The “8(a) Program” for Small Businesses Owned and Controlled by the Socially and Economically Disadvantaged: Legal Requirements and Issues
Released: 2016-01-06T00:00:00

Summary: Commonly known as the "8(a) Program," the Minority Small Business and Capital Ownership Development Program is one of several federal contracting programs for small businesses. The 8(a) Program provides participating small businesses with training, technical assistance, and contracting opportunities in the form of set-asides and sole-source awards. A "set-aside" is an acquisition in which only certain contractors may compete, while a sole-source award is a contract awarded, or proposed for award, without competition. In FY2014, the federal government spent over $16 billion on contracts and subcontracts with 8(a) firms. Other programs provide similar assistance to other types of small businesses (e.g., women-owned, HUBZone).

Eligibility for the 8(a) Program is generally limited to small businesses "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" that demonstrate "potential for success." Each of these terms is further defined by the Small Business Act, regulations promulgated by the Small Business Administration (SBA), and judicial and administrative decisions.

A "business" is generally a for-profit entity that has a place of business located in the United States and operates primarily within the United States or makes a significant contribution to the U.S. economy by paying taxes or using American products, materials, or labor. A business is "small" if it is independently owned and operated; is not dominant in its field of operations; and meets any definitions or standards established by the Administrator of Small Business. Ownership is "unconditional" when it is not subject to any conditions precedent or subsequent, executory agreements, or similar limitations. "Control" is not the same as ownership and includes both strategic policy setting and day-to-day administration of business operations.

Members of certain racial and ethnic groups are presumed to be socially disadvantaged, although individuals who do not belong to these groups may prove they are also socially disadvantaged. To be economically disadvantaged, an individual must have a net worth of less than $250,000 (excluding ownership in the 8(a) firm and equity in one's primary residence) at the time of entry into the program. This amount increases to $750,000 for continuing eligibility. In determining whether an applicant has good character, SBA looks for criminal conduct, violations of SBA regulations, or debarment or suspension from federal contracting. For a firm to have "potential for success," it generally must have been in business in the field of its primary industry classification for two years immediately prior to applying to the program. However, small businesses owned by Alaska Native Corporations, Community Development Corporations, Indian tribes, and Native Hawaiian Organizations are eligible for the 8(a) Program under somewhat different terms.

The 8(a) Program has periodically been challenged on the grounds that the presumption that members of certain racial and ethnic groups are disadvantaged violates the constitutional guarantee of equal protection. The outcomes in early challenges to the program varied, with some courts finding that the plaintiffs lacked standing because they were not economically disadvantaged. Most recently, two federal district court decisions found that the program is not unconstitutional on its face because (1) "breaking down barriers to minority business development created by discrimination and its lingering effects" constitutes a compelling government interest; (2) the government had a strong basis in evidence for concluding that race-based action was necessary to further this interest; and (3) the 8(a) Program is narrowly tailored to "minimize the burden on non-minority firms." However, in one of these cases, the court did find that the program was unconstitutional as applied in the military simulation and training industry because the government conceded it had no evidence of discrimination in this industry. The decision in one case was appealed. The litigation in the other has reportedly been settled.


paragraphs: C ommonly known as the "8(a) Program," the Minority Small Business and Capital Ownership Development Program is one of several federal contracting programs for small businesses. The 8(a) Program provides participating small businesses with training, technical assistance, and contracting opportunities in the form of set-asides and sole-source awards. A "set-aside" is an acquisition in which only certain contractors may compete, while a sole-source award is a contract awarded, or proposed for award, without competition. Eligibility for the 8(a) Program is generally limited to small businesses "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" that demonstrate "potential for success." However, small businesses owned by Alaska Native Corporations (ANCs), Community Development Corporations (CDCs), Indian tribes, and Native Hawaiian Organizations (NHOs) are eligible for the 8(a) Program under somewhat different terms. In FY2014, the federal government spent over $16 billion on contracts and subcontracts with 8(a) firms. Other programs provide similar assistance to other types of small businesses (e.g., women-owned, HUBZone). 

The 8(a) and other programs for small businesses are of perennial interest to Congress, given that 

It is the declared policy of the Congress that the Government should aid, counsel, assist, and protect, insofar as is possible, the interests of small-business concerns in order to preserve free competitive enterprise, to insure that a fair proportion of the total purchases and contracts or subcontracts for property and services for the Government (including but not limited to contracts or subcontracts for maintenance, repair, and construction) be placed with small-business enterprises, to insure that a fair proportion of the total sales of Government property be made to such enterprises, and to maintain and strengthen the overall economy of the Nation. 

However, recent Congresses have had particular interest in the 8(a) Program because of the recession of 2007-2009, its effects on minority-owned small businesses, and small businesses' role in job creation. 

This report provides a brief history of the 8(a) Program, summarizes key requirements, and discusses legal challenges alleging that the program's presumption that members of certain racial and ethnic groups are socially disadvantaged violates the constitutional guarantee of equal protection. 
subsections: section_title: Historical Development
subsections: section_title: Origins of the 8(a) Program
paragraphs: The current 8(a) Program resulted from the merger of two distinct types of federal programs: those seeking to assist small businesses in general and those seeking to assist racial and ethnic minorities. This merger first occurred, as a matter of executive branch practice, in 1967 and was given a statutory basis in 1978. 
subsections: section_title: Federal Programs for Small Businesses
paragraphs: Congress first authorized a federal agency to enter into prime contracts with other agencies and subcontract with small businesses for the performance of these contracts in 1942. The agency was the Smaller War Plants Corporation (SWPC), which was created partly for this purpose, and Congress gave it these powers in order to ameliorate small businesses' financial difficulties while also "mobiliz[ing] the productive facilities of small business in the interest of successful prosecution of the war." The SWPC's subcontracting authority expired along with the SWPC at the end of the World War II. However, in 1951, at the start of the Korean War, Congress created the Small Defense Plants Administration (SDPA), which was generally given the same powers that the SWPC had exercised. Two years later, in 1953, Congress transferred the SDPA's subcontracting authorities, among others, to the newly created Small Business Administration, with the intent that the SBA would exercise these powers in peacetime, as well as in wartime. When the Small Business Act of 1958 transformed the SBA into a permanent independent agency, this subcontracting authority was included in Section 8(a) of the act. At its inception, the SBA's subcontracting authority was not limited to small businesses owned and controlled by the socially and economically disadvantaged. Under the original Section 8(a), the SBA could contract with any "small-business concerns or others," but the SBA seldom, if ever, employed this subcontracting authority, focusing instead upon its loan and other programs.

section_title: Federal Programs for Racial and Ethnic Minorities
paragraphs: Federal programs for racial and ethnic minorities began developing at approximately the same time as those for small businesses, although there was initially no explicit overlap between them. The earliest programs were created by executive orders, beginning with President Franklin Roosevelt's order on June 25, 1941, requiring that all federal agencies include a clause in defense-related contracts prohibiting contractors from discriminating on the basis of "race, creed, color, or national origin." Subsequent Presidents followed Roosevelt's example, issuing a number of executive orders seeking to improve the employment opportunities of members of various racial and ethnic groups. These executive branch initiatives took on new importance after the Kerner Commission's report on the causes of the urban riots of 1966 concluded that African Americans would need "special encouragement" to enter the economic mainstream. 

Presidents Lyndon Johnson and Richard Nixon laid the foundations for the present 8(a) Program in the hope of providing such "encouragement." Johnson created the President's Test Cities Program (PTCP), which involved a small-scale use of the SBA's authority under Section 8(a) to award contracts to firms willing to locate in urban areas and hire unemployed individuals, largely African Americans, or sponsor minority-owned businesses by providing capital or management assistance. However, under the PTCP, small businesses did not have to be minority-owned to receive subcontracts under Section 8(a). Nixon's program was larger and focused more specifically on minority-owned small businesses. During the Nixon Administration, the SBA promulgated its earliest regulations for the 8(a) Program. In 1970, the first of these regulations articulated the SBA's policy of using Section 8(a) to "assist small concerns owned by disadvantaged persons to become self-sufficient, viable businesses capable of competing effectively in the market place." A later regulation, promulgated in 1973, defined "disadvantaged persons" as including, but not limited to, "black Americans, Spanish-Americans, oriental Americans, Eskimos, and Aleuts." However, the SBA lacked explicit statutory authority for focusing its 8(a) Program on minority-owned businesses until 1978, although courts generally rejected challenges alleging that SBA's implementation of the program was unauthorized because it was "not specifically mentioned in statute."

section_title: 1978 Amendments to the Small Business Act and Subsequent Regulations
paragraphs: In 1978, Congress amended the Small Business Act to give the SBA statutory authority for its 8(a) Program for minority-owned businesses. Under the 1978 amendments, SBA can only subcontract under Section 8(a) with "socially and economically disadvantaged small business concerns," or businesses which are least 51% owned by one or more socially and economically disadvantaged individuals and whose management and daily operations are controlled by such individual(s).

The 1978 amendments established a basic definition of "socially disadvantaged individuals," which included those who have been "subjected to racial or ethnic prejudice or cultural bias because of their identity as a member of a group without regard to their individual qualities." They also included congressional findings that "Black Americans, Hispanic Americans, Native Americans, and other minorities" are socially disadvantaged. Thus, if an individual was a member of one of these groups, he or she was presumed to be socially disadvantaged. Otherwise, the amendments were generally seen to grant the SBA discretion to recognize additional groups or individuals as socially disadvantaged based upon criteria promulgated in regulations. Under these regulations, which include a three-part test for determining whether minority groups not mentioned in the amendment's findings are disadvantaged, the SBA recognized the racial or ethnic groups listed in Table 1 as socially disadvantaged for purposes of the 8(a) Program. The regulations also established standards of evidence to be met by individuals demonstrating personal disadvantage and procedures for rebutting the presumption of social disadvantage accorded to members of recognized minority groups.

The 1978 amendments also defined "economically disadvantaged individuals," for purposes of the 8(a) Program, as "those socially disadvantaged individuals whose ability to compete in the free enterprise system has been impaired due to diminished capital and credit opportunities as compared to others in the same business area who are not socially disadvantaged." Later, the SBA established by regulation that personal net worth of less than $250,000 at the time of entry into the 8(a) Program ($750,000 for continuing eligibility) constitutes economic disadvantage. 

section_title: Expansion of the 8(a) Program to Include "Disadvantaged" Groups
paragraphs: Although the 8(a) Program was originally established for the benefit of disadvantaged individuals , in the 1980s, Congress expanded the program to include small businesses owned by four "disadvantaged" groups . 

The first owner-group to be included was Community Development Corporations (CDCs). A CDC is

a nonprofit organization responsible to residents of the area it serves which is receiving financial assistance under part A of this subchapter [42 U.S.C. §§9805 et seq .] and any organization more than 50 percent of which is owned by such an organization, or otherwise controlled by such an organization, or designated by such an organization for the purpose of this subchapter [42 U.S.C. §§9801 et seq .].

Congress created CDCs with the Community Development Act of 1981 and instructed the SBA to issue regulations ensuring that CDCs could participate in the 8(a) Program.

In 1986, two additional owner-groups—Indian tribes and Alaska Native Corporations (ANCs)—became eligible for the 8(a) Program when Congress passed legislation providing that firms owned by Indian tribes—which include ANCs —were to be deemed "socially disadvantaged" for purposes of the 8(a) Program. In 1992, ANCs were further deemed to be "economically disadvantaged."

The final owner-group, that of Native Hawaiian Organizations (NHOs), was recognized in 1988. An NHO is defined as

any community service organization serving Native Hawaiians in the State of Hawaii which (A) is a nonprofit corporation that has filed articles of incorporation with the director (or the designee thereof) of the Hawaii Department of Commerce and Consumer Affairs, or any successor agency, (B) is controlled by Native Hawaiians, and (C) whose business activities will principally benefit such Native Hawaiians.

section_title: Current Requirements
paragraphs: Under the current 8(a) Program, participating firms are eligible for set-asides or sole-source awards of federal contracts, as well as training and technical assistance from SBA. Detailed statutory and regulatory requirements govern eligibility for the Program; set-asides and sole-source awards to 8(a) firms; and related issues. These requirements are generally the same for all participants in the 8(a) Program, although there are instances where there are "special rules" for 8(a) firms owned by groups. An Appendix to this report compares the requirements applicable to individual owners of 8(a) firms to those applicable to groups owning 8(a) firms (i.e., ANCs, CDCs, NHOs, and Indian tribes).
subsections: section_title: Requirements In General
subsections: section_title: Eligibility for the 8(a) Program
paragraphs: Eligibility for the 8(a) Program is limited to "small business[es] which [are] 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 demonstrate[] potential for success." Each of these terms is further defined by the Small Business Act; regulations that the SBA has promulgated to implement Section 8(a); and judicial and administrative decisions. The eligibility requirements are the same at the time of entry into the 8(a) Program and throughout the Program unless otherwise noted. 
subsections: section_title: "Business"
paragraphs: Except for small agricultural cooperatives, a "business" is a for-profit entity that has a place of business located in the United States and operates primarily within the United States or makes a significant contribution to the U.S. economy by paying taxes or using American products, materials, or labor. For purposes of the 8(a) Program, businesses may take the form of individual proprietorships, partnerships, limited liability companies, corporations, joint ventures, associations, trusts, or cooperatives.

section_title: "Small"
paragraphs: A business is "small" if it is independently owned and operated; is not dominant in its field of operations; and meets any definitions or standards established by the Administrator of the SBA. These standards focus primarily upon the size of the business as measured by the number of employees or its gross income, but they also take into account the size of other businesses within the same industry. For example, businesses in the field of "scheduled passenger air transportation" are "small" if they have fewer than 1,500 employees, while those in the data processing field are "small" if they have a gross income of less than $32.5 million. 

Affiliations between businesses, or relationships allowing one party control or the power of control over another, generally count in size determinations, with the SBA considering "the receipts, employees, or other measure of size of the concern whose size is at issue and all of its domestic and foreign affiliates, regardless of whether the affiliates are organized for profit." Businesses can thus be determined to be other than small because of their involvement in joint ventures, subcontracting arrangements, or franchise or license agreements, among other things, provided that their income or personnel numbers, plus those of their affiliate(s), are over the pertinent size threshold. 

section_title: "Unconditionally owned and controlled"
paragraphs: Participants in the 8(a) Program must be "at least 51% unconditionally and directly owned by one or more socially and economically disadvantaged individuals who are citizens of the United States" unless they are owned by an ANC, CDC, NHO, or Indian tribe. Ownership is "unconditional" when it is not subject to any conditions precedent or subsequent, executory agreements, voting trusts, restrictions on or assignments of voting rights, or other arrangements that could cause the benefits of ownership to go to another entity. Ownership is "direct" when the disadvantaged individuals own the business in their own right and not through an intermediary (e.g., ownership by another business entity or by a trust that is owned and controlled by one or more disadvantaged individuals). Non-disadvantaged individuals and non-participant businesses that own at least 10% of an 8(a) business may generally own no more than 10 to 20% of any other 8(a) firm. Non-participant businesses that earn the majority of their revenue in the same or similar line of business are likewise barred from owning more than 10% (increasing to 20%-30% in certain circumstances) of another 8(a) firm. 

Participants must also be controlled by one or more disadvantaged individuals. "Control is not the same as ownership" and includes both strategic policy setting and day-to-day management and administration of business operations. Management and daily business operations must also be conducted by one or more disadvantaged individuals unless the 8(a) business is owned by an ANC, CDC, NHO, or Indian tribe. These individuals must have managerial experience "of the extent and complexity needed to run the concern" and generally must devote themselves full-time to the business "during the normal working hours of firms in the same or similar line of business." A disadvantaged individual must hold the highest officer position within the business. Non-disadvantaged individuals may otherwise be involved in the management of an 8(a) business, or may be stockholders, partners, limited liability members, officers, or directors of an 8(a) business. However, they may not exercise actual control or have the power to control the firm or its disadvantaged owner(s), or receive compensation greater than that of the highest-paid officer (usually the CEO or President) without SBA approval. 

section_title: "Socially disadvantaged individual"
paragraphs: Socially disadvantaged individuals are "those who have been subjected to racial or ethnic prejudice or cultural bias within American society because of their identities as members of groups and without regard to their individual qualities." Members of designated groups, listed in Table 1 , are entitled to a rebuttable presumption of social disadvantage for purposes of the 8(a) Program, although this presumption can be overcome with "credible evidence to the contrary." Individuals who are not members of designated groups must prove they are socially disadvantaged by a preponderance of the evidence. Such individuals must show (1) at least one objective distinguishing feature that has contributed to social disadvantage (e.g., race, ethnic origin, gender, physical handicap, long-term residence in an environment isolated from mainstream American society); (2) personal experiences of substantial and chronic social disadvantage in American society; and (3) negative impact on entry into or advancement in the business world. In assessing the third factor, the SBA will consider all relevant evidence produced by the applicant, but must consider the applicant's education, employment, and business history to see if the totality of the circumstances shows disadvantage. Groups not included in Table 1 may obtain listing by demonstrating disadvantage by a preponderance of the evidence.

section_title: "Economically disadvantaged individual"
paragraphs: Economically disadvantaged individuals are "socially disadvantaged individuals whose ability to compete in the free enterprise system has been impaired due to diminished capital and credit opportunities as compared to others in the same or similar line of business who are not socially disadvantaged." Individuals claiming economic disadvantage must describe it in a personal statement and submit financial documentation. The SBA will examine their personal income for the past three years, their personal net worth, and the fair market value of the assets they own. However, principal ownership in a prospective or current 8(a) business is generally excluded when calculating net worth, as is equity in individuals' primary residence. For initial eligibility, applicants to the 8(a) Program must have a net worth of less than $250,000. For continued eligibility, net worth must be less than $750,000.

section_title: "Good character"
paragraphs: In determining whether an applicant to, or participant in, the 8(a) Program possesses "good character," the SBA looks for criminal conduct; violations of SBA regulations; current debarment or suspension from government contracting; managers or key employees who lack business integrity; and the knowing submission of false information to the SBA. 

section_title: "Demonstrated potential for success"
paragraphs: For a firm to have demonstrated potential for success, it generally must have been in business in the field of its primary industry classification for at least two full years immediately prior to the date of its application to the 8(a) Program. However, the SBA may grant a waiver allowing firms that have been in business for less than two years to enter the 8(a) Program when (1) the disadvantaged individuals upon whom eligibility is based have substantial business management experience; (2) the business has demonstrated the technical experience necessary to carry out its business plan with a substantial likelihood of success; (3) the firm has adequate capital to sustain its operations and carry out its business plan; (4) the firm has a record of successful performance on contracts in its primary field of operations; and (5) the firm presently has, or can demonstrate its ability to timely obtain, the personnel, facilities, equipment, and other resources necessary to perform contracts under Section 8(a).

section_title: Set-Asides and Sole-Source Awards Under Section 8(a)
paragraphs: Section 8(a) of the Small Business Act authorizes agencies to award contracts for goods or services, or to perform construction work, to the SBA for subcontracting to small businesses participating in the 8(a) Program. A "set-aside" is an acquisition in which only certain contractors may compete, while a sole-source award is a contract awarded, or proposed for award, without competition. Although the Competition in Contracting Act (CICA) generally requires that agencies obtain "full and open competition through the use of competitive procedures" when procuring goods or services, set-asides and sole-source awards are both permissible under CICA. In fact, an 8(a) set-aside is a recognized competitive procedure. Agencies are effectively encouraged to subcontract through the 8(a) Program because there are government-wide and agency-specific goals regarding the percentage of procurement dollars awarded to "small disadvantaged businesses," among others. Awards made via set-asides or on a sole-source basis count toward these goals, and businesses participating in the 8(a) Program are considered small disadvantaged businesses.
subsections: section_title: Discretion to Subcontract Through the 8(a) Program
paragraphs: There are few limits on agency discretion to subcontract through the 8(a) Program. However, the SBA is prohibited by regulation from accepting procurements for award under Section 8(a) when

1. the procuring agency issued a solicitation for or otherwise expressed publicly a clear intent to reserve the procurement as a set-aside for small businesses not participating in the 8(a) Program prior to offering the requirement to SBA for award as an 8(a) contract; 2. the procuring agency competed the requirement among 8(a) firms prior to offering the requirement to SBA and receiving SBA's acceptance of it; or 3. the SBA makes a written determination that "acceptance of the procurement for 8(a) award would have an adverse impact on an individual small business, a group of small businesses located in a specific geographical location, or other small business programs."

Additionally, SBA is barred from awarding an 8(a) contract, either via a set-aside or on a sole-source basis, "if the price of the contract results in a cost to the contracting agency which exceeds a fair market price." 

Otherwise, agency officials may offer contracts to the SBA "in [their] discretion," and the SBA may accept requirements for the 8(a) Program "whenever it determines such action is necessary or appropriate." The courts and the Government Accountability Office (GAO) will generally not hear protests of agencies' determinations regarding whether to procure specific requirements through the 8(a) Program unless it can be shown that government officials acted in bad faith or contrary to federal law.

section_title: Monetary Thresholds and Subcontracting Mechanism Under 8(a)
paragraphs: Once the SBA has accepted a contract for the 8(a) Program, the contract is awarded either through a set-aside or on a sole-source basis, with the amount of the contract generally determining the acquisition method used. When the anticipated total value of the contract, including any options, is less than $4 million ($7 million for manufacturing contracts), the contract is normally awarded without competition. In contrast, when the anticipated value of the contract exceeds $4 million ($7 million for manufacturing contracts), the contract generally must be awarded via a set-aside with competition limited to 8(a) firms so long as there is a reasonable expectation that at least two eligible and responsible 8(a) firms will submit offers and the award can be made at fair market price. Sole-source awards of contracts valued at $4 million ($7 million or more for manufacturing contracts) may only be made when (1) there is not a reasonable expectation that at least two eligible and responsible 8(a) firms will submit offers at a fair market price, or (2) the SBA accepts the requirement on behalf of an 8(a) firm owned by an Indian tribe, an ANC or, in the case of Department of Defense contracts, an NHO. Requirements valued at more than $4 million ($7 million for manufacturing contracts) cannot be divided into several acquisitions at lesser amounts in order to make sole-source awards. 

section_title: Other Requirements
paragraphs: Other key requirements of the 8(a) Program include the following: 

Inability to protest an 8(a) firm's eligibility for an award : When the SBA makes or proposes an award to an 8(a) firm, that firm's eligibility for the award cannot be challenged or protested as part of the solicitation or proposed contract award. Instead, information concerning a firm's eligibility for the 8(a) Program must be submitted to SBA in accordance with separate requirements contained in Section 124.517 of Title 13 of the Code of Federal Regulations . Maximum of nine years in the 8(a) Program : Firms may participate in the 8(a) Program for no more than nine years from the date of their admission into the Program, although they may be terminated or graduate from the program before nine years have passed. One-time eligibility for the 8(a) Program : Once a firm or a disadvantaged individual upon whom a firm's eligibility was based has exited the 8(a) Program after participating in it for any length of time, neither the firm nor the individual is generally eligible to participate in the 8(a) Program again. When at least 50% of the assets of one firm are the same as those of another firm, the firms are considered identical for purposes of eligibility for the 8(a) Program. Limits on ownership of 8(a) firms by family members of current or former 8(a) firm owners : Individuals generally may not use their disadvantaged status to qualify a firm for the 8(a) Program if the individual has an immediate family member who is using, or has used, his or her disadvantaged status to qualify a firm for the 8(a) Program. Limits on the amount of 8(a) contracts that a firm may receive : 8(a) firms may generally not receive additional sole-source awards once they have received a combined total of competitive and sole-source awards in excess of $100 million, in the case of firms whose size is based on their number of employees, or in excess of an amount equivalent to the lesser of (1) $100 million or (2) five times the size standard for the industry, in the case of firms whose size is based on their revenues. Additionally, 8(a) firms in the "transitional stage," or the last five years of participation, must achieve annual targets for the amount of revenues they receive from non-8(a) sources. These targets increase over time, with firms required to attain 15% of their revenue from non-8(a) sources in the fifth year; 25% in the sixth year; 35% in the seventh year; 45% in the eight year; and 55% in the ninth year. Firms that do not display the relevant percentages of revenue from non-8(a) sources are ineligible for sole-source 8(a) contracts "unless and until" they correct the situation. Limitations on subcontracting : Although not only under the authority of Section 8(a) of the Small Business Act or applicable only to 8(a) businesses, limitations on subcontracting require that small businesses receiving contracts under a set-aside perform an amount of work that equals certain minimum percentages of the amount paid under the contract. Specifically, small businesses must generally perform at least 50% of the costs of the contract incurred for personnel with its own employees, in the case of service contracts; and at least 50% of the cost of manufacturing supplies or products (excluding the cost of materials), in the case of manufacturing contracts. 

section_title: Requirements for Tribally, ANC-, NHO-, and CDC-Owned Firms
paragraphs: Tribes, ANCs, NHOs or CDCs themselves generally do not participate in the 8(a) Program. Rather, businesses that are at least 51% owned by such entities participate in the 8(a) Program, although the rules governing their participation are somewhat different from those for the 8(a) Program generally. 
subsections: section_title: Eligibility for the 8(a) Program
subsections: section_title: "Small"
paragraphs: Firms owned by Indian tribes, ANCs, NHOs, and CDCs must be "small" under the SBA's size standards. However, certain affiliations with the owning entity or other business enterprises of that entity are excluded in size determinations unless the Administrator of Small Business determines that a small business owned by an ANC, CDC, NHO, or Indian tribe "[has] obtained, or [is] likely to obtain, a substantial unfair competitive advantage within an industry category" because of such exclusions. Other affiliations of small businesses owned by ANCs, CDCs, NHOs, and Indian tribes can count in size determinations, and ANC-owned firms, in particular, have been subjected to early graduation from the 8(a) Program because they exceeded the size standards. 

section_title: "Business"
paragraphs: Firms owned by ANCs, CDCs, NHOs, and Indian tribes must be "businesses" under the SBA's definition. Although ANCs themselves may be for-profit or nonprofit, ANC-owned businesses must be for-profit to participate in the 8(a) Program. 

section_title: "Unconditionally owned and controlled"
paragraphs: Firms owned by ANCs, CDCs, NHOs, or Indian tribes must be unconditionally owned and substantially controlled by the ANC, CDC, NHO, or Indian tribe, respectively. However, under SBA regulations, tribally or ANC-owned firms may be managed by individuals who are not members of the tribe or Alaska Natives if the firm can demonstrate:

that the Tribe [or ANC] can hire and fire those individuals, that it will retain control of all management decisions common to boards of directors, including strategic planning, budget approval, and the employment and compensation of officers, and that a written management development plan exists which shows how Tribal members will develop managerial skills sufficient to manage the concern or similar Tribally-owned concerns in the future. 

NHO-owned firms must demonstrate that the NHO controls the board of directors. However, the individual who is responsible for the NHO-owned firm's day-to-day management need not establish personal social and economic disadvantage. CDCs are to be managed and have their daily operations conducted by individuals with "managerial experience of an extent and complexity needed to run the [firm]."

section_title: "Socially disadvantaged"
paragraphs: As owners of prospective or current 8(a) firms, Indian tribes, ANCs, NHOs, and CDCs are all presumed to be socially disadvantaged. 

section_title: "Economically disadvantaged"
paragraphs: By statute, ANCs are deemed to be economically disadvantaged, and CDCs are similarly treated as economically disadvantaged. Indian tribes and NHOs, in contrast, must establish economic disadvantage at least once. Indian tribes must present data on, among other things, the number of tribe members; the tribal unemployment rate; the per capita income of tribe members; the percentage of the local Indian population above the poverty level; the tribe's access to capital; the tribe's assets as disclosed in current financial statements; and all businesses wholly or partially owned by tribal enterprises or affiliates, as well as their primary industry classification. However, once a tribe has established that it is economically disadvantaged for purposes of one 8(a) business, it need not reestablish economic disadvantage in order to have other businesses certified for the 8(a) Program unless the Director of the Office of Business Development requires it to do so. 

When determining whether an NHO is economically disadvantaged, SBA will consider "the individual economic status of NHO's members," the majority of whom "must qualify as economically disadvantaged" under the same standards as individual applicants to the 8(a) Program. Specifically:

For the first 8(a) applicant owned by a particular NHO, individual NHO members must meet the same initial eligibility economic disadvantage thresholds as individually-owned 8(a) applicants. For any additional 8(a) applicant owned by the NHO, individual NHO members must meet the economic disadvantage thresholds for continued 8(a) eligibility.

section_title: "Good character"
paragraphs: When an organization owns an actual or prospective 8(a) firm, all members, officers, or employees of that organization are generally not required to show good character. The regulations governing tribally and ANC-owned firms explicitly address the issue, stating that the "good character" requirement applies only to officers or directors of the firm, or shareholders owning more than a 20% interest. NHO-owned firms may be subject to the same requirements in practice. With CDC-owned firms, the firm itself and "all of its principals" must have good character.

section_title: "Demonstrated potential for success"
paragraphs: Firms owned by ANCs, CDCs, NHOs, and Indian tribes may provide evidence of "potential for success" in several ways, including by demonstrating that

1. the firm has been in business for at least two years, as shown by individual or consolidated income tax returns for each of the two previous tax years showing operating revenues in the primary industry in which the firm seeks certification; 2. the individuals who will manage and control the daily operations of the firm have substantial technical and management experience; the firm has a record of successful performance on government or other contracts in its primary industry category; and the firm has adequate capital to sustain its operations and carry out its business plan; or 3. the owner-group has made a firm written commitment to support the operations of the firm and has the financial ability to do so.

The first of these ways for demonstrating potential for success is the same for individually owned firms, and the second arguably corresponds to the circumstances in which SBA may waive the requirement that individually owned firms have been in business for at least two years. There is no equivalent to the third way for individually owned firms, and some commentators have suggested that this provision could "benefit ANCs [and other owner groups] by allowing more expeditious and effortless access to 8(a) contracts for new concerns without having to staff new subsidiaries with experienced management."

section_title: Report of Benefits for Firms Owned By ANCs, Indian Tribes, NHOs, and CDCs
paragraphs: Although implementation of this requirement has been delayed, 8(a) firms owned by ANCs, CDCs, NHOs, and Indian tribes must submit information annually to the SBA showing

how the Tribe, ANC, NHO or CDC has provided benefits to the Tribal or native members and/or the Tribal, native or other community due to the Tribe's/ANC's/NHO's/CDC's participation in the 8(a) … program through one or more firms. This data includes information relating to funding cultural programs, employment assistance, jobs, scholarships, internships, subsistence activities, and other services provided by the Tribe, ANC, NHO or CDC to the affected community.

section_title: Set-Asides and Sole-Source Awards
paragraphs: Like other participants in the 8(a) Program, firms owned by ANCs, CDCs, NHOs, and Indian tribes are eligible for 8(a) set-asides and may receive sole-source awards valued at less than $4 million ($7 million for manufacturing contracts). However, firms owned by ANCs and Indian tribes can also receive sole-source awards in excess of $4 million ($7 million for manufacturing contracts) even when contracting officers reasonably expect that that at least two eligible and responsible 8(a) firms will submit offers and the award can be made at fair market price. NHO-owned firms may receive sole-source awards from the Department of Defense under the same conditions. 

section_title: Other Requirements
paragraphs: Firms owned by ANCs, CDCs, NHOs, and Indian tribes are governed by the same regulations as other 8(a) firms where certain of the "other requirements" are involved, including (1) inability to protest an 8(a) firm's eligibility for an award; (2) maximum of nine years in the 8(a) Program (for individual firms); and (3) limits on subcontracting. However, the requirements for such firms differ somewhat from those for other 8(a) firms where one-time eligibility for the 8(a) Program; limits on majority ownership of 8(a) firms; and limits on the amount of 8(a) contracts that a firm may receive are involved. Firms owned by ANCs, CDCs, NHOs, and Indian tribes may participate in the 8(a) Program only one time. However, unlike the disadvantaged individuals upon whom other firms' eligibility for the 8(a) Program is based, ANCs, CDCs, NHOs, and Indian tribes may confer eligibility for the 8(a) Program upon firms on multiple occasions and for an indefinite period. Additionally, although ANCs, CDCs, NHOs, and Indian tribes may not own 51% or more of a firm obtaining the majority of its revenues from the same "primary" industry in which another firm they own or owned currently operates or has operated within the past two years, there are no limits on the number of firms they may own that operate in other primary industries. Moreover, ANCs, CDCs, NHOs, and Indian tribes may own multiple firms that earn less than 50% of their revenue in the same "secondary" industries. Finally, firms owned by ANCs, CDCs, NHOs, and Indian tribes may continue to receive additional sole-source awards even after they have received a combined total of competitive and sole-source 8(a) contracts in excess of the dollar amount set forth in Section 124.519 of Title 13 of the Code of Federal Regulations , while individually owned firms may not. However, firms owned by any of these four types of entities are subject to the same requirements regarding the percentages of revenue received from non-8(a) sources at various stages of their participation in the 8(a) Program as other 8(a) firms. 

section_title: Constitutionality of the 8(a) Program
paragraphs: The 8(a) Program has periodically been challenged on the grounds that the presumption that members of certain racial and ethnic groups are disadvantaged violates the constitutional guarantee of equal protection. The outcomes in early challenges to the program varied, with some courts finding that the plaintiffs lacked standing to bring such challenges because they were not economically disadvantaged, or were otherwise ineligible for the program; and other courts finding that the program was unconstitutional as applied in specific cases. More recently, in its 2012 decision in DynaLantic Corporation v. U.S. Department of Defense , the U.S. District Court for the District of Columbia found that the 8(a) Program was not unconstitutional on its face because (1) "breaking down barriers to minority business development created by discrimination and its lingering effects" constitutes a compelling government interest; (2) the government had a strong basis in evidence for concluding that race-based action was necessary to further this interest; and (3) the 8(a) Program is narrowly tailored to "minimize the burden on non-minority firms." However, the court found that the program was unconstitutional as applied in the military simulation and training industry because the Department of Defense (DOD) conceded it had "no evidence of discrimination, either in the public or private sector, in the simulation and training industry."

Particularly in its rejection of the facial challenge to the 8(a) Program, the court emphasized certain aspects of the program's history and requirements when finding that the government had articulated a compelling interest for the program and had a strong basis in evidence for its actions. Specifically, the court rejected the plaintiff's assertion that the 8(a) Program was "not truly remedial," but rather favored "virtually all minority groups … over the larger pool of citizens," because non-minority individuals may qualify for the program, and all 8(a) applicants must demonstrate economic disadvantage. The court also noted that the history of the 8(a) program prior to 1978 (when Congress expressly authorized set-asides for disadvantaged small businesses) had evidenced that race-neutral methods were insufficient to promote contracting with minority-owned small businesses. The court further noted that the 8(a) Program was intended to be a business development program, not a means to "channel contracts" to minority firms; that Section 8(a) of the Small Business Act expressly provides that awards may be made through the 8(a) Program only when SBA determines that "such action is necessary and appropriate"; and that the act requires the President and SBA to report annually to Congress on the program, thereby ensuring that Congress has evidence as to whether there is a "continuing compelling need for the program." Similarly, in finding that the program was narrowly tailored to meet the government's interests, the court noted (1) that goals for contracting with small disadvantaged businesses are purely aspirational, and there are no penalties for failing to meet them; (2) the nine-year limits on program participation for individual owners and firms; and (3) that SBA may not accept a requirement for the 8(a) Program if it determines that doing so will have a adverse effect on another small business or group of small businesses. The court emphasized that the last two factors, in particular, helped ensure that race-conscious remedies do not "last longer than the discriminatory effects [they are] designed to eliminate," and "work the least harm possible to other innocent persons competing for the benefit."

A 2015 decision by the U.S. District Court for the District of Columbia in Rothe Development, Inc. v. Department of Defense subsequently adopted the reasoning of the DynaLantic court in finding that the 8(a) Program is not unconstitutional on its face. In so doing, the court noted the same attributes of the 8(a) Program that the DynaLantic court had emphasized. In particular, in its brief discussion, the court noted the following six factors: 

1. alternative, race-neutral remedies had proved unsuccessful in addressing the discrimination targeted here; 2. the 8(a) Program is "appropriately flexible" because it imposes no quotas and prescribes no consequences for failure to meet the aspirational goals as to the percentage of federal contract dollars awarded to small disadvantaged businesses; 3. the program is neither under- nor over-inclusive, since it "does not provide that every member of a minority group is disadvantaged"; 4. the program imposes temporal limits on individuals' participation in the program, and SBA continuously monitors participants' eligibility; 5. the aspirational goals for contracting with small disadvantaged businesses are "numerically proportionate" to the evidence regarding the availability of minority firms that are ready, able, and willing to perform government contracts; and 6. various aspects of the 8(a) Program minimize the program's burden on non-minority firms (e.g., SBA cannot accept a contract for award through the 8(a) Program if it determines that doing so would have an "adverse impact" on other small businesses).

The decision in Rothe has been appealed to the U.S. Court of Appeals for the District of Columbia Circuit. The litigation in DynaLantic , however, was reportedly settled by the parties while their appeals to the D.C. Circuit were pending.
subsections: section_title: Comparison of the Requirements Pertaining to Different Types of 8(a) Firms


Question-summary annotations: questions: question: What is the 8(a) Program?
answer: Commonly known as the "8(a) Program," the Minority Small Business and Capital Ownership Development Program is one of several federal contracting programs for small businesses.
child_questions: question: What does this program provide?
answer: The 8(a) Program provides participating small businesses with training, technical assistance, and contracting opportunities in the form of set-asides and sole-source awards.
child_questions: question: What is a set-aside?
answer: A "set-aside" is an acquisition in which only certain contractors may compete, while a sole-source award is a contract awarded, or proposed for award, without competition.

question: What is the scale of government spending on the 8(a) Program?
answer: In FY2014, the federal government spent over $16 billion on contracts and subcontracts with 8(a) firms.

question: What other programs are similar to the 8(a) Program?
answer: Other programs provide similar assistance to other types of small businesses (e.g., women-owned, HUBZone).

questions: question: What is the working definition of social disadvantage?
answer: Members of certain racial and ethnic groups are presumed to be socially disadvantaged, although individuals who do not belong to these groups may prove they are also socially disadvantaged.

question: What does it mean to be economically disadvantaged?
answer: To be economically disadvantaged, an individual must have a net worth of less than $250,000 (excluding ownership in the 8(a) firm and equity in one's primary residence) at the time of entry into the program.
child_questions: question: Why may this amount change?
answer: This amount increases to $750,000 for continuing eligibility.

question: How does SBA determine "good character"?
answer: In determining whether an applicant has good character, SBA looks for criminal conduct, violations of SBA regulations, or debarment or suspension from federal contracting.

question: How is potentiality for success determined?
answer: For a firm to have "potential for success," it generally must have been in business in the field of its primary industry classification for two years immediately prior to applying to the program.
child_questions: question: Why may some businesses not be under the same requirements?
answer: However, small businesses owned by Alaska Native Corporations, Community Development Corporations, Indian tribes, and Native Hawaiian Organizations are eligible for the 8(a) Program under somewhat different terms.