SBA Clarifies Inconsistencies in 8(a) and Mentor-Protégé Ownership Rules

A lot has been happening in the 8(a) Business Development Program world over the past couple of weeks. SBA has been busy updating regulations applicable to the 8(a) Program to both bring SBA rules into alignment with the economic realities in a post-COVID world and to make 8(a) requirements more uniform across the board. Here, we focus on a change to ownership rules for non-disadvantaged owners of 8(a) Program participants that are also part of an SBA-approved Mentor-Protégé Agreement.

As mentioned, the SBA has been busy with a flurry of activity related to the 8(a) Program. With probably the largest impact to the 8(a) Program, was the decision regarding a challenge to a presumption of social disadvantage. That decision led to the ongoing temporary pause on submission and at least some application reviews. And don’t forget the SBA’s regulatory agenda which includes a planned change to increase the economic disadvantage thresholds for 8(a) (and economically disadvantaged women owned small business) participation. Now, we turn to the 8(a) Program participant ownership rules, and resolve a long-standing conflict between such rules and those applicable to Mentor-Protégé Program participants.

13 C.F.R. § 124.105 discusses, in detail, the ownership requirements for the SBA’s 8(a) Program including the minimum ownership percentage a disadvantaged individual may have and the maximum ownership percentage that non-disadvantaged individuals may have in an 8(a) Program participant. The ownership requirement for the disadvantaged individual is relatively easy to determine. Ownership of a partnership? “At least 51 percent of every class of partnership interest.” 13 C.F.R. § 124.105(b). Ownership of an LLC? “At least 51 percent of each class of member interest.” 13 C.F.R. § 124.105(c). Ownership of a corporation? “At least 51 percent of each class of voting stock outstanding and 51 percent of the aggregate of all stock outstanding.” 13 C.F.R. § 124.105(d).

This is consistent with the SBA’s ownership requirements for woman-owned small businesses and service-disabled veteran owned small businesses as well. In short, the qualifying individual, or group of qualifying individuals, must unconditionally and directly own 51% of the business. Logic then follows that non-disadvantaged individuals and/or non-8(a) concerns, which we will collectively call non-disadvantaged persons, are permitted to own up to 49% of the 8(a) participant. Simple, right? Yes, but—there’s always a “but,” right?—when non-disadvantaged owners begin “collecting” ownership shares in multiple 8(a) participants, the rules get a bit more complicated.

The ownership restrictions for non-disadvantaged persons with an interest in multiple 8(a) concerns are much more limited. 13 C.F.R. § 124.105(h)(1) restricts non-disadvantaged persons that are a general partner or stockholder with an ownership share of at least 10% in one 8(a) participant from owning more than a 10% interest in another 8(a) participant in the developmental stage, or 20% in the transitional stage. There was no change to this particular section between the prior version and the current version.

However, there were some changes to 13 C.F.R. § 124.105(h)(2) to help clarify a conflict between 8(a) ownership rules and the Mentor-Protégé Program rules. The information in the previous version of 13 C.F.R. § 124.105(h)(2), focusing on non-8(a) participant concerns in the same or similar line of business, remains intact, although it is broken up between different sections. 13 C.F.R. § 124.105(h)(2) restricts non-8(a) participant concerns, or principals of such concerns, in the same or similar line of business from owning more than a 10% interest in an 8(a) participant in the developmental stage, or 20% in the transitional stage.

The remaining information was moved to a new sub-section, found at 13 C.F.R. § 124.105(h)(2)(i), which restricts former 8(a) participants in the same or similar line of business, or principals of such concerns,  from owning more than a 20% interest in a current 8(a) participant in the developmental stage, or 30% in the transitional stage.

If you are familiar with SBA programs, you are probably wondering whether this means that mentors are now restricted from, at the very most, owning more than a 30% interest in a current 8(a) participant. According to SBA’s Mentor-Protégé Program rules, a mentor has traditionally been permitted to own up to a 40% interest in its protégé. It’s no doubt one of the benefits that attracts mentors to the Mentor-Protégé Program. But the former language of 13 C.F.R. § 125.9(d)(2) made no mention of participants in the Mentor-Protégé Program. So, which is it: 10, 20, 30, or 40%? Well, this, my friends, is exactly what the change in this particular 8(a) Program ownership rule targets.

Finding a need for clarity, SBA added new language, found at 13 C.F.R. § 125.9(d)(2)(i), which states that a mentor in an SBA-approved Mentor-Protégé Agreement may own up to 40% of its protégé. This applies whether the mentor and protégé are in the same or similar line of business—“same or similar line of business” meaning business activities that share the same four-digit industry group of the NAICS Manual as the 8(a) participant’s primary industry classification. For example, a mentor who worked in 541310 Architectural Services would be in the same or similar line of business as its protégé if the protégé’s primary industry classification is 541330 Engineering Services, because both NACS Codes fall under the 5413 industry group of Architectural, Engineering, and Related Services.

Given the number of changes that occurred within this particular rule amendment in the Federal Register, it is easy to see that the SBA is making an attempt to clear up some long-standing ambiguities within the 8(a) Program. Stay tuned for more information on even more changes within this action-packed Federal Register entry.

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