SBIR Gateway
SBA Changes SBIR Size Standard Eligibility Rule
Wants Comments for Additional Changes

Updated January 19, 2005
(Updates in Red)

On December 3, 2004 the SBA issued a new "Final Rule" pertaining to SBIR size standards and eligibility for participation in the SBIR program. In this case the term "Final Rule" describes an action that the SBA has taken to formally enact the rule change by publishing it in the Federal Register. This serves as a legal notice of a change to the Code of Federal Regulations (CFR), specifically 13 CFR 121.702, which goes into effect January 3, 2005. The term "Final Rule" does not constitute a permanent status, or even a guarantee of longevity. In fact, this final rule may already be in jeopardy even before it takes effect.

Welcomed Changes to a Hot Button Issue
In brief this new rule makes changes to 13 CFR 121.702 which now provides added flexibility concerning the ownership and control of a small business. Starting with this new rule which goes into effect on January 3, 2005, a small business can be majority owned and controlled by another entity such as Venture Capital Companies (VCCs), Employee Stock Option Plan (ESOPs), Joint Ventures (JVs), Trusts, or other small business concerns.

The main issue to this expanded eligibility is that the entity with majority ownership must itself be at least 51% owned and controlled by individuals who are citizens of, or permanent resident aliens in the United States AND together with its affiliates, not have more than 500 employees. Although the SBA makes no distinction between VCCs and any other for-profit entities, this rule will allow a VCC to own and control an SBIR awardee, as long as the VCC is itself at least 51% owned and controlled by U.S. citizens and permanent resident aliens and the SBIR awardee, together with its affiliates, meets the 500-employee size standard.

BIO, NVCA and Other Large VCs Not Satisfied with the Final Rule
Large special interest organizations such as the Biotechnology Industry Organization (BIO) and the National Venture Capital Association (NVCA) are not pleased with with the SBA rule change because it does not change the rules to permit large VCCs to have majority ownership and control of a small business. These and a few other organizations have spent major $$$ to lobby Congress for an exemption to small business size standards to allow large VCCs and Institutional Investors to majority own and control entities that would otherwise be considered a small business. These lobbyists initiated a big push in the late stages of the 108th Congress to get their legislation introduced and passed before final adjournment. However, individual and collective efforts by many opposed to this exemption helped to defeat that effort, at least for now.

Small Businesses, small VCCs, and others who are opposed to the BIO/NVCA initiative, want Congress to hold hearings in order to adequately present their side of the story. The SBIR Gateway will soon be featuring an article called Truths & Myths of VC eligibility.

Big Money Lobbyists Put Pressure on SBA, New Final Rule in Jeopardy
Although the SBA has been working on revising the size standards for many of SBA's other small business programs, pressure from the big money lobbying efforts by organizations such as BIO and NVCA have led the SBA to include the non-small business VC majority ownership and control issues for the SBIR program to be reconsidered. This is happening even before the new "Final Rule" takes effect. The new final rule is alive but its longevity is in question.

Concurrent to the release of the Final Rule announcement in the Federal Register (FR), the SBA also issued an Advance Notice of Proposed Rulemaking in the FR that deals with many SBA size standard issues. The majority of these issue have nothing to do with the SBIR program but there is one very important SBIR item listed. The SBA is seeking public comments on whether it should provide an exclusion from affiliation for venture capital companies (VCC) in size determinations for eligibility for the SBIR Program. Under such a policy, VCCs that invest in SBIR participants would not be considered affiliates of the SBIR participant and their size would therefore not be included in determining the size of the participant.

The SBA has several concerns that they would like comments on, including:

  1. The role of VCC financing on SBIR projects during Phases I and II.
  2. The impact of such a change in eligibility requirements on the composition of SBIR participants. For example, would the program shift towards lower-risk technologies closer to market, or become more geographically concentrated following industries and areas of venture capital focus?
  3. The types of firms and projects that would benefit most from such a change, and those that would benefit the least.
  4. Whether an exclusion from affiliation for VCCs would require justifying limiting the exclusion to VCCs and not including other entities such as not-for-profit organizations.
  5. Whether or not granting VCC exclusion from affiliation would adversely affect the ability of small business concerns without such access to private capital to compete for SBIR awards.
  6. Whether the participation of firms owned and controlled by VCC firms would ultimately create an environment of multiple repeat award winners.
  7. Alternative approaches that may assist small business concerns in obtaining and utilizing VCC funding while participating in the SBIR Program, aside from a policy that requires an exclusion from affiliation for VCC majority-owned small business concerns.
To Comment or Not to Comment
This VC exclusionary issue is much broader than just VCCs. If this proposed effort gets off the ground it can and most likely will change the entire complexion of the SBIR program. Even SBA fears that an exclusion for VCCs only cannot be supported, and perhaps that will open up the doors for non-profits to play. How would one of the big VCCs like to compete against an organization like Battelle, or an educational institution such as MIT or Johns Hopkins?

The SBIR Gateway has heard from several small VCCs who are not in favor of the BIO/NVCA position. Although these small VCCs are very pleased to be able participate in the SBIR program, they realize that they could not compete well against the big VCCs with their virtually unlimited resources.

The SBA needs to hear from you concerning these matters, pro or con. Jere Glover of the Small Business Technology Coalition (SBTC), a non-partisan, nonprofit industry association of companies dedicated to promoting the creation and growth of research-intensive, technology, believes that your comments should also be sent to your Senators and Congressmen. Congress does have the power to override the efforts of the SBA by creating legislation to satisfy the big BIO/NVCA lobbyists.

The deadline for comments is February 1, 2005. The NEW deadline for comments is April 3, 2005. Please read the SBA's Advance Notice of Proposed Rulemaking (ANPRM) before you submit a comment. That document will guide you to the areas of interest SBA would like you to address.

How to Provide Comments
You may submit comments, identified by RIN 3245-AF22 by any of the following methods:

  • Federal eRulemaking Portal: Follow the instructions for submitting comments.
  • E-mail:  [email protected]. Include RIN 3245-ZA02 in the subject line of the message.
  • Fax:  (202) 205-6930.
  • Mail:  Gary M. Jackson, Assistant Administrator for Size Standards, 409 Third Street, SW, Washington, DC 20416.
  • Hand Delivery / Courier:  Gary M. Jackson, Assistant Administrator for Size Standards, 409 Third Street, SW, Washington, DC 20416.

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