SBIR Gateway

SBIR Insider Newsletter
SBA Proposed Rule Questions
June 19, 2012



Dear SBIR Insider,

Many insiders (including me) expected the SBA's size standard issues to be straight forward, and mainly dealing with the changes necessary to accommodate the new SBIR reauthorization law. However, what we received were many changes to important areas where there was no statutory authority to do so, such as redefining "Domestic Business Concern" and items such as changing eligibility from "at time of award" to "at time of submission."

This edition is very important because it deals with the complex issues of SBIR/STTR eligibility, the size standards that allow you and others to participate in the program, as well as several proposed changes that are viewed by many SBIR veterans as destructive to the program, and small businesses alike. The SBIR program and the SBA desperately need your involvement and informed comments.

In this issue:

Proposed Change in "Domestic Business Concern" Opens SBIR to Foreign Ownership

After our last SBIR Insider, I promised you a quick follow up on the issues, but the result was chaos due to various interpretations on the complexities of SBA's proposed size standards. I owe you an apology because in my first quick reading of the issues, I assumed SBA's language about "domestic concerns" would protect you from foreign entities competing in SBIR. I was very wrong on that point.

According to some experts, (and a big thank you to eagle eye Kevin Burns of Precision Combustion), there's a loophole big enough to float an aircraft carrier through, that will allow a non-domestic entity to establish a company in the US, and compete for SBIR funding.

According to Jere Glover of the SBTC, if the new proposed SBA regs are accepted as proposed, anyone on the planet can hire a lawyer, establish a domestic concern, and become an SBIR company and compete against you. I've seldom seen the SBTC membership and Glover so exercised over an SBA action. It should be noted that Jere Glover spent 7 years as the SBA's Chief Counsel for Advocacy (nominated by President Clinton, and approved by the Senate), so he has a lot of insight as to how the SBA works.

Another SBIR insider noted: With the SBA's new definition of a "Domestic Business Concern," all a foreign owner needs do is set up a wholly-owned U.S. LLC, complying with the simple-to-meet new rules of a "domestic business concern", and he or she can buy and operate as many SBIR firms as they may wish. This could be done by a foreign individual, or a foreign company (though it would also have to keep its affiliated employment without small business guideline), or even a foreign government or agency.

The Small Business Technology Council (SBTC) will be releasing a paper on this and other important size standard issues, early next week. We will follow up on how you can maximize the effectiveness of your comments to SBA. It will take a combination of individual and collective efforts.

SBA's Sean Greene Tries to Bring Clarity to the Proposed Rules and the Importance of Your Comments

Some SBIR Insider's believe the new SBA language in the proposed size standards rules are harmful to the program, and are anti-small business, while others believe them to be well meaning (in that it opens up the program to more people) but misguided in that it allows non-domestic companies and large businesses to partake in a small business program.

This is really a serious issue, so to give you additional perspective on SBA rulemaking and SBIR Policy Directive development, we were able to talk with Mr. Sean Greene, SBA's Associate Administrator for Investment and Special Advisor for Innovation.

We asked Mr. Greene where things are with the rules and policy directive process.

SG: We put out a proposed rule and we are running a public comment period to get direct feedback on whatever set of issues that people have. And we explicitly are asking people for comments and specific recommended changes on the rule.

Some people believe there is a hidden agenda by some in the SBA to change the rules to make it friendlier to foreign or non small business entities. Is there some sort of hidden agenda?

SG: We tried in our preamble to say, look here's everything we did. Here are some of the different things we considered, here are the open questions we have, so if you have a perspective, please answer these questions…to kind of get all of these issues out on the table.. to have that full and open discourse.

To date, you have had a webinar and one roundtable outreach session in DC. I understand there are more planned. What is the purpose of these roundtables, and do comments at roundtables carry more importance than the written comments?

SG: No. Even at the roundtables we say please formally submit your comment. The roundtables are good because you get more of a conversation flow, and you can get a variety of perspectives. They are both important.

Let me give one good example of that. One of the changes we made in the proposed rule was to change the time of eligibility from the time of award to the time of application. We did that for a variety of reasons. In the one roundtable we've had on this [in DC], we got a lot of feedback saying, hey it should be the other way, you shouldn't have changed this and here's why. Ok, let's hear more from people, that's precisely the kind of feedback we want.

Mr. Greene explained [paraphrased due to a rambling reporter..] There is a difference in the size standard rule currently open for comment (RIN: 3245-AG46), and the upcoming publishing of the SBIR & STTR policy directives, due out at the end of this month. The size standard rule does not become active until the commenting period is closed, everything evaluated, and a final rule is published, expected in December of 2012.

However, the SBIR and STTR policy directives will take effect immediately upon publishing in the Federal Register (targeted for the end of June). There will be a 60 day public comment period for the policy directives once they are released.

SG: The good news for everybody concerned is that the agencies can start implementing and working all the changes set in the policy directive or set in the statute such as shorting timelines, improved commercialization assistance etc.

So we will run that open public comment period, get feedback and fully expect to make a bunch of changes based on that feedback.

Many people who don't know the process feel that commenting is an exercise in futility because the government [in this case SBA] will just do what it wants anyhow.

SG: Let me state for the record, We have every intent to review all of the public comments and take those comments into consideration in making the final rule.

By the way, OIRA (OMB's Office of Information and Regulatory Affairs) which is the part of OMB that does this, they look, and so part of the process will be for us to say, here are all the comments from the public, we have reviewed them and here's how we're modifying things as a result.

So you're going on record to say that public comment is important?

SG: Yes! You can make the quote God Yes!!

Do you realize that by invoking the word God, some may feel you're going republican?

SG: No comment….

Sean, when you were invited to come to the SBA in the role of Associate Administrator for Investment and Special Advisor for Innovation, the SBA Office of Technology (responsible for SBIR) was down in the sub-basement, buried in the contracts department. Compared to your other functions, SBIR was miniscule, yet you devoted a great deal of time and energy to bring the Office of Technology out of the basement. We haven't seen a high placed SBA official do that in many years. Why did you become so involved in SBIR?

SG: [It] is a program that matters, and it is worth the time and energy to get it right.

Proposed Change to Eligibility from "At time of Award" to "At Time of Submission"

This is an important topic that has spawned many conversations and cast a shadow over much of the SBIR community. Startups, university professors, potential PIs and other key people will be greatly affected if this new rule is allowed to stand.

The following is the opinion of Mr. Dave Metzger, of Arnold & Porter LLP in McLean, VA. Barrister Metzger is a well known, respected and feared attorney who has, amongst other things, specialized in SBIR and government contract law for many years. He also once worked at SBA so he has a lot of insight as to how the agency works.

Here's your chance to hear from Metzger without the meter running, and I think you'll find it enlightening.

From: Dave Metzger

The time at which size is determined for SBIR firms has been time of award since 1982. The rationale SBA now cites orally (but not in the proposed rule) for adding time of submission relates to a misreading of a single reference in the Act to "applicant." SBA misreads that section as relating to time at which size is determined, which it doesn't. All of the reasons being debated are different than SBA's.

The rationale for determining size at the time of award relates largely to formation of SBIR firms during Phase I. Chances of winning a Phase I are less than 1 in 10. Selection for award provides the assurance necessary to effect the "jump" by a prospective entrepreneur from the relative safety of a non-profit, university, etc. to the newly formed SBIR firm.

In 1982, we were sensitive to the need for Phase I formation. We are less so today. The rationale here is no different than SBA's determination of size for sole source 8(a) awards at the time of award. Why? Because complying with all SBA requirements takes effort, and completion of that process needs to be afforded reasonable time.

One of those requirements is the "shared key employee" rule. A tenured professor is a key employee. If the professor also owns an SBIR firm, they are affiliated under the rule. That is one reason why determination of size at time of submission deters Phase I formation, and time of award, after contract selection, takes some of the "chill" out of the bone-chilling risks of Phase I SBIR firm formation.

SBA also claims that IGs want the change to deter fraud. Since fraudulent, as well as ignorant representations can occur at any time or stage, this rationale make no sense.

I hope you strongly urge people to comment. SBA needs a record upon which to base changes in the rule. No comment is too small to effect major changes in the rule.

Important Tips on How to Make Your Comments Heard and Relevant for Consideration

If the SBIR community is to be successful in the commenting campaign, the SBA should receive hundreds of comments from the small business community. Your involvement is very important.

Imagine all those comments having to be read, categorized and evaluated by SBA employees. Comments are only important if the relevant portions of your comments are actually read, so keep your comments short and to the point.

Don't comment on issues that have been settled in the legislation such as "I don't believe VCs should be allowed to participate." That will go nowhere, but you can comment on how they can or can't participate on the basis of the language stated in the proposed rule (including any objections you have to the revised definition of "Domestic Business Concern.")

As an example, if you were to comment on the issue highlighted above by Mr. Metzger, you might want to:

[start with]

D. Section 121.704—When SBA Determines Size and Eligibility

[then quote a portion of the proposed text that is relevant]

" SBA has proposed that for its SBIR and STTR programs it will determine size and eligibility of the concern at the time it submits an application in response to the SBIR or STTR solicitation or announcement and at the time of award."

[then concisely describe why and how you want it changed, or conversely comment that you like the rule and want it retained]

These tips can maximize the effectiveness of your comments, and streamline the process for the reviewers.

The best way to comment is to use the regulations.gov web system. They make it very easy for you. Just go to:

https://www.federalregister.gov/articles/2012/05/15/2012-11586/small-business-size-regulations-small-business-innovation-research-sbir-program-and-small-business

You should read the proposed language. Then in the upper right hand corner, click on "Comment Now". You'll have to register your information, then you can type your comments into comment box, or copy and paste from your word processor into the text box (formatting will not be preserved). Alternatively, if your comment requires formatting, tables, etc., you can attach a Word or PDF file (in the upload files box), which has a 10mb size limit. Make sure you use standard fonts or your file could be hosed.

Your comments will be public so don't divulge any proprietary information!

You can also read other's comments by going to the federal register link above, then click on the link under the green "Submit a Comment" button that states: Read the: "24 Submitted Comments"

Note: At this point I would suggest waiting several days for the SBTC to issue their guidance on comments, because they will delineate several of the important issues you may want to consider. There is strength in numbers.

FAST and i6 Challenge Grants Open

The SBA has opened another round of their Federal & State Technology Partnership (FAST) grant program to provide competitive matching grants to state approved organizations for the purpose of providing assistance and guidance to small technology business concerns dealing in SBIR/STTR. The funding announcement (closing July 9) can be found at:

http://www.grants.gov/search/search.do;jsessionid=JxTkPXFL31nBwmNJsd8q5CGJw6NsslpvpJ9jfHQq76ZBpMy2dgr3!-1255049606?oppId=174316&mode=VIEW

Also, this year the i6 Challenge grant program is including references to SBIR/STTR in their mission of acquiring best strategies to create Proof of Concept Centers. This opportunity is open through July 20. Information can be found at:

http://www.grants.gov/search/search.do?mode=VIEW&oppId=175993

Thanks to Roy Keller for noticing that.

Closing Thoughts

My hope is to be in receipt of some comments from SBTC, SBBC NSBA and ASBL so we can do a better job of defining the size standard issues, especially the Domestic Business Concern issue.

I expect to get back to you by mid next week with some suggestions you may consider in supplying comment to SBA on the size standard rule. Substantive comments should include justification for challenge or support.

Sincerely,

Rick

Rick Shindell
SBIR Gateway
Zyn Systems
40 Alderwood Dr.
Sequim, WA 98382
360-681-4123
rick@zyn.com
www.zyn.com/sbir



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