HUBZone Program: SBA Will Delete “Direct” Ownership Requirement

HUBZone companies owned by U.S. citizens will no longer be required to demonstrate that the ownership is “direct.”

The SBA’s HUBZone program rules have long required that a HUBZone company owned by U.S. citizens be at least 51% directly owned by those citizens–as opposed to allowing the qualifying citizens to own those interests through legal vehicles like holding companies.  But the SBA has had second thoughts, and effective May 25, 2018, the direct ownership requirement will be eliminated.

In a direct final rule issued on March 26, the SBA writes that “[d]irect ownership is not statutorily mandated” by the portion of the Small Business Act governing the HUBZone program.  The SBA has concluded that “the purposes of the HUBZone program–capital infusion in underutilized geographic areas and employment of individuals living in those areas–may be achieved whether ownership by U.S. citizens is direct or indirect.”

The SBA explains:

The regulations first implementing the HUBZone program were largely based on those governing the Small Disadvantaged Business (SDB) program, which is no longer in existence and which served different goals than the HUBZone program. The SDB program and SBA’s other currently active socioeconomic programs (including the 8(a) BD program, the WOSB small business program, and the SDVO small business program) are intended to assist the business development of small concerns owned and controlled by certain individuals, so requiring direct ownership for these programs is consistent with their purposes. The HUBZone program differs in that the program’s goals do not center on the socioeconomic status of the SBC owner but rather the location of the business and the residence of its employees.

The SBA concludes: “[t]his direct final rule deletes the requirement that ownership by United States citizens in the HUBZone program must be direct, and instead it merely copies the statutory requirement that a HUBZone small business concern must be at least 51% owned and controlled by United States citizens.”

The public is invited to submit comments on the direct final rule by April 25, 2018.  The rule will automatically become effective on May 25 “unless significant adverse comment is received” by the April 25 deadline.

If anyone makes adverse comments (significant or otherwise), it won’t be me.  I’ve long felt that the direct ownership requirement is unnecessary for HUBZone companies owned by U.S. citizens, and applaud the SBA’s deletion of this requirement.  Elimination of this requirement will allow greater flexibility for U.S. citizens to own HUBZone companies using vehicles that may make good sense from business, liability, and tax standpoints.

It’s worth noting that the change only applies to HUBZone companies owned by U.S. citizens.  HUBZone companies owned by Indian Tribes, ANCs, NHOs, CDCs and small agricultural cooperatives have separate requirements which are unaffected by this change.

One final, slightly off-topic note: if you’re an SDB, don’t freak out about SBA’s statement that the SDB program “is no longer in existence.”  The SDB program is still in existence.  It’s right there in the SBA’s regulations, and SDB self-certification can still offer important benefits–for example, large prime contractors are required to meet SDB goals under typical subcontracting plans.  I think what the SBA meant to say is that the SBA no longer operates the SDB program as a formal certification program, which is certainly true; the SBA stopped certifying SDBs in 2008.