make 

middle and lower income individuals 

ineligible to the extent they have 

invested prudently in accounts to 

ensure income at a time in their lives 

that they are no longer working. SBA 

believes that it should not penalize an 

individual who has invested in a 

qualified retirement account. 

SBA believes that it is necessary to 

put into the regulations provisions 

establishing objective criteria for income 

and total assets in determining 

economic disadvantage to publicize 

SBA’s current policies in this area. 

While the proposed rule establishing 

$200,000 in income and $3,000,000 in 

total assets as the levels above which an 

individual is deemed not to be 

economically disadvantaged for 

purposes of initial 8(a) eligibility is not 

a change in SBA policy, these standards 

are currently contained only in 

decisions rendered by SBA’s OHA. 

Including these standards in the 

regulatory text will aid all applications 

in more fully understanding SBA’s 

eligibility requirements. 

SBA believes that it makes sense to 

early graduate a firm from the 8(a) BD 

program where it no longer qualifies as 

small for its primary NAICS code for 

two consecutive years because it is 

reasonable to conclude that at that point 

the firm has substantially achieved the 

targets, objectives and goals contained 

in its business plan, and thus, has met 

the standard set forth in § 7(j)(10)(H) of 

the Small Business Act, 15 U.S.C. 

636(j)(10(H), for graduation. 

SBA also believes it makes sense to 

raise the revenue levels above which 

audited financial statements and 

reviewed financial statements should be 

required for continued 8(a) BD 

participation. As the cost for audited 

and reviewed financial statements 

increases, those costs are becoming 

more of a burden on developing 

disadvantaged small businesses. In 

addition, SBA notes that while size 

standards have increased due to 

inflation over time, the levels of revenue 

above which audited and reviewed 

financial statements are required for the 

8(a) program have not. As such, SBA 

believes that it makes sense to increase 

these levels and alleviate the burden on 

smaller firms. 

2. What is SBA’s description and 

estimate of the number of small entities 

to which the rule will apply? In FY 2007, 

SBA approved 60 mentor/prote ́ge ́

agreements. In FY 2006, SBA approved 

173 mentor/prote ́ge ́ agreements. There 

are currently more than 300 approved 

mentor/prote ́ge ́ agreements. The 

proposed changes to the mentor/prote ́ge ́

program would not affect all small firms 

that are currently SBA-approved 

prote ́ge ́s. The significant proposed 

restriction on the program would 

prohibit a joint venture between a 

prote ́ge ́ firm and its SBA-approved 

mentor to subcontract additional work 

on the contract to the mentor. Thus, it 

would affect only those mentor/prote ́ge ́

relationships in which the mentor and 

prote ́ge ́ firms joint venture for one or 

more government contracts and the 

mentor wants to also act as a 

subcontractor on the contract. While the 

number of these situations is not great, 

the potential for abuse without the 

proposed change is. 

The average number of applications 

for the 8(a) BD program for the past five 

fiscal years (FYs 2003 to 2007) is 3,682. 

There are approximately 6–10 declines 

based solely on control issues per 100 

declines. For this time period, there 

were 1,583 total declines for the 8(a) 

program. Based on the estimated 

number of declines due to control 

issues, this would translate as between 

95 and 158 declines for control for the 

past five fiscal years, or an average of 19 

to 30 per year. The number of firms 

declined for control reasons because the 

individual claiming disadvantaged 

status lived outside the United States is 

miniscule. We know of only two cases 

during the five year period where SBA 

declined a firm on that basis. 

For the last five fiscal years, there are 

approximately 3–5 declines per 100 

declines based solely on issues relating 

to economic disadvantage. This would 

translate into between 48 and 80 

declines based on economic 

disadvantage during the last five fiscal 

years, or an average of 9 to 16 per year. 

SBA believes that the number of firms 

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declined due solely to significant assets 

in an IRA or other qualifying retirement 

account is very small. SBA anticipates 

that 1 or 2 firms per year which would 

have been found not to be economically 

disadvantaged, and thus ineligible for 

the 8(a) BD program, will be eligible 

because of the proposed change. Of the 

9 to 16 declines per year due to 

economic disadvantage, less than half 

were due to excessive income or total 

assets. As such, the provisions 

establishing objective criteria for income 

and total assets would affect no more 

than 8 8(a) applicants each year. 

During the last three fiscal years (FYs 

2005 to 2007), a total of 591 firms were 

terminated from the 8(a) BD program 

(143 in FY 2007, 318 in FY 2006, and 

130 in FY 2005), 342 firms voluntarily 

withdrew from the program (149 in FY 

2007, 95 in FY 2006, and 98 in FY 

2005), and 42 firms left the program due 

to early graduation (12 in FY 2007, 12 

in FY 2006, and 18 in FY 2005). 

As reported in the Dynamic Small 

Business Search, there are currently 

9,609 Participants in the 8(a) BD 

program. Of those firms, 5,876 firms 

have less than $10 million in annual 

revenue, and 5,365 firms have less than 

$5 million in annual revenue. Thus, the 

proposed change to raise the revenue 

level under which Participants must 

submit audited or reviewed financial 

statements to SBA would ease the 

regulatory burden on these firms. 

3. What are the projected reporting, 

recordkeeping, and other compliance 

requirements of the rule and an estimate 

of the classes of small entities which 

will be subject to the requirements? 

There would be no additional reporting 

or recordkeeping requirements imposed 

by the rule. The rule would ease the 

regulatory burden on smaller 8(a) firms. 

Specifically, SBA proposes to raise the 

level above which audited financial 

statements are required from 

Participants with gross annual receipts 

of more than $5,000,000 to Participants 

with gross annual receipts of more than 

$10,000,000. Reviewed financial 

statements would be required of all 

Participants with gross annual receipts 

between $2,000,000 and $10,000,000, 

instead of between $1,000,000 and 

$5,000,000. 

4. What are the relevant Federal rules 

which may duplicate, overlap or conflict 

with the rule? The Federal Acquisition 

Regulation (FAR) defers to and 

incorporates the substance of the 

provisions set forth in SBA’s regulations 

for issues pertaining to the 8(a) program. 

To the extent the FAR is inconsistent 

with 8(a) rules implemented by SBA, 

the FAR would need to be changed to 

be consistent. 

Paperwork Reduction Act 

For purposes of the Paperwork 

Reduction Act, 44 U.S.C. Ch. 35, SBA 

has determined that this proposed rule, 

if adopted in final form, would contain 

no new reporting or recordkeeping 

requirements. 

List of Subjects 

13 CFR Part 121 

Administrative practice and 

procedure, Government procurement, 

Government property, Grant programs— 

business, Individuals with disabilities, 

Loan programs—business, Reporting 

and recordkeeping requirements, Small 

businesses. 

13 CFR Part 124 

Administrative practice and 

procedures, Government procurement, 

Hawaiian natives, Indians—business 

and finance, Minority businesses, 

Reporting and recordkeeping 

requirements, Tribally-owned concerns, 

Technical assistance. 

For the reasons set forth above, the 

Small Business Administration 

proposes to amend parts 121 and 124 of 

title 13 of the Code of Federal 

Regulations as follows: 

PART 121—SMALL BUSINESS SIZE 

REGULATIONS 

Subpart A—Size Eligibility Provisions 

and Standards 

1. The authority citation for part 121 

continues to read as follows: 

Authority: 15 U.S.C. 632, 634(b)(6), 636(b), 

637(a), 644 and 662(5); and, Pub. L. 105–135, 

sec. 401 et seq., 111 Stat. 2592. 

2. Amend § 121.103 by revising 

paragraph (b)(6), by revising the second 

and third sentences of paragraph (h) 

introductory text, and by revising 

paragraph (h)(3)(iii) to read as follows: 

§ 121.103 How does SBA determine 

affiliation? 

* * * * * 

(b) * * * 

(6) An 8(a) BD Participant that has an 

SBA-approved mentor/prote ́ge ́

agreement is not affiliated with a mentor 

firm solely because the prote ́ge ́ firm 

receives assistance from the mentor 

under the agreement. Similarly, a 

prote ́ge ́ firm is not affiliated with its 

mentor solely because the prote ́ge ́ firm 

receives assistance from the mentor 

under a Federal Mentor-Prote ́ge ́ program 

where an exception to affiliation is 

specifically authorized by statute or by 

SBA under the procedures set forth in 

§ 121.903. Affiliation may be found in 

either case for other reasons. 

* * * * * 

(h) * * * This means that a specific 

joint venture entity generally may not be 

awarded more than three contracts over 

a two year period, starting from the date 

of the award of the first contract, 

without the partners to the joint venture 

being deemed affiliated for all purposes. 

Because SBA determines size and 

affiliation as of the date an offeror 

submits its initial offer including price 

to a procuring agency, SBA will also 

determine compliance with this three 

awards in two years rule as of the date 

of initial offer including price. As such, 

an individual joint venture may be 

awarded more than three contracts 

without SBA finding general affiliation 

between the joint venture partners 

where the joint venture had received 

two or fewer contracts as of the date it 

submitted one or more additional offers 

which thereafter result in one or more 

additional contract awards. The same 

two (or more) entities may create 

additional joint ventures, and each new 

joint venture entity may be awarded up 

to three contracts in accordance with 

this section. At some point, however, 

such a longstanding inter-relationship 

or contractual dependence between the 

same joint venture partners will lead to 

a finding of general affiliation between 

and among them. For purposes of this 

provision and in order to facilitate 

tracking of the number of contract 

awards made to a joint venture, a joint 

venture must be in writing and must do 

business under its own name, and it 

may (but need not) be in the form of a 

separate legal entity, and it may (but 

need not) be populated. * * * 

* * * * * 

(3) * * * 

(iii) Two firms approved by SBA to be 

a mentor and prote ́ge ́ under 13 CFR 

124.520 may joint venture as a small 

business for any Federal government 

prime contract or subcontract, provided 

the prote ́ge ́ qualifies as small for the size 

standard corresponding to the NAICS 

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. If the 

procurement is to be awarded through 

the 8(a) BD program, SBA must approve 

the joint venture pursuant to § 124.513. 

If the procurement is to be awarded 

other than through the 8(a) BD program 

(e.g., small business set aside, HUBZone 

set aside), SBA need not approve the 

joint venture prior to award, but if the 

size status of the joint venture is 

protested, the provisions of 

§§ 124.513(c) and (d) will apply. This 

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means that the joint venture must meet 

the requirements of §§ 124.513(c) and 

(d) in order to receive the exception to 

affiliation authorized by this paragraph. 

* * * * * 

3. Amend § 121.402(b) by revising the 

last sentence and adding a new sentence 

at the end thereof to read as follows: 

§ 121.402 What size standards are 

applicable to Federal Government 

contracting programs? 

* * * * * 

(b) * * * Acquisitions for supplies 

must be classified under the appropriate 

manufacturing NAICS code, not under a 

wholesale trade or retail trade NAICS 

code. A concern that submits an offer or 

quote for a contract or subcontract 

where the NAICS code assigned to the 

contract or subcontract is one for 

supplies, and furnishes a product it did 

not itself manufacture or produce, is 

categorized as a nonmanufacturer and 

deemed small if it meets the 

requirements set forth in § 121.406(b). 

* * * * * 

4. Amend § 121.406 by revising 

paragraph (a) introductory text, (a)(1) 

(b)(1) introductory text, revising 

paragraphs (b)(1)(ii) and (b)(1)(iii), by 

redesignating paragraphs (b)(3), (b)(4) 

and (b)(5) as paragraphs (b)(5), (b)(6), 

and (b)(7), respectively, by adding new 

paragraphs (b)(3) and (b)(4), and by 

revising newly redesignated paragraph 

(b)(6) to read as follows: 

§ 121.406 How does a small business 

concern qualify to provide manufactured 

products or other supply items under small 

business set-aside or 8(a) contracts? 

(a) General. In order to qualify as a 

small business concern for a small 

business set-aside or 8(a) contract to 

provide manufactured products or other 

supply items, an offeror must either: 

(1) Be the manufacturer or producer of 

the end item being procured (and the 

end item must be manufactured or 

produced in the United States); or 

* * * * * 

(b) Nonmanufacturers. (1) A concern 

may qualify as a small business concern 

for a requirement to provide 

manufactured products or other supply 

items as a nonmanufacturer if it: 

* * * * * 

(ii) Takes ownership or possession of 

the item(s) with its personnel, 

equipment or facilities in a manner 

consistent with industry practice; and 

(iii) Will supply the end item of a 

small business manufacturer, processor 

or producer made in the United States, 

or obtains a waiver of such requirement 

pursuant to paragraph (b)(5) of this 

section. 

* * * * * 

(3) The nonmanufacturer rule applies 

only to procurements that have been 

assigned a manufacturing NAICS code, 

Sectors 31–33. It does not apply to 

supply contracts that do not primarily 

consist of manufacturing. 

(4) The nonmanufacturer rule applies 

only to the supply component of a 

requirement classified as a 

manufacturing contract. If a requirement 

is classified as a service contract, but 

also has a supply component, the 

nonmanufacturer rule does not apply to 

the supply component of the 

requirement. 

Example 1 to paragraph (b)(4). A 

procuring agency seeks to acquire computer 

integration and maintenance services. 

Included within that requirement, the agency 

also seeks to acquire some computer 

hardware. If the procuring agency determines 

that the principal nature of the procurement 

is services and classifies the procurement as 

a services procurement, the nonmanufacturer 

rule does not apply to the computer 

hardware portion of the requirement. This 

means that while a contractor must meet the 

applicable performance of work requirement 

set forth in § 125.6 for the services portion of 

the contract, the contractor does not have to 

supply the computer hardware of a small 

business manufacturer. 

Example 2 to paragraph (b)(4). A 

procuring agency seeks to acquire computer 

hardware, as well as computer integration 

and maintenance services. If the procuring 

agency determines that the principal nature 

of the procurement is for supplies and 

classifies the procurement as a supply 

procurement, the nonmanufacturer rule 

applies to the computer hardware portion of 

the requirement. A firm seeking to qualify as 

a small business nonmanufacturer must 

supply the computer hardware manufactured 

by a small business. Because the requirement 

is classified as a supply contract, the 

contractor does not have to meet the 

performance of work requirement set forth in 

§ 125.6 for the services portion of the 

contract. 

* * * * * 

(6) The two waiver possibilities 

identified in paragraph (b)(5) of this 

section are called ‘‘individual’’ and 

‘‘class’’ waivers respectively, and the 

procedures for requesting and granting 

them are contained in § 121.1204. 

* * * * * 

5. In § 121.1001, add a new paragraph 

(b)(10) to read as follows: 

§ 121.1001 Who may initiate a size protest 

or request a formal size determination? 

* * * * * 

(b) * * * 

(10) The SBA Inspector General may 

request a formal size determination with 

respect to any of the programs identified 

in paragraph (b) of this section. 

PART 124—8(a) BUSINESS 

DEVELOPMENT/SMALL 

DISADVANTAGED BUSINESS STATUS 

DETERMINATIONS 

6. The authority citation for part 124 

is revised 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, section 8021, Pub. L. 108–87, and 

42 U.S.C. 9815. 

7. Remove the term ‘‘SIC’’ and add, in 

its place, the term ‘‘NAICS,’’ in the 

following places: 

a. § 124.110(c); 

b. § 124.111(d); 

c. § 124.502(c)(3); 

d. § 124.503(b); 

e. § 124.503(b)(1); 

f. § 124.503(b)(2); 

g. § 124.503(c)(1)(iii); 

h. § 124.503(g)(3); 

i. § 124.505(a)(3); 

j. § 124.507(b)(2)(i); 

k. § 124.513(b)(1), (b)(1)(i), and 

(b)(1)(ii)(A); 

l. § 124.513(b)(2); 

m. § 124.513(b)(3); 

n. § 124.514(a)(1); 

o. § 124.515(d); 

p. § 124.517(d)(1); 

q. § 124.517(d)(2); 

r. § 124.519(a)(1); 

s. § 124.519(a)(2); 

t. § 124.1002(b)(1), (b)(1)(i), and 

(b)(1)(ii); and 

u. § 124.1002(f)(3). 

8. Revise § 124.2 to read as follows: 

§ 124.2 For 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. The nine year 

program term may be shortened only by 

termination, early graduation or 

voluntary withdrawal as provided for in 

this subpart. 

9. In § 124.3, add new definitions for 

‘‘NAICS code,’’ and ‘‘Regularly 

maintains an office’’ in alphabetical 

order, and revise the definitions of 

‘‘Primary industry classification’’ and 

‘‘Same or similar line of business,’’ to 

read as follows: 

§ 124.3 What definitions are important in 

the 8(a) BD program? 

* * * * * 

NAICS code means North American 

Industry Classification System code. 

* * * * * 

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Primary industry classification means 

the six digit North American Industry 

Classification System (NAICS) code 

designation which best describes the 

primary business activity of the 8(a) BD 

applicant or Participant. The NAICS 

code designations are described in the 

North American Industry Classification 

System book published by the U.S. 

Office of Management and Budget. SBA 

utilizes § 121.107 of this chapter in 

determining a firm’s primary industry 

classification. SBA may permit a 

Participant to change its primary 

industry classification if the Participant 

can demonstrate that the majority of its 

revenues during a two-year period have 

evolved from one NAICS code to 

another. 

* * * * * 

Regularly maintains an office means 

conducting business activities as an ongoing business concern from a fixed 

location on a daily basis. The best 

evidence of the regular maintenance of 

an office is documentation that shows 

that third parties routinely transact 

business with a Participant at a location 

within a particular geographical area. 

Such evidence includes advertisements, 

bills, correspondence, lease agreements, 

land records, and evidence that the 

Participant has complied with all local 

requirements concerning registering, 

licensing, or filing with the State or 

County where the place of business is 

located. 

Same or similar line of business 

means business activities within the 

same four-digit ‘‘Industry Group’’ of the 

NAICS Manual as the primary industry 

classification of the applicant or 

Participant. The phrase ‘‘same business 

area’’ is synonymous with this 

definition. 

* * * * * 

10. Revise § 124.101 to read as 

follows: 

§ 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 and residing in the United States, and 

which demonstrates potential for 

success. 

11. Amend § 124.102 by redesignating 

paragraph (a) as paragraph (a)(1), and by 

adding a new paragraph (a)(2) to read as 

follows: 

§ 124.102 What size business is eligible to 

participate in the 8(a) BD program? 

(a)(1) * * * 

(2) In order to remain eligible to 

participate in the 8(a) BD program after 

certification, a firm must generally 

remain small for its primary industry 

classification, as adjusted during the 

program. SBA may graduate a 

participant prior to the expiration of its 

program term where the firm exceeds 

the size standard corresponding to its 

primary NAICS code for two successive 

program years. 

* * * * * 

12. Amend § 124.104 by revising 

paragraph (b)(2); redesignating 

paragraph (c)(2)(ii) as paragraph 

(c)(2)(iv), adding new paragraphs 

(c)(2)(ii) and (c)(2)(iii), and by adding 

new paragraphs (c)(3) and (c)(4) to read 

as follows: 

§ 124.104 Who is economically 

disadvantaged? 

* * * * * 

(b) * * * 

(2) When married, an individual 

claiming economic disadvantage must 

submit separate financial information 

for his or her spouse, unless the 

individual and the spouse are legally 

separated. SBA may consider a spouse’s 

financial situation in determining an 

individual’s access to credit and capital. 

SBA does not take into consideration 

community property laws when 

determining economic disadvantage. 

* * * * * 

(c) * * * 

(2) * * * 

(ii) Funds invested in an Individual 

Retirement Account (IRA) or other 

official retirement account that are 

unavailable to an individual until 

retirement age without a significant 

penalty will not be considered in 

determining an individual’s net worth. 

In order to properly assess whether 

funds invested in a retirement account 

may be excluded from an individual’s 

net worth, the individual must provide 

information about the terms and 

restrictions of the account to SBA. 

(iii) Income received from an S 

corporation will be excluded from net 

worth where the applicant or 

Participant provides documentary 

evidence demonstrating that the income 

was reinvested in the firm or used to 

pay taxes arising in the normal course 

of operations of the firm. 

* * * * * 

(3) Personal income for the past two 

years. If an individual’s adjusted gross 

income averaged over the two years 

preceding submission of the 8(a) 

application exceeds $200,000, SBA will 

presume that such individual is not 

economically disadvantaged. For 

continued 8(a) BD eligibility, SBA will 

presume that an individual is not 

economically disadvantaged if his or her 

adjusted gross income averaged over the 

two preceding years exceeds $250,000. 

The presumption may be rebutted by a 

showing that this income level was 

unusual and not likely to occur in the 

future, that losses commensurate with 

and directly related to the earnings were 

suffered, or by evidence that the income 

is not indicative of lack of economic 

disadvantage. Income earned by S 

corporations which is reinvested in or 

used to pay taxes arising in the normal 

course of operations of the firm is 

exempted from income for purposes of 

this section provided that documentary 

evidence is submitted demonstrating 

this use. Likewise, S corporation losses 

may not be subtracted from an 

individual’s income to reduce that 

income. 

(4) Fair market value of all assets. An 

individual will generally not be 

considered economically disadvantaged 

if the fair market value of all his or her 

assets (including his or her primary 

residence and the value of the 

applicant/Participant firm) exceeds $3 

million for an applicant concern and $4 

million for continued 8(a) BD eligibility. 

The only assets excluded from this 

determination are funds excluded under 

paragraph (c)(2)(ii) of this section as 

being invested in a qualified IRA 

account. 

13. Amend § 124.105 by revising 

paragraphs (g) and (h)(2) to read as 

follows: 

§ 124.105 What does it mean to be 

unconditionally owned by one or more 

disadvantaged individuals? 

* * * * * 

(g) Ownership of another Participant 

in the same or similar line of business. 

(1) An individual may not use his or 

her disadvantaged status to qualify a 

concern if that individual has an 

immediate family member who is using 

or has used his or her disadvantaged 

status to qualify another concern for the 

8(a) BD program. The AA/BD may waive 

this prohibition if the two concerns 

have no connections, either in the form 

of ownership, control or contractual 

relationships, and provided the 

individual seeking to qualify the second 

concern has management and technical 

experience in the industry. Where the 

concern seeking a waiver is in the same 

or similar line of business as the current 

or former 8(a) concern, there is a 

presumption against granting the 

waiver. The applicant must provide 

clear and compelling evidence that no 

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connection exists between the two 

firms. 

(2) If the AA/BD grants a waiver 

under paragraph (g)(1) of this section, 

SBA will, as part of its annual review, 

assess whether the firm continues to 

operate independently of the other 

current or former 8(a) concern of an 

immediate family member. SBA may 

initiate proceedings to terminate a firm 

for which a waiver was granted from 

further participation in the 8(a) BD 

program if it is apparent that there are 

connections between the two firms that 

were not disclosed to the AA/BD when 

the waiver was granted or that came into 

existence after the waiver was granted. 

SBA may also initiate termination 

proceedings if the firm begins to operate 

in the same or similar line of business 

as the current or former 8(a) concern of 

the immediate family member and the 

firm did not operate in the same or 

similar line of business at the time the 

waiver was granted. 

(h) * * * 

(2) A non-Participant concern in the 

same or similar line of business or a 

principal of such concern may not own 

more than a 10 percent interest in a 

Participant that is in the developmental 

stage or more than a 20 percent interest 

in a Participant in a transitional stage of 

the program, except that a former 

Participant or a principal of a former 

Participant (except those that have been 

terminated from 8(a) BD program 

participation pursuant to §§ 124.303 and 

124.304) may have an equity ownership 

interest of up to 20 percent in a current 

Participant in the developmental stage 

of the program or up to 30 percent in a 

transitional stage Participant, in the 

same or similar line of business. 

* * * * * 

14. Amend § 124.106 by revising 

paragraph (a)(2), and (e) introductory 

text, and by adding a new paragraph (h) 

to read as follows: 

§ 124.106 When do disadvantaged 

individuals control an applicant or 

Participant? 

* * * * * 

(a)(1) * * * 

(2) A disadvantaged full-time manager 

must hold the highest officer position 

(usually President or Chief Executive 

Officer) in the applicant or Participant. 

Such manager must reside in the United 

States, and must generally spend at least 

part of every month physically present 

in the primary offices of the applicant 

or Participant. 

* * * * * 

(e) Non-disadvantaged individuals 

may be involved in the management of 

an applicant or Participant, and may be 

stockholders, partners, limited liability 

members, officers, and/or directors of 

the applicant or Participant. However, 

no non-disadvantaged individual or 

immediate family member may: * * * 

* * * * * 

(h) Notwithstanding the provisions of 

this section requiring a disadvantaged 

owner to control the daily business 

operations and long-term strategic 

planning of an 8(a) BD Participant, 

where a disadvantaged individual upon 

whom eligibility is based is a reserve 

component member in the United States 

military who has been called to active 

duty, the Participant may elect to 

designate one or more individuals to 

control the Participant on behalf of the 

disadvantaged individual during the 

active duty call-up period. If such an 

election is made, the Participant will 

continue to be treated as an eligible 8(a) 

Participant and no additional time will 

be added to its program term. 

Alternatively, the Participant may elect 

to suspend its 8(a) BD participation 

during the active duty call-up period 

pursuant to §§ 124.305(h)(1)(ii) and 

124.305(h)(4). 

§ 124.108 [Amended] 

15. Amend § 124.108 by removing 

paragraph (f). 

16. Amend § 124.109 by revising 

paragraphs (c)(3)(ii), (c)(4)(i) 

introductory text, and (c)(6) to read as 

follows: 

§ 124.109 Do Indian tribes and Alaska 

Native Corporations have any special rules 

for applying to the 8(a) BD program? 

* * * * * 

(c) * * * 

(3) * * * 

(ii) A tribe may not own 51% or more 

of another firm which, either at the time 

of application or within the previous 

two years, has been operating in the 8(a) 

program under the same primary NAICS 

code as the applicant. A tribe may, 

however, own a Participant or other 

applicant that conducts or will conduct 

secondary business in the 8(a) BD 

program under the NAICS code which 

is the primary NAICS code of the 

applicant concern. In addition, once an 

applicant is admitted to the 8(a) BD 

program, it may not receive an 8(a) 

contract in a secondary NAICS code that 

is the primary NAICS code of another 

Participant (or former participant that 

has left the program within two years of 

the date of application) owned by the 

tribe for a period of two years from the 

date of admission to the program. 

* * * * * 

(4) * * * 

(i) The management and daily 

business operations of a tribally-owned 

concern must be controlled by the tribe, 

through one or more individual 

members who possess sufficient 

management experience of an extent 

and complexity needed to run the 

concern, or through management as 

follows: 

* * * * * 

(6) Potential for success. A triballyowned applicant concern must possess 

reasonable prospects for success in 

competing in the private sector if 

admitted to the 8(a) BD program. A 

tribally-owned applicant may establish 

potential for success by demonstrating 

that: 

(i) It has been in business for at least 

two years, as evidenced by income tax 

returns for each of the two previous tax 

years showing operating revenues in the 

primary industry in with the applicant 

is seeking 8(a) BD certification; or 

(ii) The individual(s) who will 

manage and control the daily business 

operations of the firm have substantial 

technical and management experience, 

the applicant has a record of successful 

performance on contracts from 

governmental or nongovernmental 

sources in its primary industry category, 

and the applicant has adequate capital 

to sustain its operations and carry out 

its business plan as a Participant; or 

(iii) The tribe has made a firm written 

commitment to support the operations 

of the applicant concern and it has the 

financial ability to do so. 

* * * * * 

17. Amend § 124.112 by removing the 

word ‘‘and’’ at the end of paragraph 

(b)(7), by redesignating paragraph (b)(8) 

as paragraph (b)(9), by adding a new 

paragraph (b)(8), by revising paragraphs 

(d)(1) and (d)(3), and by adding new 

paragraphs (e) and (f) to read as follows: 

§ 124.112 What criteria must a business 

meet to remain eligible to participate in the 

8(a) BD program? 

* * * * * 

(b) * * * 

(8) For each Participant owned by a 

tribe, ANC, NHO or CDC, information 

showing how its 8(a) participation has 

benefited the tribal or native members 

and/or the tribal, native or other 

community. This data includes 

information relating to funding cultural 

programs, employment assistance, jobs, 

scholarships, internships, subsistence 

activities, and other services to the 

affected community; and 

* * * * * 

(d) Excessive withdrawals. (1) The 

term withdrawal includes, but is not 

limited to, the following: cash 

dividends; distributions in excess of 

amounts needed to pay S Corporation 

taxes; cash and property withdrawals; 

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payments to immediate family members 

not employed by the Participant; 

bonuses to officers; and investments on 

behalf of an owner. SBA will look at the 

totality of the circumstances in 

determining whether to include a 

specific amount as a withdrawal under 

this paragraph. 

* * * * * 

(3) Withdrawals are excessive if 

during any fiscal year of the Participant 

they exceed: 

(i) $200,000 for firms with sales up to 

$1,000,000; 

(ii) $250,000 for firms with sales 

between $1,000,000 and $2,000,000; and 

(iii) $400,000 for firms with sales 

exceeding $2,000,000. 

* * * * * 

(e) Change in primary industry 

classification. A Participant may request 

that the primary industry classification 

contained in its business plan be 

changed by filing such a request with its 

servicing SBA district office. SBA will 

grant such a request only where the 

Participant can demonstrate that the 

majority of its revenues during a twoyear period have evolved from one 

NAICS code to another. 

(f) Graduation determination. As part 

of the final annual review performed by 

SBA prior to the expiration of a 

Participant’s nine-year program term, 

SBA will determine if the Participant 

has met the targets and objectives set 

forth in its business plan and, thus, 

whether the Participant will be 

considered to have graduated from the 

8(a) BD program at the expiration of its 

program term. 

18. Revise § 124.202 to read as 

follows: 

§ 124.202 How must an application be 

filed? 

An application for 8(a) BD program 

admission must generally be filed in an 

electronic format. An electronic 

application can be found by going to the 

8(a) BD page of SBA’s Web site 

(www.sba.gov). An applicant concern 

that does not have access to the 

electronic format or does not wish to file 

an electronic application may request in 

writing a hard copy application from the 

AA/BD. The SBA district office will 

provide an applicant concern with 

information regarding the 8(a) BD 

program. 

19. Revise § 124.203 to read as 

follows: 

§ 124.203 What must a concern submit to 

apply to the 8(a) BD program? 

Each 8(a) BD applicant concern must 

submit those forms and attachments 

required by SBA when applying for 

admission to the 8(a) BD program. These 

forms and attachments may include, but 

not be limited to, financial statements, 

Federal personal and business tax 

returns, and personal history 

statements. An applicant must also 

submit IRS Form 4506T, Request for 

Copy or Transcript of Tax Form, to SBA. 

In all cases, the applicant must provide 

a wet signature from each individual 

claiming social and economic 

disadvantage status. 

20. Amend § 124.204 by revising 

paragraph (a), redesignating paragraphs 

(c), (d) (e) and (f) as paragraphs (d), (e), 

(f) and (g), and adding new paragraph 

(c) to read as follows: 

§ 124.204 How does SBA process 

applications for 8(a) BD program 

admission? 

(a) The AA/BD is authorized to 

approve or decline applications for 

admission to the 8(a) BD program. The 

DPCE will receive, review and evaluate 

all 8(a) BD applications. Applications 

submitted by firms owned by ANCs will 

be initially reviewed by SBA’s San 

Francisco DPCE unit. SBA will advise 

each program applicant within 15 days 

after the receipt of an application 

whether the application is complete and 

suitable for evaluation and, if not, what 

additional information or clarification is 

required to complete the application. 

SBA will process an application for 8(a) 

BD program participation within 90 

days of receipt of a complete application 

package by the DPCE. Incomplete 

packages will not be processed. 

* * * * * 

(c) The burden of proof to 

demonstrate eligibility is on the 

applicant concern. If a concern does not 

provide requested information within 

the allotted time provided by SBA, or if 

it submits incomplete information, SBA 

may presume that disclosure of the 

missing information would adversely 

affect the firm or would demonstrate 

lack of eligibility in the area to which 

the information relates. 

* * * * * 

21. Revise § 124.205 (a) and (b) to read 

as follows: 

§ 124.205 Can an applicant ask SBA to 

reconsider SBA’s initial decision to decline 

its application? 

(a) An applicant may request the AA/ 

BD to reconsider his or her initial 

decline decision by filing a request for 

reconsideration with SBA. The 

applicant may submit a revised 

electronic application or submit its 

request for reconsideration to the SBA 

field office that originally processed its 

application by personal delivery, first 

class mail, express mail, facsimile 

transmission followed by first class 

mail, or commercial delivery service. 

The applicant must submit its request 

for reconsideration within 45 days of its 

receipt of written notice that its 

application was declined. If the date of 

actual receipt of such written notice 

cannot be determined, SBA will 

presume receipt to have occurred ten 

calendar days after the date the notice 

was sent to the applicant. The applicant 

must provide any additional 

information and documentation 

pertinent to overcoming the reason(s) 

for the initial decline, including 

information and documentation 

regarding changed circumstances. 

(b) The AA/BD will issue a written 

decision within 45 days of SBA’s receipt 

of the applicant’s request. The AA/BD 

may either approve the application, 

deny it on the same grounds as the 

original decision, or deny it on other 

grounds. If denied, the AA/BD will 

explain why the applicant is not eligible 

for admission to the 8(a) BD program 

and give specific reasons for the decline. 

* * * * * 

22. Revise § 124.301 to read as 

follows: 

§ 124.301 What are the ways a business 

may leave the 8(a) BD program? 

A concern participating in the 8(a) BD 

program may leave the program by any 

of the following means: 

(a) Expiration of the program term 

established pursuant to § 124.2; 

(b) Voluntary withdrawal; 

(c) Graduation pursuant to § 124.302; 

(d) Early graduation pursuant to the 

provisions of §§ 124.302 and 124.304; or 

(e) Termination pursuant to the 

provisions of §§ 124.303 and 124.304. 

23. Amend § 124.302 by revising the 

heading, by revising paragraphs (a) 

introductory text and (a)(1), by 

removing paragraph (d), by 

redesignating paragraph (c) as paragraph 

(d), and by adding a new paragraph (c) 

to read as follows: 

§ 124.302 What is graduation and what is 

early graduation? 

(a) General. SBA may graduate a firm 

from the 8(a) BD program at the 

expiration of its program term 

(graduation) or prior to the expiration of 

its program term (early graduation) 

where SBA determines that: 

(1) The concern has successfully 

completed the 8(a) BD program by 

substantially achieving the targets, 

objectives, and goals set forth in its 

business plan, and has demonstrated the 

ability to compete in the marketplace 

without assistance under the 8(a) BD 

program; or 

* * * * * 

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(c) Exceeding the size standard 

corresponding to the primary NAICS 

code. SBA may graduate a participant 

prior to the expiration of its program 

term where the firm exceeds the size 

standard corresponding to its primary 

NAICS code for two successive program 

years. 

* * * * * 

24. Amend § 124.303 by revising 

paragraphs (a)(2), (a)(13) and (a)(16) to 

read as follows: 

§ 124.303 What is termination? 

(a) * * * 

(2) Failure by the concern to maintain 

its eligibility for program participation, 

including failure by an individual 

owner or manager to continue to meet 

the requirements for economic 

disadvantage set forth in § 124.104 

where such status is needed for 

eligibility and the Participant has not 

met the targets and objectives set forth 

in its business plan. 

* * * * * 

(13) Excessive withdrawals, including 

transfers of funds or other business 

assets, from the concern for the personal 

benefit of any of its owners or any 

person or entity affiliated with the 

owners that hinder the development of 

the concern (see § 124.112(d)). 

* * * * * 

(16) Debarment, suspension, 

voluntary exclusion, or ineligibility of 

the concern or its principals pursuant to 

2 CFR parts 180 and 2700 or FAR 

subpart 9.4 (48 CFR part 9, subpart 9.4). 

* * * * * 

25. Revise § 124.304(f) to read as 

follows: 

§ 124.304 What are the procedures for 

early graduation and termination? 

* * * * * 

(f) Effect or early graduation or 

termination. (1) After the effective date 

of early graduation or termination, a 

Participant is no longer eligible to 

receive any 8(a) BD program assistance. 

However, such concern is obligated to 

complete previously awarded 8(a) 

contracts, including any priced options 

which may be exercised. 

(2) When SBA early graduates or 

terminates a firm from the 8(a) BD 

program, the firm will generally not 

qualify as an SDB for future 

procurement actions. If the firm believes 

that it does qualify as an SDB and seeks 

to certify itself as an SDB, as part of its 

SDB certification the firm must identify: 

(i) That it has been early graduated or 

terminated; and 

(ii) The circumstances that have 

changed since the early graduation or 

termination or that do not prevent it 

from qualifying as an SDB. 

(3) Where a concern certifies that it 

qualifies as an SDB pursuant to 

paragraph (f)(2) of this section, the 

procuring activity contracting officer 

shall protest the SDB status of the firm 

to SBA pursuant to § 124.1010. 

26. Amend § 124.305 by revising the 

first sentence of paragraph (a), and by 

revising paragraph (h) to read as 

follows: 

§ 124.305 What is suspension and how is 

a Participant suspended from the 8(a) BD 

program? 

(a) Except as set forth in paragraph (h) 

of this section, at any time after SBA 

issues a Letter of Intent to Terminate an 

8(a) Participant pursuant to § 124.304, 

the AA/BD may suspend 8(a) contract 

support and all other forms of 8(a) BD 

program assistance to that Participant 

until the issue of the Participant’s 

termination from the program is finally 

determined. * * * 

* * * * * 

(h)(1) SBA will suspend a Participant 

from receiving further 8(a) BD program 

benefits when termination proceedings 

have not been commenced pursuant to 

§ 124.304 where: 

(i) A Participant requests a change of 

ownership and/or control and SBA 

discovers that a change of ownership or 

control has in fact occurred prior to 

SBA’s approval; or 

(ii) A disadvantaged individual who 

is involved in the ownership and/or 

control of the Participant is called to 

active military duty by the United 

States, his or her participation in the 

firm’s management and daily business 

operations is critical to the firm’s 

continued eligibility, and the 

Participant elects not to designate a nondisadvantaged individual to control the 

concern during the call-up period 

pursuant to proposed § 124.106(h). 

(2) A suspension initiated under 

paragraph (h) of this section will be 

commenced by the issuance of a notice 

similar to that required for terminationrelated suspensions under paragraph (b) 

of this section, except that a suspension 

issued under paragraph (h) not 

appealable. 

(3) Where a Participant is suspended 

pursuant to paragraph (h)(1)(i) of this 

section and SBA approves the change of 

ownership and/or control, the length of 

the suspension will be added to the 

firm’s program term only where the 

change in ownership or control results 

from the death or incapacity of a 

disadvantaged individual or where the 

firm requested prior approval and 

waited at least 60 days for SBA approval 

before making the change. 

(4) Where a Participant is suspended 

pursuant to paragraph (h)(1)(ii) of this 

section, the Participant must notify SBA 

when the disadvantaged individual 

returns to control the firm so that SBA 

can immediately lift the suspension. 

When the suspension is lifted, the 

length of the suspension will be added 

to the concern’s program term. 

* * * * * 

§ 124.403 [Amended] 

27. Amend § 124.403 by removing 

paragraph (d). 

28. Amend § 124.501 by revising the 

first sentence of paragraph (h) to read as 

follows: 

§ 124.501 What general provisions apply 

to the award of 8(a) contracts? 

* * * * * 

(h) A Participant must certify that it 

qualifies as a small business under the 

size standard corresponding to the 

NAICS code assigned to each 8(a) 

contract. * * *? 

* * * * * 

29. Amend § 124.503 by revising 

paragraph (h) to read as follows: 

§ 124.503 How does SBA accept a 

procurement for award through the 8(a) BD 

program? 

* * * * * 

(h) Task or Delivery Order Contracts— 

(1) Contracts set aside for exclusive 

competition among 8(a) Participants. (i) 

A task or delivery order contract that is 

reserved exclusively for 8(a) Program 

Participants must follow the normal 8(a) 

competitive procedures, including an 

offering to and acceptance into the 8(a) 

program, SBA eligibility verification of 

the apparent successful offerors prior to 

contract award, and application of the 

performance of work requirements set 

forth in § 124.510, and the 

nonmanufacturer rule, if applicable, (see 

§ 121.406(b). 

(ii) Individual orders need not be 

offered to or accepted into the 8(a) BD 

program. 

(iii) A concern awarded such a 

contract may generally continue to 

receive new orders even if it has grown 

to be other than small or has exited the 

8(a) BD program, and agencies may 

continue to take credit toward their 

prime contracting goals for orders 

awarded to 8(a) Participants. However, 

a concern may not receive, and agencies 

may not take 8(a), SDB or small business 

credit, for an order where the concern 

has been asked by the procuring agency 

to re-certify its size status and is unable 

to do so (see § 121.404(g)), or where 

ownership or control of the concern has 

changed and SBA has granted a waiver 

to allow performance to continue (see 

§ 124.515). 

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(2) 8(a) credit for orders issued under 

multiple award contracts that were not 

set aside for exclusive competition 

among eligible 8(a) Participants. In 

order to receive 8(a) credit for orders 

placed under multiple award contracts 

that were not initially set aside for 

exclusive competition among 8(a) 

Participants: 

(i) The order must be offered to and 

accepted into the 8(a) BD program; 

(ii) The order must be competed 

exclusively among 8(a) concerns; 

(iii) The order must require the 

concern comply with applicable 

limitations on subcontracting provisions 

(see § 125.6 of this chapter) and the 

nonmanufacturer rule, if applicable, (see 

§ 121.406(b) of this chapter) in the 

performance of the individual order; 

and 

(iv) SBA must verify that a concern is 

an eligible 8(a) concern prior to award 

of the order in accordance with 

§ 124.507; 

* * * * * 

30–31. Amend § 124.504 by revising 

the first sentence of paragraph (a), by 

removing paragraph (d), by 

redesignating paragraph (e) as paragraph 

(d), and by revising redesignated 

paragraph (d) to read as follows: 

§ 124.504 What circumstances limit SBA’s 

ability to accept a procurement for award as 

an 8(a) contract? 

(a) Reservation as small business setaside, or HUBZone or service disabled 

veteran-owned small business award. 

The procuring activity issued a 

solicitation for or otherwise expressed 

publicly a clear intent to reserve the 

procurement as a small business setaside or a HUBZone or service disabled 

veteran-owned award prior to offering 

the requirement to SBA for award as an 

8(a) contract. * * * 

* * * * * 

(d) Release for non-8(a) competition. 

(1) Except as set forth in paragraph 

(d)(4) of this section, where a 

procurement is awarded as an 8(a) 

contract, its follow-on or renewable 

acquisition must remain in the 8(a) BD 

program unless SBA agrees to release it 

for non-8(a) competition. If a procuring 

agency would like to fulfill a follow-on 

or renewable acquisition outside of the 

8(a) BD program, it must make a written 

request to and receive the concurrence 

of the AA/BD to do so. In determining 

whether to release a requirement from 

the 8(a) BD program, SBA will consider: 

(i) Whether the agency has achieved 

its SDB goal; 

(ii) Where the agency is in achieving 

its HUBZone, SDVO, WOSB, or small 

business goal, as appropriate; and 

(iii) Whether the requirement is 

critical to the business development of 

the 8(a) Participant that is currently 

performing it. 

(2) SBA may decline to accept the 

offer of a follow-on or renewable 8(a) 

acquisition in order to give a concern 

previously awarded the contract that is 

leaving or has left the 8(a) BD program 

the opportunity to compete for the 

requirement outside of the 8(a) BD 

program. 

(i) SBA will consider release under 

this paragraph (d)(2) only where: 

(A) The procurement awarded 

through the 8(a) BD program is being or 

was performed by either a Participant 

whose program term will expire prior to 

contract completion, or by a former 

Participant whose program term expired 

within one year of the date of the 

offering letter; 

(B) The concern requests in writing 

that SBA decline to accept the offer 

prior to SBA’s acceptance of the 

requirement for award as an 8(a) 

contract; and 

(C) The concern qualifies as a small 

business for the requirement now 

offered to the 8(a) BD program. 

(ii) In considering release under this 

paragraph (d)(2), SBA will balance the 

importance of the requirement to the 

concern’s business development needs 

against the business development needs 

of other Participants that are qualified to 

perform the requirement. This 

determination will include 

consideration of whether rejection of the 

requirement would seriously reduce the 

pool of similar types of contracts 

available for award as 8(a) contracts. 

SBA will seek the views of the 

procuring agency. 

(3) SBA will release a requirement 

under this paragraph only where the 

procuring activity agrees to procure the 

requirement as a small business, 

HUBZone, service disabled veteranowned small business, or womenowned small business set-aside. 

(4) The requirement that a follow-on 

procurement need must be released 

from the 8(a) BD program in order for 

it to be fulfilled outside the 8(a) BD 

program does not apply to orders 

offered to and accepted for the 8(a) BD 

program pursuant to § 124.503(h). 

32. Amend § 124.506 by revising 

paragraph (a)(2)(ii), the example in 

paragraph (a) (3), and paragraph (b) to 

read as follows: 

§ 124.506 At what dollar threshold must an 

8(a) procurement be competed among 

eligible Participants? 

* * * * * 

(a) * * * 

(2) * * * 

(ii) The anticipated award price of the 

contract, including options, will exceed 

$5,500,000 for contracts assigned 

manufacturing NAICS codes and 

$3,500,000 for all other contracts; and 

* * * 

* * * * * 

(3) * * * 

Example to paragraph (a)(3). If the 

anticipated award price for a professional 

services requirement is determined to be $3.2 

million and it is accepted as a sole source 

8(a) requirement on that basis, a sole source 

award will be valid even if the contract price 

arrived at after negotiation is $3.6 million. 

* * * * * 

(b) Exemption from competitive 

thresholds for Participants owned by 

Indian tribes, ANCs and NHOs. (1) SBA 

may award a sole source 8(a) contract to 

a Participant concern owned and 

controlled by an Indian tribe or an ANC 

where the anticipated value of the 

procurement exceeds the applicable 

competitive threshold if SBA has not 

accepted the requirement into the 8(a) 

BD program as a competitive 

procurement. 

(2) SBA may award a sole source 8(a) 

contract to a Participant concern owned 

and controlled by an NHO on behalf of 

DoD where the anticipated value of the 

procurement exceeds the applicable 

competitive threshold if SBA has not 

accepted the requirement into the 8(a) 

BD program as a competitive 

procurement. 

(3) There is no requirement that a 

procurement must be competed 

whenever possible before it can be 

accepted on a sole source basis for a 

tribally-owned or ANC-owned concern, 

or a concern owned by an NHO for 

contracts accepted on behalf of DoD, but 

a procurement may not be removed 

from competition to award it to a 

tribally-owned, ANC-owned or NHOowned concern on a sole source basis. 

(4) A joint venture between one or 

more eligible tribally-owned, ANCowned or NHO-owned Participants and 

one or more non-8(a) business concerns 

may be awarded sole source 8(a) 

contracts above the competitive 

threshold amount, provided that no 

non-8(a) joint venture partner also acts 

as a subcontractor to the joint venture 

awardee. 

* * * * * 

33. Amend § 124.507 by adding 

paragraphs (c)(2)(i), (c)(2)(ii) and 

(c)(2)(iii) to read as follows: 

§ 124.507 What procedures apply to 

competitive procurements? 

* * * * * 

(c) * * * 

(2) * * * 

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(i) A Participant may have bona fide 

places of business in more than one 

location. 

(ii) In order for a Participant to 

establish a bona fide place of business 

in a particular geographic location, the 

SBA district office serving the 

geographic area of that location must 

determine if that location in fact 

qualifies as a bona fide place of business 

under SBA’s requirements. 

(A) A Participant must submit a 

request for a bona fide business 

determination to the SBA district office 

servicing it. 

(B) The servicing district office will 

forward the request to the SBA district 

office serving the geographic area of the 

particular location for processing. 

(iii) In order for a Participant to be 

eligible to submit an offer for a 8(a) 

procurement limited to a specific 

geographic area, it must receive from 

SBA a determination that it has a bona 

fide place of business within that area 

prior to submitting its offer for the 

procurement. 

* * * * * 

34. Amend § 124.509(a)(1) by adding 

a new sentence at the end thereof to 

read as follows: 

§ 124.509 What are non-8(a) business 

activity targets? 

(a) General. (1) * * * Work 

performed by an 8(a) Participant for any 

Federal department or agency other than 

through an 8(a) contract, including work 

performed on orders under the General 

Services Administration Multiple 

Award Schedule program, and work 

performed as a subcontractor, including 

work performed as a subcontractor to 

another 8(a) Participant on an 8(a) 

contract, qualifies as work performed 

outside the 8(a) BD program. 

* * * * * 

35. Amend § 124.512 by adding a new 

sentence at the end of paragraph (a), by 

revising paragraph (b), and by adding a 

new paragraph (c) to read as follows: 

§ 124.512 Delegation of contract 

administration to procuring agencies. 

(a) * * * Tracking compliance with 

the performance of work requirements 

set forth in § 124.510 is included within 

the functions performed by the 

procuring activity as part of contract 

administration. 

(b) This delegation of contract 

administration authorizes a contracting 

officer to execute any priced option or 

in scope modification without SBA’s 

concurrence. The contracting officer 

must, however, submit copies to SBA of 

all modifications and options exercised 

within 10 business days of their 

occurrence. 

(c) SBA may conduct periodic 

compliance on-site agency reviews of 

the files of all contracts awarded 

pursuant to Section 8(a) authority. 

36. Amend § 124.513 by revising 

paragraphs (c)(3), (c)(6), (d), and (e), and 

adding a new paragraph (i) to read as 

follows: 

§ 124.513 Under what circumstances can a 

joint venture be awarded an 8(a) contract? 

* * * * * 

(c) * * * 

(3) Stating that the 8(a) Participant(s) 

must receive profits from the joint 

venture commensurate with the work 

performed by the 8(a) Participant(s); 

* * * * * 

(6) Specifying the responsibilities of 

the parties with regard to negotiation of 

the contract, source of labor, and 

contract performance, including ways 

that the parties to the joint venture will 

ensure that the joint venture and the 

8(a) partner(s) to the joint venture will 

meet the performance of work 

requirements set forth in paragraph (d) 

of this section. 

* * * * * 

(d) Performance of work. For any 8(a) 

contract, including those between 

mentors and prote ́ge ́s authorized by 

§ 124.520, the joint venture must 

perform the applicable percentage of 

work required by § 124.510, and the 8(a) 

partner(s) to the joint venture must 

perform at least 40% of the work 

performed by the joint venture. The 

work performed by 8(a) partners to a 

joint venture must be more than 

administrative or ministerial functions 

so that they gain substantive experience. 

(e) Prior approval by SBA. (1) SBA 

must approve a joint venture agreement 

prior to the award of an 8(a) contract on 

behalf of the joint venture. 

(2) Where a joint venture has been 

established and approved by SBA for 

one 8(a) contract, a second or third 8(a) 

contract may be awarded to that joint 

venture provided an addendum to the 

joint venture agreement, setting forth 

the performance requirements on that 

second or third contract, is provided to 

and approved by SBA prior to contract 

award. 

* * * * * 

(i) Performance of work report. At the 

completion of every 8(a) contract 

awarded to a joint venture, the 8(a) 

Participant(s) to the joint venture must 

submit a report to the local SBA district 

office explaining how the performance 

of work requirements were met for the 

contract. 

37. Amend § 124.519 by revising 

paragraphs (a) and (f) to read as follows: 

§ 124.519 Are there any dollar limits on the 

amount of 8(a) contracts that a Participant 

may receive? 

(a) A Participant (other than one 

owned by an Indian tribe, ANC or NHO) 

may not receive sole source 8(a) contract 

awards where it has received a 

combined total of competitive and sole 

source 8(a) contracts in excess of the 

dollar amount set forth in this section 

during its participation in the 8(a) BD 

program. 

* * * * * 

(f) The AA/BD may waive the 

requirement prohibiting a Participant 

from receiving sole source 8(a) contracts 

in excess of the dollar amount set forth 

in this section where the head of a 

procuring activity represents that award 

of a sole source 8(a) contract to the 

Participant is needed to achieve 

significant interests of the Government. 

38. Amend § 124.520 by: 

A. Revising the heading, 

B. Revising the first and last sentences 

of paragraph (a), 

C. Revising paragraphs (b)(1)(i) and 

(iv), (b)(2), and (b)(3), 

D. Revising paragraph (c)(1), 

E. Adding a new sentence to the end 

of paragraph (c)(2), 

F. Revising paragraph (c)(3), 

G. Adding new paragraphs (c)(4) and 

(5), 

H. Revising paragraph (d)(1), 

I. Revising paragraph (e)(1), and the 

second sentence of (e)(2), 

J. Redesignating paragraph (f) as 

paragraph (g), 

K. Adding a new paragraph (f), 

L. Redesignating newly designated 

paragraphs (g)(2) and (g)(3) as 

paragraphs (g)(3) and (g)(4), 

M. Adding a new paragraph (g)(2), 

and 

N. Adding a new paragraph (h) 

The additions and revisions read as 

follows: 

§ 124.520 What are the rules governing 

SBA’s Mentor/Prote ́ge ́ program? 

(a) General. The mentor/prote ́ge ́

program is designed to encourage 

approved mentors to provide various 

forms of business development 

assistance to prote ́ge ́ firms. * * * The 

purpose of the mentor/prote ́ge ́

relationship is to enhance the 

capabilities of the prote ́ge ́, assist the 

prote ́ge ́ with meeting the goals 

established in its SBA-approved 

business plan, and to improve its ability 

to successfully compete for contracts. 

* * * * * 

(b) * * * 

(1) * * * 

(i) Possesses favorable financial 

health; 

* * * * * 

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(iv) Can impart value to a prote ́ge ́ firm 

due to lessons learned and practical 

experience gained because of the 8(a) 

BD program, or through its knowledge 

of general business operations and 

government contracting. 

(2) Generally a mentor will have no 

more than one prote ́ge ́ at a time. 

However, the AA/BD may authorize a 

concern to mentor more than one 

prote ́ge ́ at a time where the concern can 

demonstrate that the additional mentor/ 

prote ́ge ́ relationship will not adversely 

affect the development of either prote ́ge ́

firm (e.g., the second firm may not be 

a competitor of the first firm). Under no 

circumstances will a mentor be 

permitted to have more than three 

prote ́ge ́s at one time. 

(3) In order to demonstrate its 

favorable financial health, a firm 

seeking to be a mentor must submit to 

SBA for review copies of the Federal tax 

returns it submitted to the IRS, or 

audited financial statements, including 

any notes, or in the case of publicly 

traded concerns the filings required by 

the Securities and Exchange 

Commission for the past three years. 

* * * * * 

(c) Prote ́ge ́s. (1) In order to initially 

qualify as a prote ́ge ́ firm, a Participant 

must: 

(i) Be in the developmental stage of 

program participation; or 

(ii) Have never received an 8(a) 

contract; or 

(iii) Have a size that is less than half 

the size standard corresponding to its 

primary NAICS code. 

(2) * * * Once a firm graduates from 

or otherwise leaves the 8(a) BD program, 

it will not be eligible for any further 

benefits from its mentor/prote ́ge ́

relationship (i.e., the receipts and/or 

employees of the prote ́ge ́ and mentor 

will generally be aggregated in 

determining size for any joint venture 

between the mentor and prote ́ge ́ after 

the prote ́ge ́ leaves the 8(a) BD program). 

(3) A prote ́ge ́ firm may generally have 

only one mentor at a time. The AA/BD 

may approve a second mentor for a 

particular prote ́ge ́ firm where (i) the 

second relationship pertains to an 

unrelated, secondary NAICS code; (ii) 

the prote ́ge ́ firm is seeking to acquire a 

specific expertise that the first mentor 

does not possess; and (iii) the second 

relationship will not compete or 

otherwise conflict with the business 

development assistance set forth in the 

first mentor/prote ́ge ́ relationship. 

(4) A prote ́ge ́ may not become a 

mentor and retain its prote ́ge ́ status. The 

prote ́ge ́ must terminate its mentor/ 

prote ́ge ́ agreement with its mentor 

before it will be approved as a mentor 

to another 8(a) Participant. 

(5) SBA will not approve a mentor/ 

prote ́ge ́ relationship for an 8(a) 

Participant with less than one year 

remaining in its program term. 

(d) Benefits. (1) A mentor and prote ́ge ́

may joint venture as a small business for 

any government prime contract or 

subcontract, including procurements 

with a dollar value less than half the 

size standard corresponding to the 

assigned NAICS code and 8(a) sole 

source contracts, provided the prote ́ge ́

qualifies as small for the procurement 

and, for purposes of 8(a) sole source 

requirements, the prote ́ge ́ has not 

reached the dollar limit set forth in 

§ 124.519. 

(i) SBA must approve the mentor/ 

prote ́ge ́ agreement before the two firms 

may submit an offer as a joint venture 

on a particular government prime 

contract or subcontract and receive the 

exclusion from affiliation. 

(ii) In order to receive the exclusion 

from affiliation for both 8(a) and non8(a) procurements, the joint venture 

must meet the requirements set forth in 

§ 124.513(c). 

(e) Written agreement. (1) The mentor 

and prote ́ge ́ firms must enter a written 

agreement setting forth an assessment of 

the prote ́ge ́’s needs and providing a 

detailed description and timeline for the 

delivery of the assistance the mentor 

commits to provide to address those 

needs (e.g., management and/or 

technical assistance, loans and/or equity 

investments, cooperation on joint 

venture projects, or subcontracts under 

prime contracts being performed by the 

mentor). The mentor/prote ́ge ́ agreement 

must: 

(i) Address how the assistance to be 

provided through the agreement will 

help the prote ́ge ́ firm meet the goals 

established in its SBA-approved 

business plan; 

(ii) Establish a single point of contact 

in the mentor concern who is 

responsible for managing and 

implementing the mentor/prote ́ge ́

agreement; and 

(iii) Provide that the mentor will 

provide such assistance to the prote ́ge ́

firm for at least one year. 

(2) * * * The agreement will not be 

approved if SBA determines that the 

assistance to be provided is not 

sufficient to promote any real 

developmental gains to the prote ́ge ́, or if 

SBA determines that the agreement is 

merely a vehicle to enable the mentor to 

receive 8(a) contracts. 

* * * * * 

(f) Decision to decline mentor/prote ́ge ́

relationship. (1) Where SBA declines to 

approve a specific mentor/prote ́ge ́

agreement, the prote ́ge ́ may request the 

AA/BD to reconsider the Agency’s 

initial decline decision by filing a 

request for reconsideration with its 

servicing SBA district office within 45 

calendar days of receiving notice that its 

mentor/prote ́ge ́ agreement was declined. 

The prote ́ge ́ may revise the proposed 

mentor/prote ́ge ́ agreement and provide 

any additional information and 

documentation pertinent to overcoming 

the reason(s) for the initial decline to its 

servicing district office. 

(2) The AA/BD will issue a written 

decision within 45 calendar days of 

receipt of the prote ́ge ́’s request. The AA/ 

BD may either approve the mentor/ 

prote ́ge ́ agreement, deny it on the same 

grounds as the original decision, or 

deny it on other grounds. If denied, the 

AA/BD will explain why the mentor/ 

prote ́ge ́ agreement does not meet the 

requirements of § 124.520 and give 

specific reasons for the decline. 

(3) If the AA/BD declines the mentor/ 

prote ́ge ́ agreement solely on issues not 

raised in the initial decline, the prote ́ge ́

can ask for reconsideration as if it were 

an initial decline. 

(4) If SBA’s final decision (either by 

allowing 45 calendar days to pass from 

receiving the initial decision or the 

decision by the AA/BD on 

reconsideration) is to decline a specific 

mentor/prote ́ge ́ agreement, the 8(a) firm 

seeking to be a prote ́ge ́ cannot attempt 

to enter another mentor/prote ́ge ́

relationship with the same mentor for a 

period of one year from the date of the 

final decision. The 8(a) firm may, 

however, submit another proposed 

mentor/prote ́ge ́ agreement with a 

different proposed mentor at any time 

after the SBA’s final decline decision. 

(g) * * * 

(2) The prote ́ge ́ must report the 

mentoring services it receives by 

category and hours. 

* * * * * 

(h) Consequences of not providing 

assistance set forth in the mentor/ 

prote ́ge ́ agreement. (1) Where SBA 

determines that a mentor has not 

provided to the prote ́ge ́ firm the 

business development assistance set 

forth in its mentor/prote ́ge ́ agreement, 

SBA will notify the mentor of such 

determination and afford the mentor an 

opportunity to respond. The mentor 

must respond within 30 days of the 

notification, explaining why it has not 

provided the agreed upon assistance 

and setting forth a definitive plan as to 

when it will provide such assistance. If 

the mentor fails to respond, does not 

supply adequate reasons for its failure to 

provide the agreed upon assistance, or 

does not set forth a definite plan to 

provide the assistance: 

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Federal Register / Vol. 74, No. 207 / Wednesday, October 28, 2009 / Proposed Rules 55723 

(i) SBA will recommend to the 

relevant procuring agency to issue a 

stop work order for each Federal 

contract for which the mentor and 

prote ́ge ́ are performing as a small 

business joint venture pursuant to 

paragraph (d)(1) of this section; 

(ii) SBA will terminate its mentor/ 

prote ́ge ́ agreement; and 

(iii) The firm will be ineligible to 

again act as a mentor for a period of two 

years from the date SBA terminates the 

mentor/prote ́ge ́ agreement. 

(2) SBA may consider a mentor’s 

failure to comply with the terms and 

conditions of an SBA-approved mentor/ 

prote ́ge ́ agreement as a basis for 

debarment on the grounds, including 

but not limited to, that the mentor has 

not complied with the terms of a public 

agreement under 2 CFR 180.800(b). 

39. Amend § 124.601 by revising 

paragraph (a) to read as follows: 

§ 124.601 What reports does SBA require 

concerning parties who assist Participants 

in obtaining Federal contracts? 

(a) Each Participant must submit 

semi-annually a written report to its 

assigned BOS that includes a listing of 

any agents, representatives, attorneys, 

accountants, consultants and other 

parties (other than employees) receiving 

fees, commissions, or compensation of 

any kind to assist such participant in 

obtaining a Federal contract. The listing 

must indicate the amount of 

compensation paid and a description of 

the activities performed for such 

compensation. 

* * * * * 

40. Amend § 124.602 by revising 

paragraphs (a) introductory text, (b), and 

(c) to read as follows: 

§ 124.602 What kind of annual financial 

statement must a Participant submit to 

SBA? 

(a) Participants with gross annual 

receipts of more than $10,000,000 must 

submit to SBA audited annual financial 

statements prepared by a licensed 

independent public accountant within 

120 days after the close of the concern’s 

fiscal year. 

* * * * * 

(b) Participants with gross annual 

receipts between $2,000,000 and 

$10,000,000 must submit to SBA 

reviewed annual financial statements 

prepared by a licensed independent 

public accountant within 90 days after 

the close of the concern’s fiscal year 

(c) Participants with gross annual 

receipts of less than $2,000,000 must 

submit to SBA an annual statement 

prepared in-house or a compilation 

statement prepared by a licensed 

independent public accountant, verified 

as to accuracy by an authorized officer, 

partner, limited liability member, or 

sole proprietor of the Participant, 

including signature and date, within 90 

days after the close of the concern’s 

fiscal year. 

41. Amend § 124.1002 by revising 

paragraph (d) and adding a new 

paragraph (h) to read as follows: 

§ 124.1002 What is a Small Disadvantaged 

Business (SDB)? 

* * * * * 

(d) Additional eligibility criteria. (1) 

Except for tribes, ANCs, CDCs, and 

NHOs, each individual claiming 

disadvantaged status must be a citizen 

of the United States. 

(2) The other eligibility requirements 

set forth in § 124.108 for 8(a) BD 

program participation do not apply to 

SDB eligibility. 

* * * * * 

(h) Full-time requirement for SDB 

purposes. An SDB is considered to be 

managed on a full-time basis by a 

disadvantaged individual if such 

individual works for the concern during 

all of the hours the concern operates. 

For example, if a concern operates 20 

hours per week and the disadvantaged 

manager works for the firm during those 

twenty hours, that individual will be 

considered as working full time for the 

firm. 

Karen G. Mills, 

Administrator. 

[FR Doc. E9–25416 Filed 10–27–09; 8:45 am] 

BILLING CODE 8025–01–P 

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