The Small Business Administration (SBA) has been busy. Previously, we reported on the SBA’s new, and long-awaited, Women-Owned Small Business Federal Contract Program. Now, for the first time in over ten years, the SBA is making significant changes to its 8(a) small business development program. 76 Fed. Reg. 8221 (Feb. 11, 2011). The changes – which take effect on March 14, 2011 – overhaul SBA policy on the 8(a) mentor-protégé program, 8(a) joint venture agreements, and the treatment of Alaskan Native Corporations (ANCs). SBA claims these changes will “strengthen” the program and “better ensure that the benefits flow to the intended recipients and help prevent waste, fraud and abuse.”
Among these changes are significant revisions to the qualifications for the 8(a) program itself. Specifically, the revised regulations at 13 CFR § 124 tighten the rules on entry to the 8(a) program and provide additional guidelines for continued eligibility. Some of the key changes to the 8(a) eligibility rules are outlined below:
- Adds Annual Income Limits: The revised regulations add – for the first time – an objective criteria to determine “economic disadvantage.” Under the rule, an individual’s adjusted gross income (averaged over three years) may not exceed $250,000 to enter the 8(a) program, and must be below $350,000 annually to maintain eligibility. § 124.101(c)(3).
- Creates Total Asset Standard: The rule also adds a “total asset” standard to the regulations. The fair market value of an individual’s assets may not exceed $4 million for initial 8(a) eligibility and $6 million for continued eligibility. This includes the value of the individual’s primary residence and business. IRAs and other retirement accounts are now excluded from the total asset determination. § 124.101(c)(2)(ii), (c)(4).
- Spousal Status: SBA will now consider a spouse’s “financial situation” in determining an individual’s access to credit and capital where the spouse has a role in the business or has lent money to, provided credit support to, or guaranteed a loan of the business. § 124.104(b)(2).
- Family Businesses: Under the new rule, an individual is prohibited from using his or her disadvantaged status to qualify a concern if an immediate family member has used this status to qualify another concern for the 8(a) program. The SBA may waive this provision if there are “no connections” between the firms; however, there is a presumption against waiver if both concerns are in the same or similar line of business. § 124.105(g).
- Exceeding the Size Standard as Grounds for “Early Graduation”: An 8(a) concern may now be “early graduated” from the program for exceeding the size standard corresponding to the primary NAICS code for three successive program years, unless the concern is able to demonstrate that it has taken steps to change its industry focus. § 124.302(c).
- Excessive Withdrawals as Ground for Termination: The amended § 124.303 allows SBA to terminate a concern from the 8(a) program for “excessive withdrawals that are detrimental to the achievement of the targets, objectives, and goals contained in the Participant’s business plan . . . .” The final rule also amends § 124.112(d) to increase each of the existing “excessive” withdrawal thresholds by $100,000.
- Preference for On-Line Applications: Although most applicants already use the online application, the rules now state SBA’s preference that firms use the online 8(a) application to apply. § 124.202.
Look for the new 8(a) eligibility rules to influence access to the program for applicants that have a spouse or family member in the same or a similar business. Likewise, the new rules appear likely to hasten the process of ushering successful 8(a) concerns out of the program. While these reforms will make it more difficult for certain businesses to enter and thrive in the program, they also create an opportunity for new 8(a) concerns to enter the void.
Stay tuned for Part 2 of this post which will describe the broad impact the revised regulations will have on the 8(a) mentor-protégé and joint venture rules.