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May 31, 2023

SBA Updates Its Regulations Governing the 8(a) Business Development Program

Advisory
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On April 27, the Small Business Administration (SBA) issued a final rule (the Final Rule) that, among other things, makes various changes to its regulations governing the 8(a) Business Development (BD) program. SBA created the 8(a) BD program (named after Section 8(a) of the Small Business Act, the principal statutory provision authorizing the program) to assist small businesses owned and controlled by socially and economically disadvantaged individuals.

Who Does the Final Rule Affect and What Changed?

This article addresses significant updates in the Final Rule which impact current 8(a) BD program participants, prospective participants, and non-8(a) BD concerns (both small and large businesses) looking to team with (e.g., through a joint venture) or acquire 8(a) firms. Among other things, the Final Rule adjusts and clarifies various eligibility requirements, ownership and control restrictions, and rules governing 8(a) set-aside and sole-source requirements.

Why Are These Changes Relevant?

These changes will impact eligibility to participate in the 8(a) BD program, program requirements for 8(a) BD participants, and how 8(a) procurements are conducted. In turn, these changes will affect the ability of current and prospective 8(a) firms to receive various benefits the 8(a) BD program provides, such as:

  1. Preferential treatment in the procurement process, including eligibility to receive 8(a) BD sole-source awards (otherwise known as “set aside” awards) and to compete in procurements reserved for 8(a) BD firms
  2. Training and management, technical assistance, and financial assistance
  3. Preferred status for acquiring surplus government property

Summary of Current and Modified 8(a) Requirements

8(a) Eligibility

A concern can participate in the 8(a) BD program if four requirements are met: (1) the concern qualifies as small; (2) one or more socially and economically disadvantaged persons unconditionally own and control the concern; (3) those persons have good character, are U.S. citizens, and reside in the U.S.; and (4) the concern has “demonstrated potential for success.”1

Size Status

To qualify as small under the 8(a) BD program, a concern (including any affiliates) cannot exceed the size standard associated with its primary North American Industry Classification System (NAICS) code.2 Those size standards are stated in terms of average annual receipts or employee headcount.3 If a concern outgrows the size standard for its primary NAICS code and exceeds that size standard for three successive years, then SBA typically graduates the concern from the 8(a) BD program. (There is a narrow exception where the firm shifts to a related secondary NAICS code reflected in its approved business plan and remains small under the secondary NAICS code.4)

SBA’s long-standing rule is that if SBA rejects a firm’s application to enter the 8(a) BD program, the firm can request a formal size determination from SBA.5 Although SBA’s Final Rule does not materially change the basic size status requirements, it does adjust the size determination process. For instance, the Final Rule eliminates the requirement to submit a new application if the only basis for denying entry to the 8(a) BD program was because the concern did not qualify as small and the firm is ultimately determined to be small through the formal size determination process.6 Instead, the concern will be automatically admitted to the 8(a) BD program. If the firm’s size was not the only reason for denying the application, then the concern must reapply and must wait at least 90 days to do so.

Social and Economic Disadvantage

To qualify for the 8(a) BD program, a concern must be unconditionally owned and controlled by one or more individuals who are both socially and economically disadvantaged. Persons are socially disadvantaged if they “have been subjected to racial or ethnic prejudice or cultural bias within American society because of their identities as members of groups and without regard to their individual qualities” based on “circumstances beyond their control.”7 Persons are economically disadvantaged if their “ability to compete in the free enterprise system has been impaired due to diminished capital and credit opportunities as compared to others in the same or similar line of business who are not socially disadvantaged.”8

  1. Social Disadvantage 

    SBA’s regulations establish a presumption that members of designated groups are socially disadvantaged, including members of certain racial or ethnic groups.9 SBA requires a person to “demonstrate that he or she has held himself or herself out, and is currently identified by others, as a member of a designated group” to qualify.10 A person who is not a member of a designated group may prove social disadvantage through a preponderance of the evidence supported by specific types of evidence.11 The Final Rule leaves the substantive evidentiary requirements unchanged, but replaces the term “physical handicap” with “identified disability” to align with new General Services Administration policies and the Americans with Disabilities Act.12

  2. Economic Disadvantage 

    SBA considers various factors when determining whether a person is economically disadvantaged, including individual net worth, certain asset transfers, income, and the fair market value of all assets.13 Although this assessment is fact-dependent, SBA has established certain bright-line rules. To show economic disadvantage, the concern must submit financial information for the qualifying individual(s) to meet qualification thresholds, which include a personal net worth of less than US$850,000, adjusted gross income of US$400,000 or less, and assets totaling US$6.5 million or less.14 If any of those thresholds are exceeded, SBA will presume the individuals are not economically disadvantaged, but that presumption is rebuttable (e.g., if the individual’s income was unusual and unlikely to occur in the future). If the qualifying individuals are married and not legally separated, they must submit financial information for their spouses if “the spouse has a role in the business (e.g., an officer, employee or director) or has lent money to, provided credit support to, or guaranteed a loan of the business.”15 These requirements remain largely unchanged other than certain adjustments relating to retirement accounts.16

Potential for Success

To show potential for success, the concern “must be in business in its primary industry classification for at least two full years immediately prior to the date of its 8(a) BD application,” unless SBA waives the requirement.17 To address confusion about what experience the applicant may rely upon, the Final Rule clarifies that experience may be “either in the private sector, at the state or local government level, or with the Federal Government.”18

Other Requirements for Eligibility

The 8(a) regulations have two other primary requirements for eligibility: good character and lack of prior participation in an 8(a) program. An applicant must show that it and all its principals have good character.19 These regulations do not define “good character” in any specific terms. However, the regulations provide scenarios that would affect a concern’s application or eligibility including “possible criminal conduct by the applicant or any of its principals”20 or “[v]iolations of any of the SBA’s regulations.”21 Concerns that are suspended or debarred or are owned by persons who are suspended or debarred are ineligible for the 8(a) program.22 An applicant is also ineligible if it or a “proprietor, partner, limited liability member, director, officer, or holder of at least 20 percent of its stock, or another person (including key employees) with significant authority over the concern: [l]acks business integrity” based on either information from an indictment, guilty plea, conviction, civil judgment, or settlement; or current incarceration, parole, or probation in certain circumstances.23 Knowingly submitting false information to the SBA can result in application denial as well.24 A concern is only eligible to participate in the 8(a) BD program once.25 

The Final Rule adds an additional eligibility requirement prohibiting firms (including firm principals) that have failed to pay “significant financial obligations” to the federal government (e.g., “unresolved tax liens and defaults on Federal loans or other Federally assisted financing”) from participating in the program.26 The Final Rule also clarifies that firms can demonstrate that these financial obligations have been settled, discharged, or forgiven and thereby be eligible for the program.27

Native American Tribes, Alaska Native Corporations, Native Hawaiian Organizations, and Community Development Corporations

Native American tribes, Alaska Native Corporations (ANCs), Native Hawaiian Organizations (NHOs), and Community Development Corporations (CDCs) are subject to additional requirements. The Final Rule made only minor adjustments to its existing regulations, including clarifying that the waiver of sovereign immunity applies only to federally recognized tribes, expanding the means by which such tribes can waive their sovereign immunity, and expanding the types of information the government can consider when evaluating potential for success.28

Ownership and Control

As discussed, socially and economically disadvantaged persons must unconditionally own and control the concern. To meet the ownership requirement, one or more disadvantaged persons must own at least 51% of the concern. Whether an 8(a) concern is controlled by a disadvantaged individual is distinct from ownership. At a high level, control focuses on who directs strategic policies of the concern, who directs the concern’s day-to-day business operations (affirmative control), and whether others have the ability to block business decisions (negative control). Assessing control is a fact-intensive inquiry. The Final Rule does not change these base requirements, but it does adjust other provisions.

Perhaps most significantly, the Final Rule revises SBA’s regulations relating to changes in ownership or control of an 8(a) concern. SBA generally requires an 8(a) contract to “be performed by the Participant that initially received it.”29 If an 8(a) small business undergoes a change in ownership or control, contracting agencies are required to terminate all 8(a) contracts for convenience (not default) unless an exception applies.

One exception is where an 8(a) concern will continue to be owned and controlled by disadvantaged persons.30 SBA must preapprove all ownership changes in writing except under certain narrow circumstances (e.g., “where all non-disadvantaged individual (or entity) owners involved in the change of ownership own no more than a 20 percent interest in the concern both before and after the transaction”), but even where those exceptions apply, the 8(a) concern must notify SBA of the ownership change within 60 days after the change.31 If an 8(a) concern does not obtain SBA approval, SBA can suspend the concern from the 8(a) BD program.32 SBA made only minor changes to these provisions, with the most significant change being that when determining whether non-disadvantaged individuals own more than 20% of the concern, SBA will aggregate the ownership interests of those individuals’ immediate family members and “any individuals who are affiliated based on an identity of interest.”33

Another exception is where SBA waives the termination requirement. SBA may waive that requirement if the 8(a) concern submits a request in writing and prior to the change in ownership or control (or, “in the case of death or incapacity,” no later than 60 calendar days after the occurrence) certain criteria apply.34 For instance, SBA may waive the termination requirement if “[o]wnership and control of the concern that is performing the 8(a) contract will pass to another Participant, but only if the acquiring firm would otherwise be eligible to receive the award directly as an 8(a) contract.”35 This provision may apply to equity purchases as well as asset sales under certain conditions. For instance, if an 8(a) concern sells all its operating assets to another 8(a) BD program participant, “[v]oluntarily graduates from the 8(a) BD program,” and “[c]eases its business operations, or presents a plan to SBA for its orderly dissolution” and the buyer certifies as small under the applicable NAICS codes for the transferred contracts, then SBA will treat the asset sale as a change in ownership.36 The Final Rule removes the requirement that the work performed under the 8(a) contract be “similar to the type of work previously performed by the acquiring concern” because that assessment goes to the firm’s responsibility, which is a determination for the procuring agency, not SBA, to make.37

Additionally, the Final Rule revises the regulations relating to the ability of non-8(a) concerns to own equity in 8(a) concerns. Currently, SBA’s regulations limit the ownership of non-8(a) concerns in 8(a) concerns to certain percentages depending on whether the non-8(a) concern was a former 8(a) BD program participant and whether the 8(a) concern is in the developmental or transitional stage.38 The Final Rule revises these restrictions to align with 13 C.F.R. § 125.9, which allows mentors to own up to 40% of the protégé.39

Business Plans

All 8(a) concerns must create a business plan that contains certain information specified in 13 C.F.R. § 124.402(c), including establishing targets, objectives, and goals.40 SBA requires 8(a) concerns to submit business plans to SBA “as soon as possible after program admission,” but no later than “60 days after program admission.”41If a concern fails to submit a business plan within 60 days, SBA will suspend the concern from participating in the 8(a) BD program.  Regardless of when a concern submits its business plan, SBA must approve the business plan before the concern is eligible for 8(a) contract awards.  That does not mean, however, that the concern is ineligible to compete for 8(a) contracts or be considered for 8(a) sole-source awards.  As the Final Rule makes clear, SBA will review the business plan and approve it if it meets SBA’s requirements when SBA conducts its pre-award eligibility review.42

8(a) concerns must annually review their business plans with their assigned Business Opportunity Specialist and submit modified plans as necessary.43 The Final Rule clarifies that an 8(a) concern is not required to submit an updated business plan unless the business plan changed from the prior year, which is consistent with current SBA practice.44

Relatedly, SBA requires 8(a) BD program participants to have non-8(a) business activity targets to ensure they are not overly reliant upon 8(a) awards and work to become self-sufficient businesses.  SBA requires 8(a) concerns to make a “good faith effort” to expand their businesses beyond 8(a) awards, and SBA will review those efforts annually.45 The Final Rule explains that an 8(a) concern can demonstrate good faith efforts if it “submitted offers for one or more non-8(a) procurements which, if awarded, would have given the participant sufficient revenues to achieve the applicable non-8(a) business activity target during its just completed program year” or discussed “extenuating circumstances that adversely impacted its efforts to obtain non-8(a) revenues.”46

Graduation

The objective of any 8(a) concern is to grow and ultimately graduate from the program.  (A concern can also exit the program by voluntary withdrawal, SBA termination, or upon expiration of the nine-year term.)  SBA will graduate an 8(a) firm at the end of the nine-year term or earlier if (1) the firm has “substantially achiev[ed] the targets, objectives, and goals set forth in its business plan, and has demonstrated the ability to compete in the marketplace without assistance under the 8(a) BD program”; or (2) the owner is “no longer economically disadvantaged.”47 SBA’s regulations previously established certain criteria for determining whether an 8(a) firm met its targets, goals, and objectives.48 Through this rulemaking, SBA is removing those criteria as unnecessary and inconsistent with the Small Business Act because SBA’s view is that the assessment should be based on the firm’s approved business plan.49

8(a) Procurements and Contract Awards

The 8(a) procurement process varies significantly from standard acquisition procedures.  To initiate an 8(a) procurement, a contracting agency must offer the contract to SBA through “a written offering letter.”50 SBA then, within specific timeframes, decides whether to accept the offer and include the contract in the 8(a) BD program.51 If the offer is for a sole-source award and SBA nominates a specific 8(a) concern for award, SBA will determine the concern’s eligibility and “accept the offer both on behalf of the 8(a) BD program and in support of a specific Participant.”52 If the sole-source offer does not nominate a specific 8(a) concern, SBA will select a participant in accordance with procedures established in SBA’s regulations.53 If SBA and the procuring agency disagree about whether the selected concern is a good match for the procurement, SBA and the agency must resolve the dispute in accordance with SBA’s regulations.54 If the offer is for a competitive procurement, “SBA will accept the offer on behalf of the 8(a) BD program” and “will determine the eligibility of the apparent successful offeror” once identified.55 If SBA does not reply to the offer, then the procuring agency may, under certain circumstances, assume SBA accepts the offer.56

The Final Rule makes a variety of changes to its regulations.  Perhaps the most substantive revisions relate to the award of orders under 8(a) multiple award contracts (MACs).  A concern that qualifies as small at the time it submits its initial offer for a MAC generally qualifies as small for orders placed under the MAC.  However, a unique rule applies to 8(a) contracts.  If a firm qualified as an 8(a) concern at the MAC level, then the concern will qualify as an 8(a) concern for competitively awarded orders.  The Final Rule clarifies that for sole-source orders, SBA must make a new eligibility determination, including assessing compliance with business activity target requirements.57 Of course, size recertifications may be required at the order level in accordance with SBA regulations and applicable FAR provisions, which could affect the procuring agency’s ability to count awards toward its small business goals or, in some instances, the concern’s eligibility for award. Additionally, SBA will allow 8(a) joint ventures (JVs) to receive both competitively awarded and sole-source orders under 8(a) MACs without applying the general bar on JVs receiving set-aside contracts more than two years after the initial contract award.

SBA made several other modifications to its regulations governing 8(a) procurements.With respect to some of the most significant revisions, the Final Rule:

  • Clarifies that procuring agencies may award task or delivery orders under MACs to 8(a) firms on a sole-source basis even if the multiple-award contracts were not set-aside for 8(a) small businesses, as long as SBA makes a new eligibility determination58
  • Explains that procuring agencies may award follow-on 8(a) contracts on a sole-source basis to a tribally-owned, ANC-owned, or NHO-owned concern so long as the “agency has not evidenced a public intent to fulfill it as a competitive 8(a) procurement,” even if the incumbent contract was awarded on a competitive basis59
  • Confirms that, notwithstanding the dollar thresholds for competing 8(a) procurements among all eligible participants, contracts may be awarded on a sole-source basis in accordance with FAR 6.302 and other applicable regulations60
  • Clarifies that procuring agencies cannot further limit 8(a) procurements based on other socioeconomic statuses (e.g., the agency cannot limit the 8(a) procurement to service-disabled, veteran-owned small businesses or women-owned small businesses)61
  • Confirms, in accordance with other SBA regulations and practices, that in the context of 8(a) JVs, SBA’s eligibility determination focuses on the 8(a) partner and SBA will generally review and approve 8(a) JV agreements for sole-source 8(a) awards, but not competitive 8(a) awards. SBA will not, however, review JV agreements for sole-source orders placed under competitively awarded 8(a) MACs62
  • Revises the bona fide place of business requirement for construction contracts in several ways. The Final Rule provides that an 8(a) concern meets the requirement for construction contract performance in a specific state if it has a bona fide place of business in that state.63 Additionally, SBA may “determine that a Participant with a bona fide place of business in the geographic area served by one of several SBA district offices or another nearby area is eligible for the award of an 8(a) construction contract.”64 An 8(a) concern meets this requirement to perform a construction contract in a specific state if it “is currently performing a contract in” that state.65 Additionally, an 8(a) concern can meet this requirement “through a full-time employee in a home office,” and that employee need not be a resident of that state.66 If the concern expects to perform the work in multiple states, then in the context of a single-award contract, the 8(a) firm must have “a bona fide place of business where a majority of the work (as identified by the dollar value of the work) is anticipated to be performed.”67 In the context of a multiple-award contract, the 8(a) concern must “have a bona fide place of business in any location where work is to be performed.”68 Of course, SBA’s moratorium on enforcing the bona fide place of work requirement remains in effect at least through September 30, 2023.
  • Clarifies that SBA has discretion to release follow-on procurements from the 8(a) program under certain circumstances69

    © Arnold & Porter Kaye Scholer LLP 2023 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.

    1. 13 C.F.R. § 124.101.

    2. Id. § 124.102(a)(1).

    3. See generally 13 C.F.R. Part 121. Certain types of concerns, including tribally-owned concerns, are subject to unique standards that can affect those concerns’ size status.

    4. Id. § 124.102(a)(2).

    5. Id. § 124.102(c).

    6. 88 Fed. Reg. at 26204; see also id. at 26174 (“SBA believes that a concern should not need to reapply to the 8(a) BD program if size was the only reason for decline. In such a case, SBA believes that the Associate Administrator for Business Development (AA/BD) should immediately certify the firm as eligible for the 8(a) BD program.”).

    7. 13 C.F.R. § 124.103(a).

    8. Id. § 124.104(a).

    9. Id. § 124.103(b)(1).

    10. Id. § 124.103(b)(2).

    11. Id. § 124.103(c).

    12. 88 Fed. Reg. at 26175, 26204.

    13. Id. § 124.104(c).

    14. Id. § 124.104(c)(2)-(4).

    15. Id. § 124.104(b).

    16. 88 Fed. Reg. at 26175, 26204.

    17. 13 C.F.R. § 124.107.

    18. 88 Fed. Reg. at 26204; see also id. at 26176.

    19. 13 C.F.R. § 124.108(a).

    20. Id. § 124.108(a)(1).

    21. Id. § 124.108(a)(2).

    22. Id. § 124.108(a)(3).

    23. Id. § 124.108(a)(4)(i)-(ii).

    24. Id. § 124.108(a)(5).

    25. Id. § 124.108(b).

    26. Id. § 124.108(e).

    27. 88 Fed. Reg. 26176.

    28. Id.

    29. 13 C.F.R.§ § 124.515(a).

    30. Id. § 124.105(i).

    31. Id. § 124.105(i)(2).

    32. Id. § 124.105(i)(4).

    33. 88 Fed. Reg. at 26204.

    34. 13 C.F.R. § 124.515(b).

    35. Id. § 124.515(b)(1).

    36. Id. § 124.515(f).

    37. 88 Fed. Reg. at 26187; see also id. at 26208.

    38. 13 C.F.R. § 124.105(h)(2).

    39. 88 Fed. Reg. at 26175, 26204.

    40. 13 C.F.R. § 124.402(a).

    41. Id. § 124.402(b).

    42. 88 Fed. Reg. at 26178, 26205.

    43. 13 C.F.R. § 124.403(a).

    44. 88 Fed. Reg. at 26178-79, 26206.

    45. 13 C.F.R. § 124.509.

    46. 88 Fed. Reg. at 26185; see also id. at 26208.

    47. 13 C.F.R. § 124.302(a).

    48. Id. § 124.302(b).

    49. 88 Fed. Reg. at 26177-78, 26205.

    50. 13 C.F.R. § 124.502(a).

    51. Id. § 124.503(a).

    52. Id. § 124.503(a)(1).

    53. Id. § 124.503(d).

    54. Id. § 124.503(e).

    55. Id. § 124.503(a)(2).

    56. Id. § 124.503(a)(3)-(4).

    57. 88 Fed. Reg. at 26182-83, 26207

    58. Id. at 26179, 26206.

    59. Id. at 26184.

    60. Id. at 26185, 26208.

    61. Id. at 26179, 26206. Note that this limitation does not preclude agencies from reserving non-8(a) procurements for other socioeconomic statuses (e.g., SDVOSB entities).

    62. Id.

    63. Id. at 26179-80, 26206.

    64. Id. at 26206.

    65. Id. at 26180, 26206.

    66. Id.

    67. Id. at 26206.

    68. Id.

    69. Id. at 26184, 26207-08.

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