Final Rule Amends SBA Regulations On Mentor-Protégé Programs, Joint Ventures and The 8(a) BD Program, Part 1: Mentor-Protégé Programs

August 15, 2016​

Part 1 of Our Summary of SBA's Changes To Regulations On Mentor-Protégé Programs, Joint Ventures and 8(a) BD Program

A few weeks ago, on July 25, 2016, the U.S. Small Business Administration (SBA) issued a final rule (the "Final Rule") amending SBA regulations to implement provisions of the Small Business Jobs Act of 2010 and the National Defense Authorization Act of 2013 (NDAA 2013). The Final Rule adopts, with some modifications, the changes that the SBA proposed on February 4, 2015 in a proposed rule. The Final Rule does three things. First, it establishes a government-wide mentor-protégé program for all small businesses and makes clarifications and conforming changes to the mentor-protégé program under the 8(a) Business Development (“8(a) BD”) program. Second, the Final Rule makes several changes to the rules applicable to joint ventures. Lastly, the Final Rule makes clarifications to the rules applicable to the 8(a) BD program. The Final rule, which can be found here, becomes effective on August 24, 2016.

In this edition of The GovCon Bulletin,™ we summarize the Final Rule's changes to the SBA's mentor-protégé programs.

Mark Amadeo 

Establishment of Government-Wide Small Business Mentor-Protégé Program  

The Final Rule implements in a new § 125.9 of SBA's regulations one new small business mentor-protégé program for all small businesses rather than separate mentor-protégé programs for small businesses, SDVOSBs, WOSBs and HUBZone small businesses. The Final Rule maintains as a separate program the 8(a) BD mentor-protégé program, which the new small business mentor-protégé program is modelled after.

The Final Rule permits the SBA to terminate a mentor-protégé agreement (“MPA”) where it determines that the parties are not complying with any term or condition of the MPA. The Final rule also requires a reporting of the benefits to the non-8(a) small business protégé from the mentor-protégé relationship and similarly permits the SBA to terminate the mentor-protégé relationship where the benefits provided to the protégé firm do not adequately justify the relationship. The SBA indicated that this determination will be fact-specific based on the totality of the circumstances.

The SBA indicated that it would not terminate an MPA where the violations are de minimus or inadvertent and that it did not intend to terminate an MPA without consideration of the views of the protégé small business.

The requirements for joint ventures between small-business protégé firms and their mentors are found in a new § 125.8. 

Applications for the Government-Wide Small Business Mentor-Protégé Program

The proposed rule contemplated two separate processes for the review of applications for the small business mentor-protégé program and the 8(a) BD mentor-protégé program. Applicants to the small business mentor-protégé program would submit their applications to the SBA's Director of Government Contracting possibly at six different locations. Applicants to mentor-protégé program under the 8(a) BD program would, on the other hand, continue to submit their applications to the SBA's Associate Administrator for the BD program (“AA/BD”) as they do under existing regulations. In light of concerns over resources and inconsistent results, however, the Final Rule establishes a separate unit within the Office of Business Development whose sole function would be to process mentor-protégé applications and review the MPAs and the assistance provided under them once approved. The new unit will process and make determinations with respect to all small business MPAs, with the ultimate decision to be made by the AA/BD or his/her designee.

Mentors 

The Final Rule permits any for-profit business of any size that demonstrates a commitment and the ability to assist approved small businesses to act as a mentor and receive the benefits of the mentor-protégé relationship. In order to make the 8(a) BD mentor-protégé program consistent with the small business mentor-protégé program, the Final Rule provides that mentors in the 8(a) BD mentor-protégé program must be for profit businesses as well.

Although the proposed rule also required a firm seeking to be a mentor to demonstrate that it “possesses a good financial condition” the SBA decided that if a proposed mentor can fulfill its obligations under a mentor-protégé agreement and has the financial wherewithal to provide all of the business development assistance to the protégé firm as described in its MPA, the SBA should not otherwise care about the proposed mentor's financial condition. Consequently, the Final Rule changed the requirement that a mentor have good financial condition to one requiring that the mentor must demonstrate that it can fulfill its obligations under mentor-protégé agreement.

In addition, the Final Rule provides that a mentor participating in any SBA-approved mentor-protégé program would generally have no more than one protégé at a time. The SBA can authorize a concern to mentor more than one protégé at a time where it can demonstrate that the additional mentor-protégé relationship would not adversely affect the development of either protégé firm (e.g.,the second firm may not be a competitor of the first firm). No firm can be a mentor of more than three protégés in the aggregate at one time under either of the mentor-protégé programs authorized by § 124.520 or § 125.9. A mentor could choose to have: Up to three protégés in the 8(a) BD program; or up to three protégés in the small business program; or one or more protégés in one program and one or more in another program, but no more than three protégés in the aggregate.

Lastly, the proposed rule provided that a protégé in the small business mentor-protégé program may not become a mentor and retain its protégé status. The Final Rule, however, provides that the SBA may authorize a small business to be both a protégé and a mentor at the same time where the firm can demonstrate that the second relationship will not compete or otherwise conflict with the first mentor-protégé relationship.

Protégés

In order to qualify as a protégé under the 8(a) BD or the small business program, the Final Rule requires a business to qualify as small for the size standard corresponding to its primary NAICS code or identify that it is seeking business development assistance with respect to a secondary NAICS code and qualify as small for the size standard corresponding to that NAICS code. This is a change from the existing 8(a) BD mentor-protégé regulation, which required an 8(a) protégé to (i) have a size that is less than half the size standard corresponding to its primary NAICS code, or (ii) be in the developmental stage of its 8(a) program participation; or (iii) not have received an 8(a) contract.

The Final Rule provides that a protégé participating in either of the mentor-protégé programs generally would have no more than one mentor at a time. However, it authorized a protégé to have two mentors where the two relationships would not compete or otherwise conflict with each other and the protégé demonstrates that the second relationship pertains to an unrelated, secondary NAICS code, or the first mentor does not possess the specific expertise that is the subject of the mentor-protégé agreement with the second mentor.

In addition, § 125.9(c)(1) of the proposed rule required that SBA verify that a firm qualifies as a small business before approving that firm to act as a protégé in a small business mentor-protégé relationship. However, because the size protest procedures permit any interested party to protest the size of any apparent successful offeror, the SBA agreed with commenters that a protégé that was not small would ultimately be found ineligible for award of the contract and, thus, would not unduly benefit from its mentor-protégé relationship. Consequently, under the Final Rule small businesses may "self-certify" to qualify as small for a small business small business mentor-protégé relationship.  The SBA’s position is that as long as it is clear that SBA's approval of a mentor-protégé relationship does not amount to a formal determination of size eligibility, the size protest procedures are sufficient to protect the integrity of the program.

The Final Rule also provides that a protégé firm that graduates or otherwise leaves the 8(a) BD program but continues to qualify as a small business may transfer its 8(a) mentor-protégé relationship to a small business mentor-protégé relationship by notification, without applying to and receiving approval from SBA to do so. 

Mentor-Protégé Programs of Other Departments and Agencies

In the new § 125.10, the Final Rule implements the mandate under NDAA 2013 that a Federal department or agency, other than the Department of Defense, cannot carry out its own agency specific mentor-protégé program for small businesses unless the head of the department or agency submits a plan for the program to SBA and receives the SBA Administrator's approval of the plan. Within one year of the effective date of the Final Rule, a department or agency that is currently conducting a mentor-protégé program (except the Department of Defense) must submit a plan to the SBA for approval in order for the program to continue.

The SBA recognized that unlike the SBA’s mentor-protégé program which contemplates a prime contractor role for the protégé, other agency-specific mentor-protégé programs incentivize mentors to utilize their protégés as subcontractors. Consequently, the Final Rule identifies subcontracting incentives as a possible benefit to be provided by procuring activities in appropriate circumstances. 

Benefits of Mentor-Protégé Relationships

As with the 8(a) BD program, under the Final Rule, a protégé in the small business mentor-protégé program may joint venture with its SBA-approved mentor and qualify as a small business for any Federal government contract or subcontract, provided the protégé qualifies as small for the size standard corresponding to the NAICS code assigned to the procurement. Thus, a joint venture between a protégé and its approved mentor in the small business mentor-protégé program will be deemed to be a small business concern for any Federal contract or subcontract. This does not mean that the joint venture affirmatively qualifies for any other small business program. For example, a joint venture between a small business protégé firm and its SBA-approved mentor will be deemed a small business concern for any Federal contract or subcontract for which the protégé qualified as small, but the joint venture will qualify for a contract reserved or set-aside for eligible 8(a) BD, HUBZone SBCs, SDVO SBCs, or WOSBs only if the protégé firm meets the particular program-specific requirements as well.

The Final Rule also clarifies that the individual identified as the project manager of the joint venture need not be an employee of the protégé firm at the time the joint venture submits an offer, but, if he or she is not, there must be a signed letter of intent that the individual commits to be employed by the protégé firm if the joint venture is the successful offeror. The Final Rule also clarifies that the individual identified as the project manager cannot be employed by the mentor and become an employee of the protégé firm for purposes of performance under the joint venture.

Consistent with the 8(a) BD program, the Final Rule also permits a mentor to a small business to own an equity interest of up to 40% in the protégé firm in order to raise capital for the protégé firm.

Written Mentor-Protégé Agreement

The Final Rule requires that all MPAs be in writing, identifying specifically the benefits intended to be derived by the projected protégé firms. The Final Rule also clarifies that a subcontract from a protégé to a mentor can be developmental assistance authorized by a mentor-protégé agreement.

The Final Rule also requires a firm seeking approval to be a protégé in either the 8(a) BD or small business mentor-protégé programs to identify any other mentor-protégé relationship it has through another Federal agency or SBA and provide a copy of each mentor-protégé agreement to SBA. The rule requires that the mentor-protégé agreement submitted to SBA for approval must identify how the assistance to be provided by the proposed mentor is different from assistance provided to the protégé through another mentor-protégé relationship, either with the same or a different mentor.

Under the Final Rule, if certain specified assistance was identified in a mentor-protégé agreement of another agency, but that assistance had not yet been provided, a firm can choose to terminate the mentor-protégé relationship with the other agency and use the not yet provided assistance as part of the assistance that will be provided through the 8(a) BD or small business mentor-protégé relationship. 

 The Final Rule also provides that SBA will review a mentor-protégé relationship annually to determine whether to approve its continuation for another year.

The SBA initially proposed to limit the duration of an MPA to three years and to permit a protégé to have one three-year MPA with one entity and one three-year MPA with another entity, or two three-year MPAs (successive or otherwise) with the same entity. Understanding that it may take longer than three years to develop a meaningful mentor-protégé relationship, however, the SBA under the Final Rule continues to authorize two three-year MPAs with different mentors, but allows each to be extended for a second three years provided the protégé has received the agreed-upon business development assistance and will continue to receive additional assistance.

The SBA limits all small businesses, including 8(a) Participants, to having two mentors. Although an 8(a) Participant can transfer its 8(a) mentor-protégé relationship to a small business mentor-protégé relationship after it leaves the 8(a) BD program, it can have only two mentor-protégé relationships in total. If it transfers its 8(a) mentor-protégé relationship to a small business mentor-protégé relationship after it leaves the program, it may enter into one additional mentor-protégé relationship.

The Final Rule also provides (for the 8(a) BD and small business mentor-protégé programs) that if control of the mentor changes (through a stock sale or otherwise), the previously approved mentor-protégé relationship may continue if, after the change in control, the mentor expresses in writing to SBA that it acknowledges the MPA and that it continues its commitment to fulfill its obligations under the agreement.