The SBA recently dropped a large proposed rule that it grouped mainly under the HUBZone program, but actually touches on almost every SBA socioeconomic certification. So, it should come as no surprise that the SBA’s 8(a) Program is facing some potential changes based on this proposed rule. There are quite a few proposed updates to the 8(a) Program. We wanted cover just a few that really stood out to us here at SmallGovCon. Be sure to review the whole rule if you want to comment on any of these 8(a) changes.
We have already covered some of the HUBZone changes, and other SBA changes, proposed in the proposed rule here. I suggest you take a look at that post, but the proposed changes to the 8(a) Program are also quite important to review. In that recent proposed rule the SBA has put forth many changes to the 8(a) Program, with these changes affecting eligibility, applications, and ownership. Below are just some of the changes that stood out to us:
Ownership
SBA has seemingly realized that inconsistent standards among programs leads to confusion for many contractors. In the rule, SBA notes that the ownership regulations related to Partnerships in the 8(a) Program, WOSB, and SDVOSB programs are not consistent program to program. SBA now states it will take action to “harmonize the provisions so that a firm simultaneously applying to be certified in more than one program must meet the same requirements.” Specifically, changes will be made to “ownership requirements for partnership to be identical for the 8(a) BD, WOSB and VetCert programs.” Presumably, this will help contractors who qualify for multiple programs, more easily stay compliant with all the different regulatory requirements.
Additionally, many 8(a) Program contractors have likely looked at selling portions of their company and ran into roadblocks imposed by regulations. Currently, the regulation states that a non-disadvantaged individual or another business “in the same or similar line of business” generally cannot own more than a 10% interest in a 8(a) Program business that is in the developmental stage or more than a 20% interest in an 8(a) Program business in the transitional stage of the 8(a) program. SBA now proposes to up those percentages to 20% and 30% respectively. This should give contractors more leeway to take on new ownership from other 8(a) Program participants, or a contractor in their same industry.
On top of this, SBA also is updating some of the requirement for receiving prior SBA approval for an ownership change. The regulation at section (i)(2) currently lists three exceptions and four examples to the requirement of gaining SBA’s prior approval of a change in ownership. This regulation will now be updated to require prior approval “where a non-disadvantaged individual owns more than a 30 percent interest in the 8(a) Participant either before or after the transaction” to be consistent with the percentage updates discussed above. Also, SBA is adding a fourth exception to SBA’s prior approval of an ownership change. This new fourth proposed exception would be: “SBA approval is not required where the 8(a) Participant has never received an 8(a) contract.” Once again, SBA is seemingly trying to make ownership changes less burdensome on 8(a) Program participants.
Primary Industry
A major part of the 8(a) Program application process is showing income for two years in the company’s “primary industry.” Primary Industry is a defined term in the 8(a) Program, and as such can be somewhat restricting for applicants. The current regulation states that a contractor applying for the 8(a) Program must show “income tax returns for each of the two previous tax years” that contain “operating revenues” in the contractor’s “primary industry.” SBA now proposes that applicants simply supply “income tax returns for each of the two previous tax years” must” which “show operating revenues.” SBA pointed out that often tax returns are not descriptive enough to meet that requirement. So, if this rule is finalized, a contractor would then just have to show they have been operating for the previous two years, which is much less high a hurdle.
This would eliminate what a lot of applicants have faced–having to get a letter from their accountant showing that the NAICS code listed on the tax return was incorrect.
Good Character
The 8(a) Program regulation also currently requires the SBA to review any contractor who applies to the program to determine if the company and all of its “principals” possess “good character.” In the proposed rule, SBA notes that for other programs (WOSB and SDVOSB), SBA does not do a “good character” review. But because the 8(a) Program is special in it developing contractors, SBA is wanting to keep some form of good character review. Thus, SBA is proposing limiting the grounds that “would serve as an automatic, mandatory bar from participation” in the 8(a) Program. SBA plans to remove the automatic bar from participation related to “possible criminal conduct” and change the “lack of business integrity” to “lack of business integrity as demonstrated by conduct that could be grounds for suspension or department.” SBA discussed different studies about the difficulty of employment for individuals with previous convictions, and how entrepreneurship can be a way out of that cycle. SBA argues that changes such as this will help increase the federal government’s ability to meet its small business contracting goals.
Reapplication
Finally, one of the biggest hurdles contractors may face when trying to get into the 8(a) Program is that under the regulations, if a contractor’s application to the 8(a) Program is officially denied, they have to wait 90 days to re-apply; and if that contractor was denied three times in 18 months, that contractor must wait a whole year to re-apply after that third denial. While not getting rid of the 90 day waiting period, SBA has stated that it plans to get rid of that year long waiting period, as “[n]o other program has such a restriction and SBA does not seek to thwart firms who have made legitimate attempts to overcome deficiencies from again applying” to the 8(a) Program.
These are but a portion of the changes to the 8(a) Program that SBA is proposing, and the proposed rule hits on changes to many SBA programs. So while we may circle back to this proposed rule in a later post, we strongly recommend that contractors take a read of the proposed rule. Since it is a proposed rule, there is still time to submit your comments on all the different changes proposed. Comments will be accepted until October 7, 2024.
When it comes to the 8(a) Program, the changes discussed here seem to indicate that the SBA wants to: 1) make the 8(a) Program fall more into line with its other programs; 2) encourage more applicants to the 8(a) Program; and 3) grant more flexibility to current participants. This indicates quite a contractor-friendly shift by SBA to the 8(a) Program, which has faced its own well documented outside challenges over the past few years. Of course, the 8(a) Program still remains quite complicated. So, make sure to check out our 8(a) Program toolkit for more of our thoughts about the 8(a) Program. And of course, if you find yourself with legal questions about the 8(a) Program, make sure to reach out to a federal government contract attorney, such as ourselves.
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