The SBA has proposed to establish a government-wide mentor-protege program available to all small businesses.

In a proposed rule released yesterday, the SBA proposed to establish a single, “universal” mentor-protege program, open to all small businesses, not just those with certain socioeconomic designations.  And critically, the SBA’s proposed mentor-protege program would allow SBA-approved mentor-protege joint ventures to qualify as “small” for any federal government prime contract or subcontract–a benefit currently available only to 8(a) companies.

In 2010, Congress gave SBA the authority to create mentor-protege programs for SDVOSBs, HUBZones, and WOSBs.  In the 2013 National Defense Authorization Act, Congress authorized the SBA to create mentor-protege programs for all small businesses, but did not mandate that SBA do so.  The 2013 NDAA also directed the SBA to establish regulations governing mentor-protege programs offered by other procuring agencies (except DoD’s mentor-protege program, which was specifically exempted).

The SBA’s proposed new rule comes in response to the statutory authority granted in 2010 and 2013.  Instead of establishing four new mentor-protege programs–one each for SDVOSB, HUBZone, WOSB, and small business firms–the SBA proposes to establish a single “universal” mentor-protege program available to all small businesses.  The SBA explains that SDVOSB, HUBZone and WOSB companies will necessarily be included in the universal mentor-protege program, and that, “having five separate small business mentor-protege programs could become confusing to the public and procuring agencies and hard to implement by SBA.”

The SBA proposes to continue operating a separate 8(a) mentor-protege program.  However, the SBA proposes to “make the small business mentor-protege program identical to the 8(a) mentor-protege program.”

Some important specifics of the SBA’s proposal are as follows:

• Eligibility of Mentor.  Under the proposed regulations, “any for-profit business concern that demonstrates a commitment and the ability to assist small business concerns may be approved to act as a mentor and receive the benefits of the mentor-protege relationship.”  SBA proposes to disallow non-profit entities from serving as mentors.
• Eligibility of Protege.  A firm would not be eligible to serve as a protege unless it qualifies as a small business under its primary NAICS code.  Further, instead of accepting self-certifications of size, the SBA will “verify that a firm qualifies as a small business before approving that firm to act as a protege in a small business mentor-protege relationship.”
• Number of Proteges.  Generally, “a mentor participating in any SBA-approved mentor-protege program will have no more than one protege at a time.”  However, the SBA may authorize up to three concurrent proteges if the mentor “can demonstrate that the additional mentor-protege relationship will not adversely affect the development” of any of the proteges.
• Number of Mentors.  Generally, a protege “will have no more than one mentor at a time.”  However, the protege “may have two mentors where the two relationships will not compete or otherwise conflict with each other and the protege demonstrates 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-protege agreement with the second mentor.”
• “One-or-the-Other” Rule.  Under the proposed rule, a company would not be able to serve as both a mentor and protege at the same time.  However, the SBA is specifically seeking comments about whether this restriction makes sense.
• Written Agreement.  The proposed rule would require the mentor and protege to execute a written agreement “identifying specifically the benefits intended to be derived by” the protege.
• SBA Approval.  The proposed rule requires that the SBA approve the written mentor-protege agreement before the mentor and protege may receive any benefits under the mentor-protege program.
• Annual Review.  Under the proposed regulation, the SBA would review the mentor-protege agreement annually to determine whether to approve its continuation for another year.
• Limited Duration.  The proposed rule specifies that a single mentor-protege agreement will be limited in duration to three years.
• Equity Interest.  The proposed regulations would allow a mentor to a small business to own an equity interest of up to 40% in the protege firm in order to raise capital for the protege.

Perhaps most critically for small businesses and large businesses alike, the proposed rule provides that “a protege may joint venture with its SBA-approved mentor and qualify as a small business for any Federal government contract or subcontract, provided the protege qualifies as small for the size standard corresponding to the NAICS code assigned to the procurement.”  The rule would allow mentor-protege joint ventures to qualify as “small” for any socioeconomic subcontract for which the protege qualified.  So, for example, a joint venture between a SDVOSB protege and its SBA-approved large business mentor would qualify for a SDVOSB set-aside contract.

Finally, instead of establishing guidelines for other agencies’ mentor-protege programs, the SBA is seeking comments as to whether there will be a “continuing need for other small business mentor-protege programs once SBA’s various mentor-protege programs are implemented.”  The SBA suggests that many agencies’ mentor-protege programs may essentially become obsolete in the event that SBA’s “universal” mentor-protege program takes hold.

It is difficult to understate the potential impact of this proposed rule.  On the one hand, many non-8(a) small businesses will be thrilled that SBA-sanctioned mentor-protege relationships may soon be available to them, and eager to begin establishing mentoring relationships with large companies.  8(a) participants, on the other hand, may be concerned that one of the most important, unique benefits of the 8(a) program–the ability to joint venture with a large mentor–will no longer be so unique.

Meanwhile, small businesses without an immediate opportunity to “land” a large business mentor may wonder whether the lack of a mentoring relationship will adversely affect their competitive standing.  In this regard, it is worth asking: If mentor-protege joint ventures become commonplace across all set-aside procurements, will agencies become reluctant to award contracts to stand-alone small businesses?

These questions, and many, many more, will undoubtedly be asked and debated as this proposed rule moves forward.  It is important to note that this is only a proposal and that the final rule may vary (perhaps considerably) from the initial version.  Public comments are due by April 6, 2015.