On Friday, August 23, the Small Business Administration issued a proposed rule that would make significant changes to the SBA’s HUBZone small business contracting program, as well as modifications to other small business programs, including the 8(a) Program and the All Small Mentor-Protégé Program.

Below is a summary of some of the changes proposed by the SBA. We will provide more detailed discussions of the proposal, and its potential impacts, in the coming days.

Comments are due by October 7, 2024. They should reference Docket No. SBA-2024-0007 or RIN 3245-AH68, and may be submitted through http://www.regulations.gov/.

HUBZone Changes: The most significant changes involve the HUBZone Program. Some of them are:

• HUBZone Eligibility Determined at the Time of Offer Plus Price: The SBA is proposing to require HUBZone entities to be eligible to receive HUBZone contracts (i.e., to be in compliance with applicable principal office and 35% HUBZone residency requirements) at the time of offer, as opposed to having to comply only at the time of the annual recertification of their HUBZone status.
• Require Recertification Every Three Years Instead of Annually: Given that HUBZone entities would have to certify their compliance with HUBZone program requirements at the time of offer, the SBA also proposes to require HUBZone concerns to be recertified to the SBA only every three years, as opposed to each year.
• No Offers While Application is Pending: The SBA would bar small business concerns from submitting an offer for a HUBZone contract while their application for admission to the program is pending. A small business concern could submit offers for set-asides only after their application is approved.
• Changes to When a HUBZone Firm Must Certify That it is “Attempting to Maintain” the 35% HUBZone Residency Requirement: The SBA recommends new rules that would require a HUBZone firm to certify it is attempting to maintain the 35% HUBZone residency requirement at each of the following times:
  • • during application for HUBZone certification
    • at completing of recertification
    • at the time of offer for any HUBZone contract

• Changes to Number of Hours HUBZone Employees Must Work: In order to qualify as an employee for HUBZone purposes, a worker will have to report 80 hours per month. The current rule requires employees to work just 40 hours a month to be considered a HUBZone employee.

8(a), Small Business and All-Small Mentor-Protégé Program Changes: The SBA is also proposing changes to 8(a) small business and All-Small Mentor-Protégé Programs. Though the SBA characterizes most of these changes as “clarifications,” some entail material changes:

• Affiliation and Negative Control. When determining whether a concern is affiliated with another for size purposes, the SBA looks at whether “negative control” exists. Under the current regulations, the SBA may find negative control when a minority shareholder has the ability to prevent a quorum or otherwise block action by the board of directors or shareholders, and thereby obliges the concern to be controlled by, even affiliated with, that minority shareholder. The current rule does not include any specific exceptions, though some have developed through case law at SBA’s Office of Hearings and Appeals. (“OHA”). See, e.g., Southern Contracting Solutions III, LLC, SBA No. SIZ-5956 (Aug. 30, 2018). The proposed rule would explicitly identify the following actions a minority shareholder may veto without risk of establishing “negative control” for purposes of affiliation:

(1) adding a new equity stakeholder

(2) dissolution of the company

(3) sale of the company or all assets of the company

(4) the merger of the company

(5) the company declaring bankruptcy

(6) amendment of the company’s governance documents to remove the shareholder’s authority to block any of (1) through (5)

• Ostensible Subcontractor and Mentor-Protégé Relationships. The SBA proposes alterations that clearly state a mentor can be found to be an ostensible subcontractor of its protégé if the joint venture requirements of § 125.8(b) are not met. The SBA is attempting to prevent a situation where a mentor could serve as a subcontractor to its protégé outside the mentor-protégé joint venture context, and avoid application of the ostensible subcontractor rule.
• 180-Day Rule for Recertifications After Sale, Merger, or Acquisition: The SBA has proposed a ruling to provide that if a concern submits a disqualifying recertification [due to a sale, merger, or acquisition], it may or may not be eligible for the award, depending on when the sale, merger, or acquisition occurred. If the merger, sale, or acquisition occurs within 180 days of offer submission and before award, the concern is ineligible for the award. If the merger, sale, or acquisition occurs after 180 days of its offer and before award, the concern would continue to be eligible.
• 8(a) Ownership and Control Requirements: The SBA is proposing several changes to the regulations that govern minority ownership of 8(a) entities. They include:
  • Increase the allowable ownership percentages for non-disadvantaged individuals and business concerns in the same or similar line of business from 10 percent when the 8(a) concern is in the developmental stage, and 20 percent when the 8(a) concern is in the transitional stage, to 20 and 30 percent, respectively.

• • Specify that prior SBA approval of an ownership change is not required when the 8(a) participant has never received an 8(a) contract. The rule would also clarify that when prior approval is not required, the 8(a) entity must notify the SBA within sixty (60) days of such a change in ownership, or before it submits an offer for an 8(a) contract, whichever occurs first.

• • Allow a right of first refusal that grants a non-disadvantaged individual the contractual right to purchase the ownership interests of a disadvantaged individual without affecting the unconditional nature of ownership—if ownership of the terms follow normal commercial practices. If those rights are exercised by a non-disadvantaged individual after certification, and that results in disadvantaged individuals owning less than 51% of the concern, the SBA will initiate termination proceedings.
• • Change the wording in the 8(a) BD, WOSB, and VetCert programs to bring them more in line with each other and ensure the control requirement is consistently applied.
• 8(a) Business Activity Targets: Congress established non-8(a) business activity targets to ensure that participants do not develop an unreasonable reliance on 8(a) awards. The current SBA regulations require them to demonstrate “good faith efforts” toward meeting their applicable non-8(a) business activity targets. The proposed rule would provide additional “clarification” as to how the SBA will determine whether an 8(a) entity has made good faith efforts to meet its business activity targets. Specifically, in determining the projected revenue the SBA will consider to assess whether one or more unsuccessful offers might generate sufficient revenues to achieve the non-8(a) business activity target, the proposed rule would direct the SBA to consider only procurements for which the participant has reasonable prospects of success.
• Novation of 8(a) Contracts: The SBA has recommended modifications that would clearly permit the novation of an 8(a) contract to the 8(a) entity, where a joint venture between an 8(a) entity and a non-8(a) business concern was awarded an 8(a) contract, and the two firms seek to terminate the joint venture and novate the 8(a) contract individually to the 8(a) entity.
• Past Performance of a Mentor-Protégé Joint Venture: The SBA is proposing language that would permit agencies to require the protégé of a mentor-protégé joint venture to have a certain level/amount of past performance, such that the protégé could not rely solely on the past performance of its mentor.

In the coming weeks we will publish a series of articles that contain more detailed discussion of the proposed changes and their potential impacts on small business federal contractors.