September 2016

SBA’s New Rules on Joint Ventures and Mentor-Protégé Program 

9/5/2016

 The U.S. Small Business Administration (SBA) amended its regulations pertaining to Small Business Joint Ventures and the Mentor-Protégé Programs on July 25, 2016. These amendments became effective on August 24, 2016.  Below are a few of the major changes:

 SBA has amended its regulations to implement provisions of the Small Business Jobs Act of 2010, and the National Defense Authorization Act for Fiscal Year 2013. The amended regulations establish a Government-wide mentor-protégé program for all small business concerns, consistent with SBA's mentor-protégé program for Participants in SBA's 8(a) Business Development (BD) program. The amendment also changes the current joint venture provisions to clarify the conditions for creating and operating joint venture partnerships, including the effect of such partnerships on any mentor-protégé relationships. The new rule additionally makes changes to current size, 8(a) Office of Hearings and Appeals and HUBZone regulations, concerning among other things, ownership and control, changes in primary industry, standards of review and interested party status for some appeals.

Universal Mentor-Protégé Program

The SBA has established a single “universal” mentor-protégé program for use by all small businesses, as opposed to having separate programs for the SDVOSB, HUBZone, WOSB and small business firms.  The SBA’s goal was to make the small business mentor-protégé program as identical as possible to the 8(a) mentor-protégé program.  To achieve this goal, one major change in the regulations is to disallow non-profit organizations from serving as mentors under the mentor-protégé program.  The current law governing 8(a) contracts allows non-profit entities to serve as mentors, however, effective August 24, 2016, non-profit entities will no longer be permitted to serve as mentors under the 8(a) mentor-protégé program.

Other important rule changes under the “universal” mentor-protégé program are as follows:

1. Mentor Qualifications.  Any for-profit business concern that demonstrates a commitment and the ability to assist small business concerns may be approved to serve as a mentor and receive the benefits of the mentor-protege program.  The for-profit business concerns include 8(a) program businesses, HUBZone firms, other small businesses and large businesses.

2. Protege Qualifications.  A business concern that qualifies as small for the size standard corresponding to its primary NAICS code or identifies that it is seeking business development assistant with respect to a secondary NAICS code, and qualify as small for the size standard corresponding to that NAICS code.  The business concern must also demonstrate how the business development assistance to be received through its proposed mentor-protégé relationship would advance the goals and objectives set forth in its business plan.

3. Number of Proteges.  Generally, a mentor participating in any mentor-protege program will have no more than one protege at a time.  The SBA may, however, authorize more than one mentor, but not more than three, if it can be demonstrated that the additional mentor-protégé relationship will not adversely affect the development of either protégé firm. (13 CFR 125.9)

4. Number of Mentors.  Generally, a protege will have one mentor at a time, however, the SBA may approve a second mentor for a particular protégé firm where the second relationship will not compete or otherwise conflict with the assistance set forth in the first mentor-protégé relationship, and (i) the second relationship pertains to an unrelated NAICS code, or (ii) the protégé firm is seeking to acquire a specific expertise that the firm mentor does not possess.

5. Written Agreement.  A written agreement setting forth the protégé’s needs and a detailed description of the benefits intended to be derived by the protégé must be entered into and executed by both the mentor and protégé.

“Populated” JVs Eliminated

One major change in the SBA’s new regulations is the elimination of populated joint ventures.  Under prior law, a joint venture could be either populated or unpopulated.  A populated joint venture will hire its own employees and operate as a separate independent entity performing contracts using its own employees, as opposed to an unpopulated joint venture which uses each of the joint venture member’s employees performing contracts.  The new rule states that if a joint venture is a formal separate legal entity, such joint venture is prohibited from populating with its own hires to perform contracts awarded to the joint venture.  The new rule allows a joint venture to have its own separate employees for administrative functions only. It may not have its own separate employee hires to perform contracts awarded to the joint venture.

HUBZone JV

The regulations applicable to the HUBZone program have also been amended to allow a joint venture between a qualified HUBZone small business and one or more other small businesses, or with an approved mentor under 13 CFR 124.520 or 13 CFR 125.9.  Under previous law, joint ventures for HUBZone contracts were permitted only in those cases where all parties to the joint venture were HUBZone certified.