Joint Ventures: SBA Proposes Major Changes

The SBA has proposed major changes to rules governing joint venturing for set-aside contracts.

As part of a proposed rule released last week, the SBA proposes to eliminate so-called “populated” joint ventures, and proposes additional changes regarding joint venture certifications, performance of work reports, and more.

Last week’s proposed rule received broad coverage (including right here at SmallGovCon) for the SBA’s proposal to create a “universal” mentor-protege program available to all small businesses.  But the proposed mentor-protege program is not the only important change the SBA has proposed.  The rules governing joint ventures would also change under the SBA’s proposed rule.

The SBA first proposes to amend the definition of a joint venture, for all of the SBA’s programs, to specify that “any joint venture must be in writing.”  For now, at least, the SBA proposal would continue to allow joint ventures to be “informal” partnerships instead of formal legal entities such as limited liability companies.  However, “regardless of form, the joint venture must be reduced to a written agreement.”  Apparently, some joint venturers have mistakenly assumed that an informal joint venture need not be in writing, which has never been the SBA’s intent.  The proposed rule would eliminate that confusion.

It is an open question of whether informal joint ventures will be allowed at all under the SBA’s new mentor-protege program.  In the proposed rule, the SBA requests comments regarding whether the SBA should require all joint ventures formed under mentor-protege agreements to be formed as separate legal entities.  The SBA “believes that such a requirement would significantly enhance SBA’s ability to monitor and track awards to mentor-protege joint ventures.”

The proposed rule would also eliminate the use of “populated” joint ventures.  Under present SBA rules, a joint venture may either be “populated” with its own personnel (and essentially function as an independent entity in its own right) or be an “unpopulated” vehicle under which the joint venturers perform contracts using their own employees.  For administrative convenience, most joint venturers already select the unpopulated format.

In the proposed regulation, the SBA explains that if populated joint ventures are allowed, “SBA is concerned that it will be difficult to definitively determine that a small protege firm directly benefits from, and in fact controls, a joint venture with a large business mentor . . ..”  The SBA continues, “SBA believes that the benefits received by a protege from a joint venture are more readily identifiable where the work done on behalf of the joint venturer is performed by the protege and the mentor separately.”  The proposed rule would allow a separate legal entity joint venture to have its own separate employees to perform administrative functions, but not to have its own separate employees to perform contracts awarded to the joint venture.

The SBA’s proposed rule would require all partners to a joint venture agreement to perform a set-aside contract to certify prior to performance that the contract will be performed in compliance with the joint venture regulations and the joint venture agreement.  Additionally, the parties to the joint venture are required to submit annual reports to the contracting officer and to the SBA certifying continuing compliance, and explaining how the performance of work requirements are being met.  A final report must be submitted following the completion of the contract.

Finally, the SBA has proposed amending the joint venture regulations applicable to the HUBZone program.  Under currently law, joint ventures are only permitted for HUBZone set-aside contracts where all parties to the joint venture are HUBZone certified.  This policy differs from the rules for the other three socioeconomic set-aside programs (8(a), SDVOSB, and WOSB), under which only the lead venturer must hold the appropriate certification.

The SBA now proposes to make the HUBZone joint venture regulations similar to those under the other three programs.  Under the proposed rule, “the HUBZone program would be consistent with the other small business programs and would allow a joint venture between a qualified HUBZone [small business] and one or more other [small businesses.”  HUBZone firms would also be permitted to form joint ventures with large, non-HUBZone mentors.  The proposed rule includes various requirements that HUBZone joint ventures would have to meet, including a requirement that the HUBZone firm provide the project manager “and otherwise control the performance” of the HUBZone contract.

I feel like a broken record saying this, but major changes are on their way.  For now, though, it is important to remember that the SBA’s proposed rule is merely a proposal, and that the final rule may differ.  Comments on the proposed rule are due April 6, 2015.

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