Current 8(a) regulations include numerous provisions that emphasize the disadvantaged individual’s ownership but run counter to common business practices or place unnecessary burdens on business owners. The proposed rule reconsiders several positions that have caused uncertainty in the application process and have often required businesses to weigh the benefits of admission to the 8(a) program against the risks of foregoing protections routinely held by minority owners. More broadly, the proposed changes resolve many of the unintentional distinctions that have emerged due to regulatory uncertainties and discretion.
Consistent with the soon-to-be-released new MySBA Certifications platform’s goal of streamlining the certification process, many of the proposed changes would eliminate unintentional differences between the SBA programs, which often arose through OHA precedent and interpretation of the regulations, but ultimately led to situations where an owner was found to control a company for purposes of the SDVOSB program but not for purposes of the 8(a) Program. To resolve the conflicting outcomes, the proposed rule suggests a number of changes, such as provisions to WOSB regulations allowing someone other than a qualifying woman to be the highest-paid employee, and replacing the 8(a) provision requiring SBA approval before changing the highest-paid employee to a non-disadvantaged individual with a 30-day notice rule instead. Another notable proposal is the adoption of six “extraordinary circumstances” under which a minority owner can exercise control without risking a finding of negative control. These are routine commercial practices such as dissolution of the company, bankruptcy, and a shareholder’s right of first refusal, which have historically cost applicants considerable time and money in trying to draft provisions that satisfy minority owners without jeopardizing 8(a) eligibility.
For other planned changes where SBA is not proposing to completely remove program-specific requirements, like the good character requirement for the 8(a) Business Development Program (13 CFR 124.108), the proposed rule seeks to lessen the impacts of prior convictions or possible criminal conduct, as well as the mandatory bar for owners lacking business integrity. In practice, while neither of these prohibitions has been absolute, the deterrent effect they have on businesses with prior indiscretions by a single owner has caused some to forego the application process altogether. Redefining the good character requirements in 13 CFR 124.108 will likely increase not only the 8(a) applicant pool but also the number of admissions.
Changes to Current Participants
Finally, the rule proposes a few notable changes for current participants in their annual review. In a move to reduce administrative burdens for participants and SBA, the proposed rule increases the financial thresholds for annual reporting requirements. Currently, firms with annual receipts between $2 million and $10 million must submit reviewed financials, and firms exceeding $10 million in annual revenue must submit audited financials. The proposed rule increases the reviewed financial threshold from $5 million to $20 million and requires only those firms with annual receipts exceeding $20 million to submit audited financial statements.
For firms in the transitional stage—years five through nine (or ten with the COVID one-year extension)—the rule proposes changes to the calculations of Business Activity Targets (BATs) (13 CFR Section 124.509) that are used to ensure participants do not become overly reliant on 8(a) contracts. Under the current rule, participants may continue to receive sole-source awards after failing to meet their BAT if they can demonstrate good faith in meeting the applicable targets. The proposed rule redefines “good faith” to include only those efforts that would have allowed the participant to meet the BATs and those for which the offeror had a reasonable prospect of success. This change could potentially restrict the level of discretion a BOS has in evaluating sole-source eligibility.
If you have questions regarding these changes, please contact Glenn Ronk.
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