SBIR Program: SBA OHA Explains The Ownership Requirements

A firm will not qualify as a small business for a Small Business Innovation Research (SBIR) grant if it does not meet the SBIR program’s regulatory ownership and control requirements–and those requirements can be confusing.

In a recent size appeal decision, the SBA Office of Hearings and Appeals explained how the SBIR program’s ownership and control requirements work in practice.

OHA’s decision in Size Appeal of Glucan Biorenewables LLC, SBA No. SIZ-5608 (2014) involved Glucan’s submission of a proposal entitled “SBIR Phase II: Green Solvent-Enabled Synthesis of Biobased Furans,” to the National Science Foundation. Glucan represented itself as a small business in its proposal.

After receiving the proposal, the NSF protested Glucan’s size and eligibility to participate in the SBIR program.  The NSF expressed concern that Glucan’s ownership structure was impermissible under the SBIR program regulations.

In response to the protest, Glucan informed the SBA Area Office that its ownership structure was as follows: (1) 48% was owned by Focus First, a limited partnership; (2) 13% was owned by the Wisconsin Alumni Research Foundation, a non-profit; and (3) the remaining 39% interest was held by four individuals.  Focus First, in turn, was controlled by its general partner, Focus First Holdings, LLC.

The SBA Area Office turned to the SBIR program’s size regulation in 13 C.F.R. § 121.702.  Under the regulation, a business may be eligible for the SBIR program if it is owned any controlled in one of three ways.  The regulation states that an eligible SBIR participant must be more than 50%  directly owned and controlled by: (1) one or more individuals; (2) other small business concerns which are, in turn, directly owned and controlled by individuals; or (3) any combination of (1) and (2).

First, the Area Office found that individuals owned less than 50% of Glucan.  Thus, Glucan could not qualify for the SBIR program under the first mechanism.

The Area Office then considered whether Glucan qualified under the second mechanism.  The Area Office found that WARF did not qualify as a “small business concern” because WARF was a non-profit, not a small business.  The Area Office also found that Focus First did not meet the requirements of the second mechanism because, although Focus First was a business, it was controlled by another business (FFH), not by individuals.  Accordingly, the Area Office determined that Glucan did not qualify for the SBIR program under the second mechanism.

The Area Office considered the third alternative and determined that because Glucan did not meet the terms of either alternative 1 or alternative 2 it could not qualify under the third alternative. Therefore, the Area Office concluded that Glucan was not eligible for an SBIR grant.

Glucan filed a size appeal with SBA OHA. Glucan argued that the Area Office erred in finding that the structure of Focus First was impermissible under the regulations. Glucan acknowledged that Focus First Holdings was the general partner of Focus First, but emphasized that Focus First Holdings was owned and managed by three individuals. Glucan asserted that Focus First was controlled by individuals through Focus First Holdings.

OHA wrote that the SBIR program size regulation states “that an SBIR awardee may be owned and controlled by small businesses which are, in turn, more than 50% directly owned and controlled by individuals.” In this case, Focus First was not directly controlled by individuals “because such control flows through an entity, Focus First Holdings.”  OHA denied Glucan’s appeal and affirmed the Area Office’s determination that Glucan was not a small business eligible for an SBIR grant.

The SBIR program can offer powerful benefits to eligible participants, but the special ownership and control regulations can create pitfalls for the unwary.  As Glucan Biorenewables discovered, an entity is not eligible for the SBIR program unless it qualifies under one of the criteria established in 13 C.F.R. § 121.702.

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