Federal agencies with a budget in excess of $100 million for extramural R&D are required to establish and operate an SBIR program. In fiscal year 2013, agencies participating in the SBIR program were required to spend at least 2.7 percent of their extramural R&D budgets on SBIR awards. Currently, 11 agencies participate in the SBIR program: the Departments of Agriculture, Commerce, Defense, Education, Energy (DOE), Health and Human Services (HHS), Homeland Security, and Transportation, and the Environmental Protection Agency, National Aeronautics and Space Administration, and National Science Foundation. Although each agency manages its own program, SBA plays a central administrative and oversight role. The SBIR program includes the following three phases: In phase I, agencies make awards to small businesses to determine the scientific and technical merit and feasibility of ideas that appear to have commercial potential. Phase I awards normally do not exceed $150,000. For SBIR, work in phase I generally lasts 6 to 9 months. In phase II, small businesses with phase I projects that demonstrate scientific and technical merit and feasibility, in addition to commercial potential, may compete for awards of up to $1 million to continue the R&D for an additional period, normally not to exceed 2 years. Phase III is for small businesses to pursue commercialization of technology developed in prior phases. Phase III work derives from, extends, or completes an effort made under prior phases, but it is funded by sources other than the SBIR program. In this phase, small businesses are expected to raise additional funds from private investors, the capital markets, or from non-SBIR funding sources within the government. While SBIR funding cannot be used for phase III, agencies can participate in phase III by, for example, purchasing the technology developed in prior phases. SBA’s Office of Investment and Innovation is responsible for overseeing and coordinating the participating agencies’ efforts for the SBIR program by setting overarching policy and issuing policy directives, collecting program data, reviewing agency progress, and reporting annually to Congress, among other responsibilities. As part of its oversight and coordination role, SBA issued an updated SBIR Policy Directive in January 2014. The directive explains and outlines requirements for agencies’ implementation of the SBIR program. The policy directive includes information on program eligibility, proposal requirements, terms of agreement for SBIR awards, and responsibilities of SBA and participating agencies for the program. Each participating agency must manage its SBIR program in accordance with program laws, regulations, and the policy directive. Each participating agency has considerable flexibility to design and manage the specifics of the program, such as determining research topics, selecting award recipients, and administering funding agreements. All of the agencies follow the same general process to obtain proposals from and make awards to small businesses for the SBIR program. At least annually, each participating agency issues a solicitation requesting proposals for projects in topic areas determined by the agency. Each agency uses its own process to review proposals and determine which proposals should receive awards. Also, each agency determines whether the funding for awards will be provided as grants or contracts. The NDAA amended the SBIR program to permit agencies to allow participation by majority-owned portfolio companies, and the act imposes certain requirements on such companies and participating agencies. As discussed, before awarding SBIR funds to majority-owned portfolio companies, agencies must submit to SBA and Congress a written determination. The NDAA also imposes statutory caps on the percentage of participating agencies’ SBIR funds that may be awarded to majority- owned portfolio companies—25 percent for NIH, DOE, and the National Science Foundation, and 15 percent for the other participating agencies. If an agency awards more than the percentage of the funds set by the statutory cap, the agency must transfer any amount in excess of the cap from its non-SBIR R&D funds to the agency’s SBIR funds. Additionally, agencies may not use investment of venture capital or investment from hedge funds or private equity firms as a criterion for the award of contracts under the SBIR program. The NDAA also requires all majority- owned portfolio companies to register as such with SBA and indicate their majority-owned portfolio company status in any SBIR application. Finally, the NDAA required SBA to update the SBIR Policy Directive to conform to NDAA amendments, such as majority-owned portfolio company participation in the program. In 2013, HHS and DOE each provided a written determination to SBA and Congress prior to making SBIR awards to majority-owned portfolio companies. More specifically, HHS’s written determination covered one of its four SBIR subunits, NIH, which according to agency officials accounted for about 98 percent of the HHS SBIR funds in fiscal year 2013. DOE’s written determination covered one of its two subunits that participate in SBIR, the Advanced Research Projects Agency-Energy (ARPA-E), which according to agency officials accounted for about 4 percent of the DOE SBIR awards in fiscal year 2013.officials told us that by opening their SBIR programs to majority-owned NIH and ARPA-E portfolio companies, they would help ensure that they received the highest quality applications with the best scientific research, regardless of whether a small business has venture capital support. In addition, NIH officials said that allowing majority-owned portfolio companies to participate in SBIR would increase the flexibility for SBIR companies to seek additional investment sources that would help support SBIR’s goal of commercialization. As part of its written determination, NIH cited a 2009 National Academy of Sciences study, whose findings suggested that the most commercially promising companies were those that were repeatedly selected by both NIH for their promising technologies and by venture capital investors for their commercial potential. A few majority-owned portfolio companies have participated in SBIR since SBA’s final rule implementing the NDAA’s changes to the SBIR eligibility requirements took effect in January 2013. NIH and ARPA-E opened their solicitations to majority-owned portfolio companies in April 2013 and June 2013, respectively. through September 2014 (end of fiscal year 2014), these subunits issued 68 SBIR solicitations, of which 56 were open to majority-owned portfolio companies. More specifically, ARPA-E opened one solicitation to majority-owned portfolio companies that covered both fiscal years 2013 and 2014, and NIH opened 55 solicitations to majority-owned portfolio companies during fiscal years 2013 and 2014. From October 2012 (start of fiscal year 2013) NIH and ARPA-E, along with SBA, have used various means to inform majority-owned portfolio companies about the eligibility changes in their SBIR programs. On its SBIR website, SBA identifies the agencies that have opted to allow majority-owned portfolio companies to participate in their SBIR programs. According to NIH and ARPA-E officials, their solicitations now specifically state that majority-owned portfolio companies may participate. Further, NIH officials told us that they e-mailed approximately 15,000 subscribers, announcing the change in their agency’s eligibility requirements. awards made comprise less than 1 percent of NIH’s and ARPA-E’s SBIR applications and awards. ARPA-E and NIH collectively received a total of 20 applications from majority-owned portfolio companies in fiscal years 2013 and 2014, compared to 11,906 applications from applicants that were not majority-owned portfolio companies. In addition, these two subunits made 12 SBIR awards to majority-owned portfolio companies. Specifically, ARPA-E made 2 SBIR awards to two majority-owned portfolio companies, which included one phase I award to one company and another award that included multiple phases to another company.In addition, NIH made awards to 10 majority-owned portfolio companies that consisted of 7 phase I awards, and 3 phase II awards. ARPA-E and NIH officials told us that it was too early for them to evaluate the impact of including majority-owned portfolio companies in their SBIR programs—such as how the composition of applicants and awardees might change—but said that this change has not created any administrative problems or burdens. The officials from both subunits told us that they did not encounter any challenges completing their written determination, updating their data systems, and monitoring their compliance with the statutory cap. ARPA-E is the only DOE subunit using the majority-owned portfolio company funding option, and so under the statute, it could potentially award up to 25 percent of DOE’s total SBIR funds to such companies. DOE and ARPA-E officials told us they administer the cap at the subunit level—meaning that ARPA-E may award up to 25 percent of its SBIR funds to majority-owned portfolio companies. According to ARPA-E officials, for fiscal year 2013, ARPA-E made approximately $7 million in SBIR awards, of which about $1.7 million (or nearly 25 percent of its SBIR awards) was awarded to a majority-owned portfolio company. For fiscal year 2014, ARPA-E officials told us that the subunit was just under its fiscal year 2014 internal cap of 25 percent of its SBIR funds. NIH consists of 27 institutes and centers, and 24 institutes and centers participate in the SBIR program. NIH officials told us that they are applying the 25 percent statutory cap to each institute and center. Officials told us that NIH as a whole was not close to its 25 percent statutory cap for fiscal year 2014, having awarded about $4.5 million to majority-owned portfolio companies, which was about 0.68 percent of the agency’s $663 million SBIR award obligations for fiscal year 2014. Representatives from four majority-owned portfolio companies that received NIH or ARPA-E SBIR awards told us that their SBIR awards have allowed them to conduct new research that would otherwise not have been undertaken.