Earlier this month, the Small Business Administration issued a proposed rule, suggesting several significant changes to the SBA’s Mentor Protégé programs.  What are the key highlights?  We summarize below.

One Consolidated Mentor-Protégé Program to Rule Them All…

First and foremost, the rule discusses the potential consolidation of the 8(a) and “All Small” Mentor Protégé programs.  As many of you will remember, up until a few years ago, there was only one Mentor-Protégé program: The 8(a) mentor-protégé program (now codified at 13 C.F.R. § 124.50).  It was first created in the late 1990s.  As the name would imply, only 8(a) companies (and their mentors) were eligible under that program.  For years, other small businesses clamored for a more widely-accessible program.  In response, in 2016, the SBA rolled out the “All Small” Mentor-protégé program (codified at 13 C.F.R. § 125.9), which was open to other types of small businesses and their mentors. 

At that time, the SBA stated that it had considered creating one, consolidated program (rather than creating a new, separate program for other types of small businesses), but decided against it.  The agency explained that it feared making changes to an already-successful 8(a) program.  It wanted to give the All-Small MP program a test run before reconsidering consolidation.   Well, the test run appears to have gone pretty well.  The program has drawn many applicants, and has been pretty successful about pushing applications through in a timely way.  Contractors have now begun to complain that having two programs is confusing, inefficient, and creates confusion.  Accordingly, the SBA started considering consolidation as early as May 2018.  Now, the agency has taken the first step in the formal consolidation process.

In explaining the reasons for the proposed rule, the SBA stated:

“SBA seeks to combine the 8(a) BD Mentor- Protégé Program and the All Small Mentor- Protégé Program at this time in order to eliminate confusion regarding perceived differences between the two Programs, remove unnecessary duplication of functions within SBA, and establish one, unified staff to better coordinate and process mentor-protégé applications.”

The proposed changes to the regulation would, essentially, merge the 8(a) MP program into the All-Small MP program by modifying the All Small Program regulations to allow all small businesses – including 8(a) – to participate as protégés.

Potential Limitations on Mentor’s Size

In addition to the consolidation of the MP programs, the rule also explains that the SBA is considering whether or not to limit the size of mentor companies.  Currently, “any concern that demonstrates a commitment and the ability to assist small business concerns may act as a mentor and receive benefits [of the mentor-protégé program.]” In order to qualify as a mentor, a concern need only demonstrate that it: (1) Is capable of carrying out its responsibilities to assist the protégé firm under the proposed mentor-protégé agreement; (2) Possesses good character; (3) Does not appear on the federal list of debarred or suspended contractors; and (4) Can impart value to a protégé firm due to lessons learned and practical experience gained or through its knowledge of general business operations and government contracting.  There are no size limitations; businesses of any size may serve as mentors.  Now, based on the suggestions of “mid-size” companies (which the SBA characterizes as “i.e., those that no longer qualify as small under their primary NAICS codes, but believe that they cannot adequately compete against the much larger companies”), the SBA is considering limiting mentor-eligibility to those firms having average annual revenues of less than $100 million. 

Potential Revision of the “Three-in-Two” Rule for JVs Formed by Mentor-Protégé Pairs

As a practical matter, many companies enter into mentor-protégé relationships as a precursor to forming a joint venture.  (The small business regulations allow an approved-mentor protégé pair to form a joint venture, and jointly pursue government opportunities, without raising the same affiliation concerns that would be raised without a mentor-protégé relationship in place).  However, the regulations at 13 C.F.R. § 121.103(h) currently place certain limitations on how many contracts a mentor-protégé JV can perform.  Specifically, the current regulations provide that a joint venture can perform no more than three contracts over a two-year period (starting from the date of the award of the first contract), without the partners to the joint venture being deemed affiliated for all purposes.  (This is known as the “3-in-2 Rule”).  If the parties intend to jointly seek work beyond three contracts or beyond two years from the date of the first award, they must form a new joint venture entity.  According to the SBA (and not surprisingly for those of us who understand business development) many contractors have raised objections about these limitations, complaining that the regulation “unduly restricts small business and can disrupt normal business operations.”  In response, the SBA’s proposed rule suggests that it “eliminate the three-contract limit for a joint venture.”  HOWEVER – the SBA is instead proposing to limit the duration of JV relationships in general.  Specifically, that “a joint venture cannot exceed two years from the date of its first award.”  This would, in the SBA’s eyes alleviate the burdens associated with the three-in-two rule, while still “preserving SBA’s belief that a joint venture is not intended to be an on-going business entity.”  This last piece is critically important for contractors to understand.  As far as the SBA is concerned, you should not be forming JVs without specific procurements, and specific, limited time periods, in mind.   

Comments to the rule are due by January 17, 2020, and can be submitted online at http://www.regulations.gov  (or by the other methods specified here.)