If you are part of a joint venture between a small protege and its large mentor under the SBA’s Mentor-Protege Program, heads up: the SBA recently amended its list of mandatory requirements for joint venture agreements to cover what happens to funds left over in the joint venture bank account at the end of a project.
Like the revised recordkeeping rules I discussed in an earlier post, the new required provision only applies to mentor-protege joint ventures pursuing small business set-aside contracts–not to JVs seeking 8(a), SDVOSB/VOSB, WOSB/EDWOSB or HUBZone work. Confusingly (and again, like the recordkeeping rules), SBA’s decision to change only the small business set-aside regulation, 13 C.F.R 125.8, means that the same joint venture agreement may not be valid for both small business set-aside contracts and socioeconomic contracts.
Before November 16, 2020, 13 C.F.R. 125.8(b)(2)(iv) required the joint venture agreement to contain a provision:
(iv) Stating that each participant must receive profits from the joint venture commensurate with the work performed by the concern;
But in a final rule effective November 16, SBA changed the regulation. 13 C.F.R. 125.8(b)(2)(iv) now requires the joint venture agreement to contain a provision:
Stating that the small business participant(s) must receive profits from the joint venture commensurate with the work performed by them, or a percentage agreed to by the parties to the joint venture whereby the small business participant(s) receive profits from the joint venture that exceed the percentage commensurate with the work performed by them, and that at the conclusion of the joint venture contract(s) and/or the termination of a joint venture, any funds remaining in the joint venture bank account shall distributed at the discretion of the joint venture members according to percentage of ownership;
The new rule varies in two significant ways. First, it allows the small business to receive profits greater than its workshare–though good luck getting the mentor to agree to that. Fortunately, since the “greater than workshare” provision is optional, my sense is that pre-existing joint venture agreements using the old language will still comply with this part of the revision.
It’s the second piece of the new rule that concerns me: “at the conclusion of the joint venture contract(s) and/or the termination of a joint venture, any funds remaining in the joint venture bank account shall distributed at the discretion of the joint venture members according to percentage of ownership.” This is a brand-new requirement, which makes me worry that pre-existing joint venture agreements developed under the old rules won’t comply, unless the members are savvy enough to notice this change and amend their agreements accordingly.
Making things even more confusing, the SBA’s final rule added the “greater than workshare” provision to the separate joint venture regulations for 8(a), SDVOSB/VOSB, HUBZone and EDWOSB/WOSB programs–but left out the “percentage of ownership” requirement. For instance, the current corresponding regulation for SDVOSBs and VOSBs, 13 C.F.R. 125.18(b)(2)(iv), requires the joint venture agreement to contain a provision:
Stating that the SDVO SBC must receive profits from the joint venture commensurate with the work performed by the SDVO SBC, or a percentage agreed to by the parties to the joint venture whereby the SDVO SBC receives profits from the joint venture that exceed the percentage commensurate with the work performed by the SDVO SBC;
If the new “percentage of ownership” requirement is important enough to make joint venturers insert it in their agreements, why limit it only to the joint venturer pursuing small business set-asides? I’m baffled, and beyond that, worried that the disconnect between these substantive requirements will unintentionally mislead small businesses into adopting non-compliant joint venture agreements.
For instance, consider a joint venture comprised of an SDVOSB and its SBA-approved mentor, a large business. The joint venturers believe themselves to be an “SDVOSB JV,” so when they draft their joint venture agreement, they scrupulously follow the requirements at 13 C.F.R. 125.18. And that’s all well and good if they stick to SDVOSB and VOSB contracts–but if they pursue small business set-asides, they need to be savvy enough to know that there is a separate regulation joint venture regulation for those contracts, and that (for whatever reason), the substantive requirements aren’t the same as for SDVOSB contracts!
I bet we’ll be seeing a few SBA Office of Hearings and Appeals cases in the months ahead involving perfectly well-meaning JVs who get tripped up by these rules. Given OHA’s longstanding history of strictly applying the requirements, I wouldn’t hold my breath and expect any leniency.
In my opinion, the SBA’s lengthy and sometimes confusing list mandatory joint venture requirements is unnecessary micromanaging, and risks harming the very small businesses the SBA is trying to assist. But that’s a soapbox I’ll climb onto another day.
For now, consider this a public service announcement: if you’re a mentor-protege JV pursuing small business set-asides, check your joint venture agreements very carefully.
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