Joint Ventures: SBA Proposes Major Changes

June 23, 2016
SBA has announced that its final rule implementing the long-awaited expansion of the mentor-protégé joint venture program under the 2013 National Defense Authorization Act (NDAA) will be released this month. The new program, available to all categories of small businesses, not just 8(a) participants, will create significant new opportunities for large and small businesses alike.Under the current regime, the mentor-protégé program and its beneficial joint-affiliation exemptions are limited to small, socioeconomically disadvantaged small businesses participating in SBA’s 8(a) business development program. The benefits to participants are manifold. First, 8(a) protégé businesses are granted an exception to the general rule that joint venture partners are deemed affiliated, allowing them to team with large businesses without jeopardizing their size status via affiliation.  It also allows large business mentors to own up to 40 percent of the protégé, thus providing much-needed capital to the protégé. Finally, it allows large business mentors to team with their protégés to compete for set-aside contracts and, in certain circumstances, it allows large business mentors to perform up to 60 percent of the work and receive up to 60 percent of the profit of contracts performed by a mentor-protégé joint venture.

Because 8(a) participants are only a small fraction of all small businesses, very few small businesses have been able to take advantage of the SBA mentor-protégé program, and many large businesses have found the pool of potential protégés too limited for their needs.

SBA’s proposed rule, released in February 2015, proposed to maintain the existing 8(a) mentor-protégé program (in a slightly altered form) and proposed to establish a new program, nearly identical to the 8(a) mentor-protégé program, available to all categories of small businesses. The highlights of the proposed rule are below:

  • Populated joint ventures (with their own employees), an already uncommon practice, would be eliminated as an option in favor of both the mentor and protégé performing as subcontractors to an unpopulated joint venture.  SBA believes this would facilitate accurate workshare calculations.
  • Mentors would be limited to one protégé and protégés to one mentor, as is the rule under the existing 8(a) program.  However, at its discretion, SBA could grant permission for mentors to have up to three protégés and for protégés to have up to two mentors.
  • The current 8(a) requirement that protégé be less than half the size standard corresponding to its primary NAICS code to be eligible for the program would be eliminated in both the 8(a) program and the new program under the proposed rule.
  • 8(a) mentor-protégé arrangements are limited to the time period in which the protégé remains in the 8(a) program.  Under the proposed rule, graduating 8(a) protégés would be able to transfer their mentor-protégé arrangement to the new general small business program.
  • The expanded mentor-protégé program would limit non-8(a) mentor-protégé arrangements to three years, although mentor-protégé joint ventures would be able to continue to perform existing contracts so long as recertifications of size made after the expiration of the mentor-protégé take into account the loss of the joint venture affiliation exemption (meaning the joint venture would likely need to recertify as a large business at that time).

Although changes are expected in the final rule, the substance of the final rule is likely to be largely similar to the proposed rule. We will update once the final rule is released.

By: Damien Specht and Rachael Plymale