Last week, the U.S. Small Business Administration (“SBA”) published a proposed rule that if implemented will increase the opportunity for large and small businesses to partner on unrestricted competitions and small business set asides by creating a comprehensive Mentor-Protégé Program that will allow any type of small business contractor to partner with another company without risking the contractor’s small business status.  The new comprehensive Program is modeled on the current 8(a) Mentor-Protégé Program, which will remain in effect but be modified under the proposed rule to create more opportunities for contracting with small disadvantaged businesses.  The proposed rule comes shortly after another proposal from the SBA that—among other sweeping changes—will create new opportunities for partnerships between similarly situated small businesses, such as allowing joint ventures to qualify as small so long as each individual partner qualifies as small.

The proposed rule implements provisions of the Small Business Jobs Act of 2010 and National Defense Authorization Act for Fiscal Year 2013, which together authorized the SBA to expand the current 8(a) Mentor-Protégé Program to all small businesses, including HUBZone, women-owned, and service-disabled, veteran-owned small businesses, as well as small businesses that do not qualify for a particular socioeconomic subcategory.  The SBA estimates that approximately 2,000 small businesses could participate in the new comprehensive Program, resulting in contracts valued at approximately $2 billion per year.  In addition to creating opportunities for large and small businesses to partner on small business set asides, the comprehensive Program will likely benefit both large and small businesses in unrestricted competitions.  If implemented, small businesses could compete for larger awards and large businesses could take advantage of price evaluation preferences when partnering with HUBZone small businesses and potentially derive other benefits currently offered to large businesses that subcontract with protégé firms, such as receiving evaluation preferences or additional credit toward obtaining small business subcontracting goals.

The SBA’s current 8(a) Mentor-Protégé Program allows SBA certified small disadvantaged businesses to partner with other companies, including large businesses, to facilitate the small disadvantaged business’s development through the joint performance of government contracts or the provision of financial assistance to the small business in the form of either loans or equity investment up to a specified amount.  A small business protégé and its mentor may form a joint venture to compete as a small business for any prime contract or subcontract, including set asides, if the protégé would independently qualify.  The joint venture and any financial assistance provided to the protégé, including in some circumstances equity investments in the protégé of up to forty percent, are effectively ignored for the purpose of determining the protégé’s size.  This insulates the protégé from many concerns that would typically arise when entering into standard subcontracting relationships with large businesses.

Participation in the current 8(a) Mentor-Protégé Program is relatively limited, however, as protégés must meet the criteria outlined above and (i) be in the developmental stage of the 8(a) Business Development Program, (ii) meet a size standard that is half the standard applicable to other small businesses in the same industry, or (iii) have never received an 8(a) contract.  As recognized in the proposed rule, a small disadvantaged business in the first year of the transitional stage of the 8(a) Business Development Program that has received a single 8(a) contract and slightly exceeds half of the size standard applicable to other small businesses in the same industry would be ineligible to participate in the current 8(a) Mentor-Protégé Program.

The proposed rule eliminates the need to establish these additional qualifications and would offer the benefits available under the current 8(a) Mentor-Protégé Program to all small businesses through the establishment of the comprehensive Program.  Firms participating in the comprehensive Program would be subject to similar requirements that apply under the current 8(a) Program, including requirements to obtain SBA approval of joint venture agreements and ensure that protégés exercise control over joint ventures, perform specific amounts of work, and receive profits commensurate with their efforts.  However, new certification and reporting requirements also would apply under the comprehensive Program and a firm seeking to become a protégé would need obtain an affirmative determination from the SBA that the firm qualifies as a small business either through an application process or by self-certifying its status after having received a positive determination in a size protest.  Under both the comprehensive Program and the modified 8(a) Program, non-profit organizations would no longer be eligible to act as mentors and joint ventures would no longer be allowed to maintain separate employees for the purpose of contract performance, although joint ventures will still be permitted to hire administrative personnel.  Mentor-protégé agreements under the comprehensive Program would be limited to a maximum term of three years with the opportunity for participants to enter into successive agreements.

The proposed rule specifically requests comments on a number of issues currently being considered by the SBA, including whether joint ventures should be required to be formed as separate legal entities, whether joint ventures should be registered in databases like the System for Award Management, whether protégés should be permitted to act as mentors to other small businesses, whether equity investments in protégés should be permitted only as long as a recognized mentor-protégé relationship exists, and whether mentors should be incentivized to enter into subcontracting relationships with protégés.