New SBA Rules On Joint Ventures and Mentor-Protégé Programs

March 2015

Spring Forward!

Well the snow is almost all gone, at least in the Washington DC area, and Spring is nearly here.  After its own hibernation, The Government Procurement Bulletin™ is back to give timely updates on changes in the government procurement legal landscape. In this edition, we review recent proposed changes to the SBA's regulations on joint ventures and mentor-protégé programs, topics we focused on in the Firm's primer Using Joint Ventures To Capture Federal Government Contracting Opportunities (January 2012). The changes, which include establishing a new SBA mentor-protégé program, are designed to expand government contracting opportunities for small businesses.

Speaking of Spring, to usher in the season, the Firm will be a sponsor of the Government Contractors Spring Soiree, hosted by our good friends at Jennifer Schaus & Associates. Registration information can be found here. So if you are in or near DC on March 23, come join us at the Kennedy Center!

Mark A. Amadeo

In February 2015, the SBA proposed a rule that will make several significant changes to its small business programs. In this edition, we are going to focus on the proposed rule changes that apply to joint ventures and to mentor-protégé programs, two issues we discussed in Using Joint Ventures To Capture Federal Government Contracting Opportunities (January 2012), which addressed the advantages of using joint ventures in federal government contracting.  We will update our primer after any rule changes become final.

Background

In September 2010, President Obama signed into law the Small Business Jobs Act of 2010 (Jobs Act), designed to protect the interests of small businesses by increasing contracting opportunities in the federal marketplace.  Under the Jobs Act, Congress authorized the SBA to establish separate mentor-protégé programs for the Service-Disabled Veteran-Owned Small Business Concern (SDVO SBC) program, the HUBZone program, and the Women-Owned Small Business (WOSB) program.  The mentor-protégé programs each were to be modeled on the SBA’s existing mentor-protégé program available to 8(a) Business Development (BD) program participants.  Then, on January 2, 2013, the President signed into law the National Defense Authorization Act for Fiscal Year 2013 (NDAA), which authorized the SBA to establish a mentor-protégé program like the 8(a) Business Development (BD) program for all other small businesses.

The SBA's February 2015 proposed regulation now seeks to implement one new mentor-protégé program for all small businesses that are not part of the 8(a) BD program.  The SBA proposes one new program rather than four new mentor-protégé programs because businesses in the other three small businesse categories (SDVO, HUBZone and WOSB) necessarily would be eligible to enter a mentor-protégé program that targets small business generally.  Under this proposed model, approved mentor-protégé arrangements would be able to bid on, and perform under, contracts for which the protégé firm qualifies (e.g., a women-owned set aside contract where the protégé firm qualifies as a WOSB). The proposed regulation also makes changes to the rules applicable to joint ventures, including small business joint ventures and mentor-protégé joint ventures, that will be discussed below.

Changes To Mentor-Protégé Programs
 

Applications To The Program

The proposed SBA rule implements one mentor-protégé program for all types of small businesses (i.e., HUBZone, SDVO, WOSB, and small businesses generally), and re-authorizes the separate existing mentor-protégé program for eligible 8(a) BD program businesses.  To apply for the new mentor-protégé program, a prospective protégé must submit information to SBA.  The SBA’s Director of Government Contracting (DGC) would review and either approve or decline small business mentor-protégé agreements. Mentor-protégé relationships in the 8(a) BD program would continue to be reviewed and approved by the SBA’s Associate Administrator for BD.  An eligible 8(a) BD program small business has the option of seeking the SBA’s approval of a mentor-protégé relationship through the 8(a) BD program, or seeking approval of a small business mentor-protégé relationship under the new program through SBA’s DGC.  The SBA is considering maintaining one office to review and approve all mentor-protégé agreements to ensure consistency in the process.  In addition, the SBA is considering instituting "open" and "closed" periods for mentor-protégé applications if the number of firms seeking approval of mentor-relationships becomes unwieldy.
 

Mentors

Under the new mentor-protégé program only for-profit businesses that demonstrate a commitment and ability to assist small businesses may be approved as mentors and receive the benefits of the mentor-protégé arrangement.  Although non-profit entities are currently permitted to act as mentors under the 8(a) BD program, in order to maintain consistency among all of the mentor-protege programs, the proposed rule amends the applicable 8(a) regulation to prohibit non-profit mentors.
 

Also, the proposed rule states that in general, a mentor participating in any SBA-approved mentor-protégé program will have no more than one protégé at a time. The SBA may, however, authorize a business to mentor more than one protégé at a time if it can demonstrate that the additional mentor-protégé relationship will not adversely affect the development of any of the protégé firms (e.g., the second firm may not be a competitor of the first firm).  A mentor may not under any circumstance be permitted to have more than three protégé in the aggregate at one time under either the new mentor-protégé program or the 8(a) BD mentor-protégé program.  In addition, consistent with the 8(a) BD mentor-protégé program, a protégé in the small business mentor-protégé program may not become a mentor and retain its protégé status.  Rather, a protégé must terminate a mentor-protégé agreement with a mentor before it will be approved as a mentor.

Protégés

Under current rules, in order to qualify as a protégé for the 8(a) BD mentor-protégé program, an 8(a) company must satisfy at least one of the following criteria: (1) it must have a size that is less than half the size standard corresponding to its primary NAICS code; (2) it must be in the developmental stage of its 8(a) BD program participation; or (3) it must not have received an 8(a) contract.  While deciding to model the new mentor-protégé program after the 8(a) BD mentor-protégé program, the SBA concluded that none of the three criteria are applicable, or should apply, to the new program.Consequently the SBA also concluded they should no longer continue to apply to the 8(a) BD mentor-protégé program.

Under the proposed rules, a protégé participating in either of the mentor-protégé programs generally will have no more than one mentor at a time. However, a protégé may have two mentors where the two relationships will not compete or otherwise conflict with each other, and the protégé demonstrates either that the second relationship pertains to an unrelated, secondary NAICS code or the first mentor does not possess the specific expertise that is the subject of the mentor-protégé agreement with the second mentor.
 

Unlike in the 8(a) BD program, there is no formal certification process under which a firm may be certified a "small business."  However, under the proposed rules, the SBA will now be required to verify that a firm qualifies as a small business before approving it as a protégé. Only a firm that is determined to be a small business and has not received a negative determination from the SBA pursuant to a size protest may qualify as a protégé.  The small size determination can occur when the business applies to the SBA's mentor-protégé program or, if earlier, as part of a size protest decision.  The SBA may also consider the status of businesses that have self-certified as SDVO small businesses and WOSB's.

Other Agency Sponsored Mentor-Protege Programs

The proposed regulation provides that a Federal agency cannot carry out its own agency-specific mentor-protégé program for small businesses unless the head of the agency submits a plan for such a program to the SBA and receives the SBA Administrator’s approval of the plan.  The regulation, however, excludes for a period of one year: (1) any mentor-protégé program established by the Department of Defense;  (2) any mentoring assistance provided under the SBIR or STTR programs; and (3) any mentor-protégé program operating as of January 2, 2013.  In order to continue to operate any current mentor-protégé program beyond the one-year period following the implementation of the SBA’s proposed mentor-protégé regulation, each department or agency would be required to obtain the SBA Administrator’s approval.  The proposed rule also implements reporting requirements for federal government agencies that have their own mentor-protégé programs. The head of each federal agency must report annually to the SBA: (1) the participants in the program, (2) the assistance provided to the small business through the program, and (3) the progress of protégé companies in competing for contracts and subcontracts.

Mentor-Protégé Relationships
As with the 8(a) BD program, under the proposed small business mentor-protégé program, a protégé may joint venture with its SBA-approved mentor and qualify as a small business for any Federal government contract or subcontract, provided the protégé qualifies as small for the size standard corresponding to the NAICS code assigned to the procurement. This means that a joint venture between a protégé and its approved mentor in the small business mentor-protégé program would be deemed to be a small business for any Federal contract or subcontract.   Although such a joint venture might be eligible to be awarded a contract set-aside for small businesses, it would not be eligible for a contract set-aside for 8(a) BD, HUBZone SBCs, SDVO SBCs or WOSBs/ EDWOSBs unless the protégé firm also meets those program-specific requirements.  As we discussed in our primer on joint ventures (here), currently the 8(a) BD mentor-protégé program presents a rare opportunity for large businesses to participate in contracts set aside for small businesses, namely 8(a) set aside contracts.  The proposed new mentor-protégé program would now expand those opportunities to other small business set-aside contracts. 
 

Consistent with the 8(a) BD program, the proposed rule would permit a mentor to own an equity interest of up to 40% in the protégé firm in order to raise capital for the protégé firm.  The proposed rule allows the ownership interest to survive the termination of a mentor-protégé relationship.

Written Mentor-Protégé Agreement

The proposed regulation requires mentor-protégé agreements to be in writing and to identify specifically the benefits to be derived by the protégé.  The SBA must approve the agreement before the protégé receives any benefits under the program.  The SBA will not, however, approve an agreement if it determines that the assistance to be provided to the protégé is insufficient to promote real development gains or if the SBA determines that the agreement is merely a vehicle to enable the mentor to receive small business contracts.  
 

Under the proposed rule, prospective protégés also must identify any other mentor-protégé relationships and provide a copy of the mentor-protégé agreement to the SBA. The proposed mentor-protégé agreement must identify how the assistance to be provided by the proposed mentor is different than the assistance already offered through other mentorship relationships.

Under the proposed regulation, the SBA will review a mentor-protégé relationship annually to determine whether to approve its continuation for another year.  In making this determination, the SBA will evaluate the relationship and determine whether the mentor provided the agreed-upon business development assistance, and whether the assistance provided appears to be worthwhile.  The SBA also proposes to limit the duration of a mentor-protégé agreement to three years.  The proposed rule also permits a protégé to have one three-year mentor-protégé agreement with one entity and one three-year mentor-protégé agreement with another entity, or two three-year mentor-protégé agreements (successive or otherwise) with the same entity.  In addition, the proposed rule provides that if control of the mentor changes (through a stock sale or otherwise), the previously approved mentor-protégé relationship may continue provided that, after the change in control, the mentor expresses in writing to the SBA that it acknowledges the mentor-protégé agreement and that it continues its commitment to fulfill its obligations under the agreement.

Changes to the SBA's Joint Venture Rules
 

Written Document Clarification
The proposed rule amends the regulation under 13 CFR §121.103(h) to more explicitly require any joint venture arrangement to be reflected in a formal written document that sets forth the responsibilities of all of the joint venturers.  This change addresses confusion caused by the current language of the regulation, which recognizes that a joint venture may be either an “informal arrangement” between parties through a written document, or a “formal written arrangement” that exists as a legal entity. According to the SBA, a writing requirement exists in either case, and the distinction it sought to make in the existing regulation was between a joint venture that is established as a separate legal entity, such as a limited liability company, and a joint venture that is not created as a separate legal entity but rather as an informal partnership.  The proposed rule, thus, clarifies that regardless of the form, the joint venture must be reduced to writing.

Restrictions on Populated Separate Legal Entities
In addition, the proposed rule also changes the SBA regulations applicable to joint ventures that are created as separate legal entities.  Under current rules, a joint venture that is created as a separate legal entity is permitted to be populated (1) with its own employees who are intended to perform under the contract, (2) with its own employees who are intended to perform only administrative functions, or (3) without any of its employees at all.  The SBA is concerned with the difficulty in determining whether or how a small protégé firm directly benefits and controls a joint venture with a large company mentor when the joint venture is formed as a separate entity and hires its own employees.  Concluding that it is easier to determine the benefit received by a protégé when the work performed under a contract is done by the protégé and mentor separately, the rule now states that a joint venture created as a separate legal entity may not be populated with employees intended to perform under the awarded contract.  The proposed rule,  however, does permit a joint venture formed as a separate legal entity to have its own separate employees to perform merely administrative functions.
 

HUBZone Joint Ventures
The proposed rule also alters the joint venture requirements for joint ventures that participate in the SBA’s HUBZone program.  The SBA's HUBZone program regulations currently recognize joint ventures only between HUBZone small businesses and other HUBZone small businesses.  Thus, businesses, including small businesses, that are not HUBZone businesses are excluded from participation in a HUBZone joint venture for purposes of competing for a HUBZone set-aside contract. With the implementation of a mentor-protégé program for HUBZone small businesses, the SBA believes that requiring joint ventures to comprise solely of HUBZone small businesses will diminish the business development assistance it seeks to provide under the mentor-protégé program.  Specifically, large businesses and established non-HUBZone small businesses would not be encouraged to participate in mentor-protégé relationships and, consequently, HUBZone small businesses would not significantly benefit from a mentor-protégé program.  Under the proposed rule, therefore, a joint venture may now submit a bid for a HUBZone contract if the joint venture agreement is between a HUBZone small business and either another small business or an approved mentor, neither of which has to be a HUBZone small business.  The joint venture itself does not need to be certified as a qualified HUBZOne small business.  Similarly, a HUBZone joint venture between a HUBZone protégé and its mentor will also be small for purposes of a HUBZone contract as long as the protégé meets the small business size standard for the contract.  As with the other small business programs, the HUBZone small business would be required to be the project manager and otherwise control the performance of a HUBZone joint venture contract.  The HUBZone joint venture would be required to perform the specified percentage of work of the contract, and the HUBZone firm would be required to perform at least 40% of the work done by the joint venture.

Certifications and Reports
Under the proposed rule, prior to performing under a contract set aside for an SDVO, HUBZone, or WOSB/EDWOSB, or a contract set aside for a small business that will be performed by a mentor-protégé joint venture, the joint venture partners must certify to the contracting officer and to the SBA that they will perform under the contract in compliance with (1) the joint venture regulations, (2) the joint venture agreement, and (3) applicable performance of work requirements for each set-aside contract they perform as a joint venture. Thereafter, annually the joint venture partners must submit a report to the contracting officer and to the SBA explaining how the performance of work requirements are being met. Once the contract is completed, they must also submit a report certifying that performance of work requirements were met for the contract and that work was performed in accordance with the joint venture agreement provisions that are required by the regulations.