SBA Proposed Rule Would Create More SBIR and STTR Opportunities for Businesses Partially Owned by Venture Capital Companies, Hedge Funds and Private Equity Firms

The Small Business Administration (“SBA”) recently issued a proposed rule to amend its regulations governing eligibility for the Small Business Innovation Research (“SBIR”) and Small Business Technology Transfer (“STTR”) programs. This proposed rule would implement provisions of the National Defense Authorization Act for Fiscal Year 2012. Specifically, the proposed rule revises the affiliation rules for participants in the SBIR and STTR programs to permit participation by concerns that are majority-owned by multiple venture capital operating companies, private equity firms or hedge funds. The proposed rule also makes changes to the regulations with respect to size protests. See 77 Fed. Reg. 28520-30, May 15, 2012.

For the first time, the proposed rule would allow concerns that are majority-owned by multiple venture capital operating companies, hedge funds or private equity firms (“investment companies”) to participate in the SBIR and STTR programs, as long as no single investment company owns more than 50 percent of the concern. These investment companies must qualify as a domestic business concern, which requires the concern to have a place of business in the U.S. and be incorporated in the U.S. Furthermore, concerns that are majority-owned by multiple investment companies must register with SBA on or before the date they submit a response to an SBIR solicitation and these concerns must indicate in their SBIR proposals that they have completed this registration.

The proposed rule allows these investment companies to participate by modifying the affiliation rules solely for the SBIR and STTR programs. Currently, such concerns would not be eligible, because the concern would be considered to be affiliated with not only the investment companies, but also the other companies owned by these investment companies. SBA’s proposed rule provides that where an SBIR or STTR applicant’s voting stock is widely held or where two or more persons (including investment companies) hold large blocks of voting stock but no one person owns more than 50 percent of the stock, the board of directors controls the applicant.

With respect to size protests for SBIR and STTR contracts, the proposed rule would amend the regulations to state that SBA or the contracting officer/funding agreement officer may file a protest at any time, as long as it is not premature. SBA will not accept a size protest until the awardee has been selected and notified of the award, which is consistent with SBA’s current practice for its contracting programs. Comments on the proposed rule are due on or before July 16, 2012.

Legal Update from McKenna, Long & Aldridge. Please contact the following for more information:
Richard B. Oliver
213.243.6169

Agustin D. Orozco
213.243.6152