Lobbyists from Venture Capital and Biotechnology organizations are busy working Capitol Hill in an effort to exempt their industries from SBA's size and ownership requirements for obtaining SBIR funding. In essence, these organizations who do not qualify as small businesses want the SBA to allow them an exemption to own and control small businesses that are competing for and/or receiving SBIR funding.

Recent rulings of ineligibility for some former SBIR award winning small businesses have raised a controversy within the SBIR community. The controversy revolves around two central eligibility issues:

1. A small business must be 51% owned and controlled by one or more individuals who are citizens of, or permanent resident aliens in, the United States, and
2. has, including its affiliates, not more than 500 employees.

The Problem as seen and expressed by the VCs

Some VCs and Biotech organizations are claiming that [recent changes] in the SBA's interpretation of eligibility standards for SBIR awards disqualifies start-up companies with venture capital backing. Also some SBIR awards have been revoked due to the small business not meeting the eligibility requirements stated previously. VCs more often that not, control more than 51% of the small businesses they invest in, and most VCs are not comprised of 51% ownership and control by "individuals" as referenced by the SBA policy directive.

Some legal opinions voiced to the Zyn SBIR Gateway stated that the word "individuals" in the legal community has a much broader scope than SBA is [now] allowing. Many Biotech organizations and their VC's want this term broadened to include corporations and other entities, including venture capital and pension funds.

The Biotech industry with its fertile environment for venture capital organizations is currently the most active arena for the controversy. VCs and Bio organizations are making inaccurate claims to congress, SBA and the news media that the SBA has been applying [new] interpretations to SBIR eligibility issues which limits VC participation and threatens an important funding source for emerging biotech companies.

Both the Senate and House Small Business Committees are receiving a great deal of pressure from Bio and VC organizations. These organizations are furnishing false and misleading information on this subject in order to get the rules changed.

VC/Biotech Claim: The SBA has recently changed its interpretation of the word individuals.

Zyn Findings: There is no evidence of a new SBA interpretation of eligibility standards. There have been a couple of cases where a participating SBIR agency made a mistake in the eligibility determination issue.

VC/Biotech Claim: SBA has recently applied its new interpretation of the word "individuals" to the CBR Laboratories ownership case to revoke an SBIR award to a company that would have previously been eligible.

Zyn Findings: This case was not "recent" and no "new" interpretation of the word "individuals" was made. This case was appealed back in January of 2001, heard by the Office of Hearings and Appeals (OHA). In that appeal, OHA ruled that a firm that is otherwise eligible for an SBIR award is disqualified if it does meet the ownership eligibility. This case took place under the old 1992 SBIR Policy Directive and was referenced for public comment during the creation of the 2002 Policy Directive now in place. (see Definition of Eligibility in the 1992 and 2002 SBIR Policy Directives)

VC/Biotech Claim: VCs should have an exemption to the "affiliation rules" under which venture capital investments are ignored in determining the eligibility of companies for small business status. 13 C.F.R. � 121.103(5)(i).

Zyn Findings: This ruling is specifically designed for Small Business Investment Companies (SBIC) (which are licensed and regulated by SBA) and bears no relationship to the SBIR program. SBICs are public-private partnerships licensed by the SBA.

Maurice Swinton, Assistant Administrator for the SBA Office of Technology addressed the VC/Biotech industry concerns.

First and foremost Mr. Swinton stated that there was no new SBA interpretation of eligibility standards. The rule of 51% ownership by individuals and the size limitation including all affiliates, of not more than 500 employees has been in place for many years. As for the word "individuals" being misconstrued by the VC's legal representatives, it should be noted that the term individuals is listed clearly as a reference to persons: i.e., 51 percent owned and controlled by one or more individuals who are citizens of, or permanent resident aliens in, the United States.

Mr. Swinton went on to explain that the eligibility requirements for SBIR are consistent with other SBA programs and 51% ownership and control are not just for SBIR but for other SBA programs as well. The SBA has always interpreted "individuals" to be natural persons, not just for SBIR but also including their other programs such as 8(a), HubZone and others.

Some concerns of the SBA include the potential impact on the competitive nature of the SBIR program. How could a small business compete against another small business that is funded and controlled by a large entity with access to great resources?

By SBA - On June 4, 2003 SBA filed notice in the Federal Register asking for comments concerning an eligibility rule change for SBIR. This change allows the small business to be owned by another for-profit business concern that is itself at least 51% owned and controlled by one or more individuals who are citizens of, or permanent resident aliens in, the United States. It makes no changes to the actual size standard of no more than 500 employees. This change will most likely be implemented soon. (see SBA Notice)

By Biotechs and VC Community - Want SBA to create an exemption to allow small businesses with venture capital investors to participate in the SBIR program by deeming that investments by venture capital be ignored when assessing whether there is 51% ownership. This also includes exemption from the < 500 employee size standard. Biotech organizations and VCs are currently lobbying congress and the SBA for these exemptions. (See remarks by Congressman Sam Graves (R-MO))

Congress is now involved in this issue. They are hearing from representatives of Biotech organizations, VC's and a few small businesses that have been adversely affected by being disqualified. Senator Bennett (R-Utah) is considering an amendment to pending SBA reauthorization legislation that would allow VCs the right to majority ownership of a small business obtaining SBIR funding.

The Small Business Technology Coalition (SBTC) reports that representatives of the venture capital and biotechnology industries have been pressing the House Small Business Committee to change the SBIR program rules. They want venture capital firms that do not qualify as small businesses to be able to own SBIR companies - but allow those acquired companies to continue accessing SBIR funds.

The venture capital and biotech lobbyists are asking the Committee to approve this change - without public hearings -- in the pending Small Business Administration Re-authorization bill. The bill is due to come to a vote before the full House in the next few weeks.

This matter is not limited to the Biotech arena and can affect every part of the SBIR program. There are several small businesses, owned and/or controlled by large organizations, that feel they have been unfairly disqualified from the SBIR program. The VCs and Biotechs believe a rule change must be made to allow non-qualifying VCs to be exempt from SBIR eligibility regulations.

Many SBIR experts believe that the VC rule change would create a severely biased playing field of small businesses trying to compete with large organizations disguising themselves as small businesses.

SBA is working on a policy change that would allow a VC to have controlling interest in a small business if the VC meets the SBA's small business eligibility requirements. A large VC can assume ownership and control of the small business after the SBIR award is completed.

Your comments are needed! We will compile comments from our SBIR user community and present them on this site as well as share them with the SBA and various congressional representatives. You have several options in offering your opinions on this subject:

1. We prefer (not require) that you provide us with your name and contact information, BUT we allow you the option to select anonymous status and your name will remain private. If a congressional staffer requires a name before accepting comments from you, we will ask your permission to release your contact information.

2. Contact information will not be given to SBIR Agencies.

3. Contact information will not be used for any commercial purposes and will not be distributed, sold or shared with other organizations.

Add Your Comments

SBA Policy Directive Information

SBA SBIR Eligibility language from 1992 and 2002 SBIR Policy Directives

Idaho SBIR Competition News, 12 Sep 2003
"SBIR Eligibility and VC Ownership" by Dr. Chris Busch www.webs.uidaho.edu/sbir/Newsletters

Boston Globe, 5 Jul 2003
"NIH Rule Hits Some Biotech Start-Ups" by Chris Gaither. The complete article is available for $2.95 by searching on "Gaither" on 5 Jul 2003 at: www.boston.com/globe/search/

BioWorld, 18 Aug 2003
"New Interpretation Of SBIR Rules Puts Squeeze On VC-Backed Firms" by Randall Osborne. This article is posted on the Idaho EPSCoR website www.uidaho.edu/sbir/docs/BioWorld_SBIR_18_Aug_2003.pdf Inc Magazine, Sep 2003

"Time to Fix the SBA" by Elizabeth Wasserman. This article includes a brief discussion of the SBIR eligibility rule, and currently is available at: www.inc.com/magazine/20030901/sba.html