Source: https://www.federalregister.gov/articles/2012/12/27/2012-30809/small-business-size-regulations-small-business-innovation-research-sbir-program-and-small-business
Timestamp: 2016-08-28 18:57:06
Document Index: 546675882

Matched Legal Cases: ['§ 121', '§ 121', '§ 121', '§ 121', '§ 121', '§ 121', '§ 121', '§ 121', '§ 121', '§ 121', '§ 121', '§ 121', '§ 5104', '§ 121', '§ 121', '§ 121', '§ 121', '§ 121', '§ 121', '§ 121', '§ 121', '§ 121', '§ 121', '§ 121', 'art 121', '§ 121', '§ 121', '§ 121', '§ 121', '§ 121', '§ 121', '§ 121', '§ 121', '§ 121', '§ 121', '§ 121', '§ 121', '§ 121', '§ 121', '§ 121', '§ 121', '§ 121', '§ 121', '§ 121', '§ 121']

-76227 (13 pages)
Shorter URL: https://federalregister.gov/a/2012-30809 Related Topics
2. Affiliation—General (§ 121.702(c)(1))
3. Affiliation—Minority Ownership Rule (§ 121.702(c)(2))
4. Affiliation—Common Management (§ 121.702(c)(3))
5. Affiliation—Identity of Interest (§ 121.702(c)(4))
6. Affiliation—Newly Organized Concern Rule(§ 121.702(c)(5))
7. Affiliation—Ostensible Subcontractor (§ 121.702(c)(7))
8. Affiliation—License Agreements (§ 121.702(c)(8))
In § 121.701, SBA proposed to make it clear that the size and ownership/control regulations apply to both the SBIR and STTR programs. In addition, SBA proposed several definitions applicable to the programs, and set forth in statute, to this section.
We also note that as in the proposed rule, SBA retained those provisions concerning ownership of an awardee by an Employee Stock Ownership Plan and eligibility of a joint venture. However, the content has been moved from § 121.702(b) into the new section on SBIR ownership in § 121.702(a) and STTR ownership in § 121.702(b) and in § 121.702(c)(6).
SBA also received several comments stating that businesses that are majority-owned by VCOCs, hedge funds or private equity firms should not participate in the STTR program. When drafting the regulations, SBA considered the fact that the statutory provisions relating to majority ownership by VCOCs, hedge funds or private equity firms specifically apply to the SBIR program. In addition, SBA considered the fact that § 5104 of the SBIR/STTR Reauthorization Act permits a small business concern that received a Phase I award under the SBIR or STTR program to receive a Phase II award in either the SBIR or STTR program. Therefore, an SBIR Phase I awardee may be able to receive an STTR Phase II award. Therefore, SBA believed that the eligibility rules of both programs should be the same and consistent. As a result, SBA's proposed amendments relating to concerns that are majority-owned by multiple VCOCs, hedge funds or private equity firms applied to both the SBIR and STTR programs.
Several respondents argued that concerns that are majority-owned by multiple VCOCs, hedge funds or private equity firms should not be able to participate in the STTR program because it was not so intended by Congress. One respondent believed that money in the STTR program is already going to universities and this proposal would dilute the program more for small businesses. SBA has reviewed this issue and has decided that such businesses may not participate in the STTR program. SBA has revised the rule accordingly and has set forth two separate eligibility criteria—one for the SBIR program (§ 121.702(a)) and one for the STTR program (§ 121.702(b)).
SBA agrees with this comment and has added this to the final rule at § 121.702(d). SBA believes that this provision clarifies this issue and utilizes a definition that is most commonly used in the market and is therefore consistent with generally accepted market practice. In addition, SBA's regulations have always given present effect to stock options when calculating an individual's or entity's ownership and control and it is thus logical and consistent to have that be the case when calculating total ownership and control of the business. This will clarify how SBA determines affiliation, ownership and control for the program.
SBA had proposed to amend its regulations relating to affiliation, solely for purposes of the SBIR and STTR programs. SBA's regulations, at § 121.103, address the principles of affiliation. Generally, affiliation exists when one business controls or has the power to control another or when a third party (or parties) controls or has the power to control both businesses. Control may arise through ownership, management, or other relationships or interactions between the parties. Affiliation is an important issue when determining size because SBA counts the receipts, employees, or other measure of the business, and includes those of all its domestic and foreign affiliates, regardless of whether the affiliates are organized for profit (13 CFR 121.103(a)(6)).
Specifically, section 5107(c)(3)(D) of the SBIR/STTR Reauthorization Act set forth an outline for affiliation with respect to those concerns that are majority-owned by VCOCs, hedge funds, or private equity firms, as well as any other business that the VCOC, hedge fund, or private equity firm has financed. In reviewing these statutory provisions, the purpose of the amendments to the SBIR and STTR programs, the purpose of the SBIR and STTR programs, and the overall goal of simplification and maximization of benefits for small businesses, SBA proposed amendments to the current affiliation rules, solely with respect to these programs. As a result, SBA proposed to address size and affiliation for the SBIR and STTR programs in § 121.702, and not in § 121.103, to avoid any confusion. In the proposed rule, SBA sought comments on its proposal to create bright-line tests for SBIR and STTR participants to apply when determining eligibility with respect to size and affiliation. In addition, SBA sought specific comments on various sections of the proposed rule relating to affiliation.
SBA believes that retaining the current minority shareholder rule would be contrary to the broader mandate of simplifying and clarifying government regulations. In fact, SBA's Office of Hearings and Appeals (OHA) has stated that there is nothing that defines these requirements in the minority shareholder rule. For example, OHA has stated that there is nothing that “defines exactly how much larger the single-largest minority interest must be `compared to other outstanding blocks of voting stock' in order to cause affiliation under 13 CFR 121.103(c)(1).”Size Appeal of SIGA Technologies, Inc., SBA No. SIZ-5201 (2011) (available at http://www.sba.gov/oha/3393). As a result, SBA has issued a final rule that takes both views into consideration and slightly amends the current minority shareholder rule to create a test for a small business to use when determining its size.
In addition, SBA has also included a separate paragraph in the rule stating that it will find affiliation under the totality of circumstances even if no one single factor for finding affiliation exist at § 121.702(c)(10). That means that SBA could find affiliation with a minority shareholder (including one that owns less than 40% equity in the SBIR/STTR awardee) if the totality of the circumstances so warrant such a finding. Consequently, we believe that the combination of all of these provisions in the final rule simultaneously helps give clearer guidance to small businesses while providing SBA with the flexibility it needs to find affiliation in those cases where businesses may be trying to game the system, which was one of the primary comments received on the rule.
However, based on this comment, SBA did believe it was important to establish a specific standard by which it may find economic dependence under the identity of interest rule. According to SBA's OHA, it “has found identity of interest based on economic dependence when one firm relies upon another for 70% or more of its receipts.”Size Appeal of Faison Office Prods., LLC, SBA No. SIZ-4834, at 10 (2007) (available at http://www.sba.gov/oha/3393). Therefore, in the final rule SBA has stated that it may find affiliation based upon economic dependence if the SBIR/STTR awardee relies upon another entity for 70% or more of its receipts.
SBA's proposed regulations for the SBIR and STTR programs stated that size and eligibility would be determined at the time of submission of the funding agreement offer and at the time of award for both Phase I and Phase II awards. SBA had requested comments on this proposal and comments on whether it should retain the current requirement that the small business certify its size and eligibility at the time of award only. Several respondents agreed with the proposed rule and stated that it was appropriate to require certification at time of offer and award. At least one respondent stated that the company should be an established business at the time it submits its proposal. Two respondents agreed that certifying at time of offer is more straightforward because it provides a date certain. Three respondents believed that SBA should require a certification at time of offer and perhaps at time of award, but not during the lifecycle of the program.
In addition, many respondents believe they do not have to be an established business entity at the time they submit the offer. These businesses should consider the fact that the U.S. Government Accountability Office (GAO) has stated the following: “It is true that a contract cannot be awarded to any entity other than the one which submitted the proposal.”Command Management Services, Inc., B-310261, B-310261.2, Dec. 14, 2007, 2008 CPD ¶ 29 (available at http://www.gao.gov/legal/index.html). GAO believed that having a different offeror and awardee may not bind any legal entity to the contract obligations or may evidence an unacceptable transfer or assignment of proposals. Trandes Corporation, B-271662, Aug. 2, 1996, 96-2 CPD ¶ 57 (available at http://www.gao.gov/legal/index.html).
SBA received one comment supporting this proposal. The respondent agreed with recertification if there has been a merger or acquisition or the contract or grant exceeds five years (which is rare for a Phase I or Phase II award). As a result, SBA has decided to adopt this proposal in the final rule. Therefore, if an SBIR or STTR awardee is acquired during performance of an SBIR or STTR funding agreement, it is permitted to continue working on the funding agreement. However, it would be required to recertify its size and ownership and control status and if it is no longer small (no longer meets the size/ownership/control requirements of the program), the agency cannot use SBIR funds for the next option on a funding agreement that is a contract or grant or for continuation of a grant. This would mean the agency could fund the award, but not using SBIR/STTR money. SBA has added this requirement to the final rule at § 121.704(b). This is modeled after the recertification provision in SBA's size standard rules. 13 CFR 121.404(g).
SBA has added this requirement to the final rule at § 121.704.
In § 121.1001(a)(4) of the proposed rule, SBA set forth who may initiate a size protest or request a formal size determination. SBA had proposed amending this section to state that a current offeror and the Associate Administrator, Investment Division may file a protest. Some of these proposed changes corresponded to the move of SBA's Office of Innovation to its Investment Division.
Second, the Office of Advocacy stated that SBA should consider allowing only the prospective offerors, among others, to file a size protest. As discussed in the preamble above, SBA amended § 121.1001(a)(4) to clarify that offerors, SBA, or the funding agreement officer may initiate a size protest or request a formal size determination. SBA's proposed rule had stated that prospective or current offerors could file a size protest. However, it was not clear who or what a prospective offeror would be, but it is clear who an actual offeror is—it is someone that actually submitted an offer or application in response to an SBIR/STTR solicitation.
1.The authority citation for 13 CFR part 121 is revised to read as follows: Authority:
2.Amend § 121.103 as follows: a. Add a new paragraph (a)(7); and
(8) These exceptions to affiliation and any others set forth in § 121.702 apply for purposes of SBA's SBIR and STTR programs.
3.Amend § 121.201 by revising paragraph (b) of footnote 11 at the end of the table “Small Business Size Standards by NAICS Industry,” to read as follows: § 121.201 What size standards has SBA identified by North American Industry Classification System codes?
(b) For purposes of the Small Business Innovation Research (SBIR) and the Small Business Technology Transfer (STTR) Programs only, a different definition has been established by law. See§ 121.702 of these regulations.
4.Revise the undesignated center heading immediately preceding § 121.701 to read as follows: Size and Eligibility Requirements for the Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) Programs
5.Revise § 121.701 to read as follows: § 121.701 What SBIR and STTR programs are subject to size and eligibility determinations and what definitions are important?
6.Revise § 121.702 to read as follows: § 121.702 What size and eligibility standards are applicable to the SBIR and STTR programs?
(iii) An individual, concern or other entity that controls one or more other concerns cannot use options, convertible securities, or agreements to appear to terminate such control before actually doing so. SBA will not give present effect to individuals', concerns' or other entities' ability to divest all or part of their ownership interest in order to avoid a finding of affiliation. (3) Affiliation based on common management. Affiliation arises where the CEO or President of a concern (or other officers, managing members, or partners who control the management of the concern) also controls the management of one or more other concerns. Affiliation also arises where a single individual, concern, or entity that controls the board of directors of one concern also controls the board of directors or management of one or more other concerns.
7.Revise § 121.704 to read as follows: § 121.704 When does SBA determine the size and eligibility status of a business concern?
8.Revise § 121.705 to read as follows: § 121.705 Must a business concern self-certify its size and eligibility status?
9.Amend § 121.1001 by revising paragraph (a)(4) as follows: § 121.1001 Who may initiate a size protest or request a formal size determination?
10.Amend § 121.1004 by revising paragraph (b) as follows: § 121.1004 What time limits apply to size protests?
11.Amend § 121.1008 by revising paragraph (a) to read as follows: § 121.1008 What occurs after SBA receives a size protest or request for a formal size determination?