[Federal Register Volume 69, Number 232 (Friday, December 3, 2004)]
[Proposed Rules]
[Pages 70197-70202]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-26609]
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Proposed Rules
Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains notices to the public of
the proposed issuance of rules and regulations. The purpose of these
notices is to give interested persons an opportunity to participate in
the rule making prior to the adoption of the final rules.
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Federal Register / Vol. 69, No. 232 / Friday, December 3, 2004 /
Proposed Rules
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SMALL BUSINESS ADMINISTRATION
13 CFR Part 121
RIN 3245-AF22
Small Business Size Standards; Selected Size Standards Issues
AGENCY: U.S. Small Business Administration.
ACTION: Advance notice of proposed rulemaking.
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SUMMARY: This Advance Notice of Proposed Rulemaking (ANPRM) seeks
comments from the public on several issues that were raised during the
public comment period of the U.S. Small Business Administration's (SBA
or Agency) recently withdrawn proposal to restructure its small
business size standards. The issues discussed in this ANPRM address
matters pertaining to SBA's size standards but were not part of the
March 19, 2004, proposed changes. To assist SBA with examining how best
to restructure and simplify its size standards, the Agency invites
comments on these issues to take into consideration in any future
proposal. This ANPRM also seeks comments on an issue concerning the
participation of businesses that are majority-owned by venture capital
companies in the Small Business Innovation Research (SBIR) Program.
Specifically, the SBA is seeking comments on whether it should provide
an exclusion from affiliation with venture capital companies in
determining small business eligibility for the SBIR Program.
DATES: Comments must be received on or before February 1, 2005.
ADDRESSES: You may submit comments, identified by RIN 3245-ZA02 by any
of the following methods:
Federal eRulemaking Portal: http://www.regulations.gov.
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.
Upon receipt of a written request under the Freedom of Information
Act, SBA will make available all public comments received.
FOR FURTHER INFORMATION CONTACT: SBA's Office of Size Standards at
(202) 205-6618 or at [email protected].
SUPPLEMENTARY INFORMATION: On March 19, 2004, SBA published a proposed
rule to restructure its small business size standards by establishing
them based primarily on the number of employees of a business concern
and by limiting to 10 the number of different size standard levels (69
FR 13130). SBA believed this would simplify the existing structure of
size standards and enable the public to better understand and use them.
The proposed rule also included changes to several specific program-
related and specialized size standards as an effort to reduce the
overall variation of size standards.
The SBA received more than 4,500 comments on the proposed changes,
with a majority of the comments expressing support for the proposal.
More than 2,300 comments that supported the proposal agreed with the
position advanced by one organization by submitting an identical
comment, which focused primarily on the proposal to revise the 500
employee size standard for nonmanufacturers to 100 employees. Of the
remaining comments, most of them objected to the proposed size
standards. These opposing comments raised concerns about SBA's
methodology for converting receipts-based size standards to employee-
based size standards and their resulting levels, the number of
potential businesses losing small business status, the thoroughness of
SBA's regulatory flexibility analysis of the proposed changes, the
determination of the employee size of a business, and SBA's overall
approach to simplifying size standards. As a result of the concerns
expressed by a large number of comments, SBA withdrew the proposal on
July 1, 2004 (69 FR 39874).
SBA remains committed to modifying its size standards in a manner
to make them simpler and easier to use. SBA seeks input from the public
on several issues on which it believes additional comment would be
helpful before deciding the next course of action. These issues concern
various aspects of size standards that have implications on the
restructuring proposal but were not part of the changes in the March
19, 2004, proposed rule. Specifically, these issues pertain to the
approach to simplify size standards, the calculation of number of
employees (including how SBA defines an employee for size purposes),
the use of receipts-based size standards, the designation of size
standards for Federal procurements, the establishment of size standards
for use solely in Federal procurement programs, the establishment of
tiered size standards, the simplification of affiliation regulations,
the simplification of the small business joint venture eligibility
regulations, the grandfathering of small business eligibility, and the
impact of SBA size standards on the regulations of other Federal
agencies.
SBA is planning other actions on size standards in addition to this
ANPRM. First, SBA plans to hold a series of public meetings on size
standards. These meetings will focus on the issues raised in this
ANPRM. Second, SBA is examining a number of specific size standards as
separate rulemaking actions, such as the nonmanufacturer size standard
which received a large number of comments supporting a reduction to the
size standard.
This ANPRM also seeks comments on an issue concerning the
participation of businesses majority-owned by venture capital companies
in the SBIR Program. Under SBA's affiliation regulations, a business
concern that is majority-owned by a company must include the size of
the company and all of its affiliates in determining small business
status for the SBIR Program and for most other programs. SBA seeks
public comments on whether it should provide an exclusion from
affiliation with venture capital companies in determining small
business eligibility for the SBIR Program, assuming such companies met
the other eligibility criteria for the program.
Approaches to simplification of size standards. As discussed above,
SBA proposed to restructure its size standards as a way to simplify and
make
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them easier to use. The March 19, 2004, proposal would have
accomplished this by primarily modifying the structure of size
standards. Many of the comments agreed with this approach. However,
many other comments contended that the current structure is not
complicated or difficult to understand, and that the proposal would in
fact make size standards more complicated.
Over the years, SBA's size standards on occasion have been
criticized as being difficult to understand. Many of these complaints
relate to issues regarding the application of size standards, not to
the size standards themselves. This ANPRM provides the public with an
opportunity to advise SBA on what areas of size standards make them
complicated or difficult to use or understand. SBA's March 19, 2004,
proposal to simplify the structure of size standard is an approach to
address one aspect of size standards. SBA is interested in whether this
approach achieves simplification or if other approaches should be
examined that address other aspects of size standards. Comments on this
issue should explain how a particular aspect of size standards is
complicated, and what modifications could be made to improve upon
existing policies. The comments should also describe the benefits to
small businesses and the users of size standards if such modifications
were adopted.
Calculation of number of employees. The March 19, 2004, proposed
rule expanded the use of employee-based size standards to industries
that have traditionally used receipt-based size standards, such as the
Construction, Retail Trade, and the Services Sectors. SBA did not
propose to change its method for counting number of employees. Under
the Small Business Size Regulations, 13 CFR 121.106, SBA calculates
number of employees in the following manner:
Section 121.106 How Does SBA Calculate Number of Employees?
(a) In determining a concern's number of employees, SBA counts all
individuals employed on a full-time, part-time, or other basis. This
includes employees obtained from a temporary employee agency,
professional employee organization or leasing concern. SBA will
consider the totality of the circumstances, including criteria used by
the IRS for Federal income tax purposes, in determining whether
individuals are employees of a concern. Volunteers (i.e., individuals
who receive no compensation, including no in-kind compensation, for
work performed) are not considered employees.
(b) Where the size standard is number of employees, the method for
determining a concern's size includes the following principles:
(1) The average number of employees of the concern is used
(including the employees of its domestic and foreign affiliates) based
upon numbers of employees for each of the pay periods for the preceding
completed 12 calendar months.
(2) Part-time and temporary employees are counted the same as full-
time employees.
(3) If a concern has not been in business for 12 months, the
average number of employees is used for each of the pay periods during
which it has been in business.
(4)(i) The average number of employees of a business concern with
affiliates is calculated by adding the average number of employees of
the business concern with the average number of employees of each
affiliate. If a concern has acquired an affiliate or been acquired as
an affiliate during the applicable period of measurement or before the
date on which it self-certified as small, the employees counted in
determining size status include the employees of the acquired or
acquiring concern. Furthermore, this aggregation applies for the entire
period of measurement, not just the period after the affiliation arose.
(ii) The employees of a former affiliate are not counted if affiliation
ceased before the date used for determining size. This exclusion of
employees of a former affiliate applies during the entire period of
measurement, rather than only for the period after which affiliation
ceased.
Many comments recommended that SBA modify its method for
calculating the number of employees of a business concern. These
comments pointed out that under SBA's current method, businesses that
utilize part-time employees, temporary employees, or lower-paid
employees would tend to outgrow an employee-based size standard quicker
than a similar business that primarily utilized full-time employees.
Calculating employment size on a full-time equivalent (FTE) basis was
often mentioned as an alternative. Calculating part-time employees in a
different manner from full-time employees in determining the overall
employment size of a business was also suggested. Comments on this
issue also raised concerns regarding the treatment of independent
contractors in determining employment size.
SBA seeks comments on alternative methods of calculating the
employment size of a business concern and, in particular, the
feasibility of using FTEs. The comments should clearly describe the
alternative calculation method and why it would be preferable to SBA's
current calculation of number of employees. Comments recommending an
alternative calculation should also address the implications on the
types of businesses that could be affected in terms of small business
eligibility.
Related to this issue is whether the time period for calculating
average employment should be modified from SBA's current method, which
uses a rolling average of the pay periods over the preceding 12 months.
For example, should average employment be based on a fixed period of
time, such as a calendar year? Also, should average employment be based
on a longer period than one year? Comments should describe the
alternative time period and explain why it would be an improvement to
the current averaging calculation.
If SBA chooses to modify its calculation of number of employees,
the method must be one that allows businesses to provide supporting
documents to the SBA, in the event of a size protest, in a verifiable
manner and one that would not create an excessive administrative
burden. Many comments on the use of employee-based size standards
contended that calculating and reporting to SBA their business'
employment size is administratively burdensome. However, other comments
pointed out that automated payroll and accounting systems enable
businesses to readily document their employment size. SBA is
particularly interested in comments that described the process small
businesses must follow to calculate average employment and whether
producing this information creates an unacceptable burden. Alternative
methods of calculating average employment should address the
implications on the alternative calculation on administrative burdens.
Use of receipts-based size standards. SBA received a number of
comments recommending that it continue to use receipts-based size
standards. These comments generally provided one of three reasons for
their position. First, receipts are considered a more appropriate
measure of business size for their industry than number of employees.
Second, average annual receipts are simpler than number of employees
for businesses when determining their small business status and less
burdensome in providing documentation to SBA in the event of a size
protest. (SBA evaluates the average annual receipts size of a business
based on the Federal tax returns submitted by the business to the
Internal Revenue
[[Page 70199]]
Service (13 CFR 121.104)). Third, the use of employee-based size
standards could encourage businesses to reduce employment, use fewer
part-time and lower-paid employees, convert employees to independent
contractors, subcontract more work to other businesses, and make other
employment related decisions that they would not otherwise adopt.
SBA seeks comments on whether it should continue to use receipts-
based size standards or establish size standards based exclusively on
number of employees. SBA in particular seeks comments on what
considerations it should give when deciding whether an industry size
standard should be based on average annual receipts or number of
employees. Also, for what industries are receipts-based size standards
more appropriate than employee-based size standards, and in what ways
are they more appropriate? Comments on this issue should address if
having one measure of size for some industries and a different measure
for other industries creates an unnecessary complication to size
standards.
Designation of size standards for Federal procurements. The size
standard designated for a Federal procurement is determined by the
North American Industry Classification System (NAICS) industry that
best describes the principle purpose of the procurement (see 13 CFR
121.402). This decision is the responsibility of the contracting
officer. Once the NAICS industry is designated, the size standard
established by SBA is assigned to the procurement solicitation. Some
comments pointed to this process as an area that makes size standards
complicated. Because size standards vary by industry, businesses and
contracting officers have at times argued for an incorrect NAICS
designation so as to effect the small business eligibility of certain
businesses. Other comments pointed out that Federal procurements that
require a contractor to perform a significant amount of activities from
several different industries are more difficult to designate a single
NAICS industry than for procurements which primarily consists of
activities of one NAICS industry. Furthermore, varying size standards
by NAICS industry results in some businesses that operate in multiple
industries being considered small for some Federal procurements but not
for other types of procurements.
SBA seeks comments on whether the process for applying size
standards to Federal procurements should be modified. If so, the
comments should describe an alternative system and how it would improve
upon the current process. Comments should also address how the
alternative process would ensure that small businesses fairly compete
with other businesses that are small in that field of work.
Establishment of size standards solely for Federal procurement. SBA
received comments arguing that it should significantly increase size
standards to assist small businesses in developing a sufficient
infrastructure that will allow them to compete for Federal procurements
in full and open competition against the leading Federal contractors.
These comments contended that the requirements and growing size of
Federal contracts create a situation in which a small business that is
awarded one or two Federal contracts automatically outgrows the size
standard and loses its eligibility to compete for future contracts
requiring small business status. These comments further contended that
businesses that are not small or among the largest Federal contractors
enter a ``dead zone'' or ``limbo zone'' where they must compete for
future Federal contracting opportunities against corporate giants
before they have developed a competitive strength to do so.
In 1984, SBA adopted a policy that its industry size standards
would apply to all programs. Before then, SBA had one set of size
standards for Federal procurement and one set for all other small
business programs. SBA is concerned that a significant increase in the
size standards to reflect trends in Federal procurement would create
size standards that are too high to realistically reflect small
businesses in an industry or for the purposes of most other Federal
small business programs.
SBA seeks comments on whether a separate set of size standards
should be established specifically for Federal procurement or whether
this would needlessly complicate size standards. These comments should
address the public policy justification for establishing such a
separate set of size standards. That is, why should a small business be
eligible for one program but not be eligible for another small business
program? If separate Federal procurement size standards were
established, what factors should SBA take into consideration in
developing the size standards that are different from SBA's current
industry analysis methodology (see SBA's size standards Web page for
proposed rules that describe the industry analysis at http://www.sba.gov/size)? Also, please address whether separate Federal
procurement size standards that are higher than the current size
standards would adversely affect the assistance to a particular segment
of small businesses extending assistance to relatively successful
larger small and mid-sized businesses.
Establishment of tiered size standards. A number of comments
suggested that SBA establish size standards to direct assistance to
different sizes of small businesses. That is, SBA should establish size
standards for sub-categories of small businesses, such as a very small
business. These comments generally argued that two levels of size
standards are needed to assist small businesses in developing into
competitive businesses capable of being successful on Federal
procurements competed on a full and open basis. These comments
recognized that higher size standards may adversely affect the
competitiveness of small businesses much smaller than the size
standard. Many of these comments tied the establishment of tiered size
standards with the estimated dollar value of a Federal procurement.
That is, lower dollar value procurements could be reserved for very
small businesses while other procurements could continue to be
available to all small businesses.
Two programs have provided for special treatment of sub-categories
of small businesses. Both of these programs were authorized by
legislation. Under the Small Business Competitiveness Demonstration
Program (Pub. L. 100-656, the Small Business Competitiveness
Demonstration Program of 1988, as amended), procurements of $25,000 or
less are reserved for emerging small businesses, defined as businesses
one-half of the applicable size standards. This program applies to
Federal procurements in four designated industry categories
(construction, refuse systems, non-nuclear ship repair, and
architectural and engineering services) issued by 10 participating
agencies (64 FR 29693, dated June 2, 1999). Until recently, the SBA
also had a Very Small Business (VBS) Program.\1\ For purposes of that
Program, a very small business was defined as one with 15 employees and
$1 million or less in average annual receipts (13 CFR 125.7). The
Program authorized Federal agencies in 10 geographic locations to
reserve procurements of $2,500 and $50,000 for very small businesses. A
legislative
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provision also established a business category termed smaller
enterprise for purposes of the Small Business Investment Company (SBIC)
Program (Pub. L. 104-205, 110 Stat. 3009-740). A smaller enterprise is
defined as a business with $6 million or less in net worth and $2
million or less in net income (13 CFR 107.710). Under the SBIC Program,
a small business investment company's portfolio must include a certain
proportion of its financings to smaller enterprises.
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\1\ The VSB Program was a pilot program authorized under Section
304 of the Small Business Administration Reauthorization and
Amendments Act of 1994 (Pub. L. 103-403). This pilot program was
extended to September 30, 2003, by the Small Business
Reauthorization Act of 2000, and further extended through June 4,
2004, by Public Law 108-217, 118 Stat. 591.
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Although legislative authority would be necessary before SBA could
consider establishing tiered size standards, it seeks comments on
whether the concept of tiered size standards addresses a compelling
need to assist certain segments of small businesses with meaningful
Federal contracting opportunities. If tiered size standards have
potential to better assist small businesses with Federal contracting
opportunities, how could such a system be structured? Because tiered
size standards would create more complexity in Federal contracting,
what are implications of a small business sub-category on other
designated business types (8(a), HUBZone, service-disabled veteran
owned small business, women-owned small business, etc.) in terms of
assistance to those businesses?
Simplification of small business status and affiliation with other
businesses. A key provision of SBA's size standards is the
consideration of affiliation with other businesses in determining the
size of a business. This fundamental concept ensures that Federal small
business assistance programs are limited to small businesses that,
because of their size, possess inherent disadvantages that larger
businesses do not experience.
SBA's general principles of affiliation provide that concerns are
affiliates of one another when one concern controls or has the power to
control the other, or a third party (or parties) controls or has the
power to control both. The power to control need not be exercised; it
need only be present. More than 50% ownership of a concern by another
will always create affiliation (with certain exceptions, summarized in
the next paragraph). Affiliation may also exist if there is less than
50% ownership of a concern by another. In these situations, SBA will
also consider factors such as management, previous relationships,
shared business or economic interests, economic dependence, convertible
debentures, agreements to merge, etc., in determining when affiliation
exists in a given situation. The regulations have been developed over
many years to provide guidance to the public on how SBA evaluates
affiliation. Because relationships among business concerns can be
extremely complicated and at times difficult to fully discover, the
affiliation regulations are more extensive than other size regulations.
SBA invites comments addressing ways to clarify its affiliation
regulations. SBA is not considering altering its principles of
affiliation. Rather, it seeks suggestions that have the potential of
improving the language of the affiliation regulations to make them
easier for the public to understand. Comments on affiliation should
explain how a current regulatory provision is unclear and suggest
revised language.
The SBA does seek comments on one specific area of affiliation
involving the small business eligibility of franchises. SBA has
received requests from the Temporary Staffing Franchise industry to
allow for an exemption from its franchise affiliation regulations. The
SBA is considering excluding certain practices of temporary franchisors
as conditions for finding affiliation. The practices are (1) the
franchisor being the employer of the individuals placed as temporary
workers by a franchisee, (2) the franchisor being responsible for the
franchisee's payroll and associated costs, (3) the franchisor
collecting the franchisee's accounts receivable, and (4) the franchisor
remitting client fees to their franchisees. Before developing a
proposed rule, SBA seeks comments from businesses in the temporary
staffing industry, including those independent staffing firms that are
not involved in franchise agreements. SBA is interested in knowing how
a change in its affiliation rule for franchises would affect the
temporary staffing industry, in particular:
Do SBA's current franchise regulations hamper the ability
of franchisees to compete in the temporary staffing industry?
Would allowing this exemption continue to allow for
temporary staffing franchisees to be ``independently owned and
operated'' businesses?
Does allowing this exemption give franchisors too much
control over their franchisees?
Would allowing this exemption give franchisors and
franchisees a competitive advantage in contracting over independent
temporary staffing businesses?
Joint ventures and small business eligibility. SBA's size
regulations have specific provisions determining the small business
eligibility of joint ventures. In general, a joint venture of two or
more businesses may qualify as an eligible small business if the
aggregate size of all the members does not exceed the applicable size
standard (13 CFR 121.103(f)). For certain larger Federal procurements,
a joint venture whose members individually qualify as a small business
may qualify as an eligible small business joint venture. On May 21,
2004, SBA adopted a change to this provision that allows a joint
venture to compete for multiple opportunities (69 FR 29192). However,
an ongoing joint venture is limited to submitting offers on three
procurement opportunities over a 2 year period. SBA believes that joint
ventures among small businesses facilitate opportunities for small
businesses to compete for larger-sized Federal procurements.
SBA is seeking additional comment on its joint venture eligibility
criteria. Comments addressing the nature of joint ventures formed by
small businesses to compete on Federal procurements, the duration of
such joint ventures, their competitive strength against other small
businesses, and other aspects of joint ventures that have a bearing on
policies to assist small business opportunities are also encouraged.
SBA is specifically interested in obtaining comments on the recent
policy of limiting a small business joint venture to three offerings
over a 2 year period. SBA is concerned about permitting a joint venture
among the same small businesses to operate as an on-going concern
competing against other small businesses. At the same time, this new
policy may be too restrictive in today's Federal contracting
environment.
Grandfathering of currently eligible small businesses. As mentioned
above, one of the concerns with the March 19, 2004, proposed rule was
the potential impact on small business that might lose small business
eligibility as a result of the restructuring of size standards. Many of
these comments pointed out that businesses develop their business plans
over the next several years premised on the existing regulations.
Abrupt changes that take away small business eligibility significantly
disrupt these business plans and force businesses to reassess the
viability of their strategies.
SBA expects that any new proposed rule to address the current
structure of size standards will have significantly less impact on
current small business eligibility than the March 19, 2004, proposal.
However, any worthwhile changes will invariably have an adverse impact
on a few small businesses. SBA seeks comments on approaches by which to
grandfather small businesses that could be adversely impacted by a
future restructuring. A related alternative may consist of a longer
implementation date than the typical 30
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day period to allow businesses to adjust to the new regulations. SBA
realizes that it may be difficult to provide comments without a
specific proposal. However, SBA seeks general ideas on the approaches
and relevant factors it considers if a provision to maintain small
business eligibility becomes necessary for a particular proposal.
Impact of SBA size standards on the regulations of other Federal
Agencies. An area of concern expressed by the comments pertained to
SBA's analysis of the impact of the March 19, 2004, proposed changes.
Under the Regulatory Flexibility Act (5 U.S.C. 601-612), Federal
agencies must assess whether their regulatory changes will
significantly impact a substantial number of small entities. In
reviewing these comments, SBA believes it has sufficient information by
which to fully analyze most of the concerns raised by these comments.
However, one area that is more difficult to examine involves the
impact of SBA's size standards on the programs and regulations of other
Federal agencies. SBA is aware of the use of its size standards in a
number of Federal regulations and is in the process of identifying
others. To ensure that future proposals adequately identify and assess
the use of SBA's size standards, SBA is requesting assistance in
identifying Federal regulations and programs that utilize its size
standards. In addition, SBA welcomes comments describing the impact
that a size standard change may have on small entities being subject to
different regulatory requirements or their eligibility for Federal
benefits. Comments on how size standard changes may effect a Federal
agency's ability to meet the purposes of the regulation will also be
helpful.
Participation of Businesses Majority-Owned by Venture Capital Companies
in the SBIR Program
The U.S. Small Business Administration (SBA) seeks 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.
On June 4, 2003, SBA proposed in the Federal Register, 68 FR 33412,
to modify Sec. 121.702 of its Small Business Size Regulations (13 CFR
part 121) to allow a small business that is owned and controlled by
another business concern to be eligible for funding agreements under
the SBIR Program. The size standard for the SBIR Program requires that
an eligible small business concern, with its affiliates, have no more
than 500 employees. The proposed rule did not propose to change this
500 employee size standard for the SBIR Program. The rule proposed only
to modify the small business eligibility requirements so that the SBIR
awardee must meet one of the two following additional criteria: (1) It
must either be a for-profit business concern that is at least 51% owned
and controlled by one or more individuals who are citizens of, or
permanent resident aliens in, the United States (as the regulations
currently require); or (2) it must be a for-profit business concern
that is 100% owned and controlled 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. Comments on the proposed rule were due to SBA by July 7,
2003. SBA received 164 comments to the proposed rule. SBA has not yet
issued its final rule, but expects to do so in the very near future.
Sixty commenters addressed an issue related to VCCs that was not a
subject of the proposed rule. Forty commenters stated that a concern
should be allowed to participate in the SBIR Program if one or more
VCCs have majority ownership or control of the concern. In addition,
most of these 40 commenters believed that if one or more VCCs owned or
controlled a concern, the VCC should not be deemed affiliated with the
concern. The justification offered was that VCC investment is crucial
to startups in the biotech industry and that SBIR funds are needed to
reduce the private risk of these investments. The remaining 20
commenters, however, were opposed to any proposal that would allow a
concern to participate in the SBIR Program if one or more VCCs have
majority ownership or control of the concern. These commenters
expressed their concern that because VCC firms often represent and are
established by large corporate interests, allowing their subsidiaries
to receive SBIR awards could result in SBIR funds, which are reserved
for small business concerns, being used to subsidize research projects
of large corporations.
The relationship of a VCC or other investment vehicle to an SBIR
participant is a broader policy question than SBA sought to address
with the June 4, 2003, proposed rule. Under current regulations (Sec.
121.103, ``What is affiliation?''), when VCCs have control of a firm in
which they invest, they are considered affiliated with that firm, just
as any other business entity would be if it had ownership or control.
SBA's Small Business Size Regulations in 13 CFR 121.103 provide a
small number of exclusions from affiliation. Concerns owned in whole or
substantial part by Small Business Investment Companies (SBICs) or
development companies licensed under the Small Business Investment Act
are not considered affiliated with the SBIC or development company.
Also, concerns owned and controlled by Indian Tribes, Alaska Regional
or Village Corporations, Native Hawaiian Organizations and Community
Development Corporations are not considered affiliates of these
entities solely because of their common ownership and common
management. Further, the regulation excludes VCCs, as defined in U.S.
Department of Labor regulations (29 CFR 2510.3-101(d)), from
affiliation with concerns receiving assistance under the Small Business
Investment Act. (The SBIR Program is established under the Small
Business Innovation Development Act, not under the Small Business
Investment Act.)
SBA believes that determining whether VCCs should be excluded from
affiliation under Sec. 121.103, assuming the small business concern
meets the ownership and control criteria established by the SBA,
requires a separate rulemaking action, affording the public an
opportunity to comment directly on SBA's proposal. Although SBA's June
4, 2003, proposed rule did not address this issue, substantial public
interest has persuaded SBA to seek additional comments directly on this
question. SBA has not determined at this time if it will propose to
exclude VCCs from affiliation or to provide some other type of
exemption for VCC investments, but is seeking public comment on whether
it should propose such a change to its affiliation rule.
SBA requests comments on the issue of whether it should propose a
change to the size affiliation regulation for SBIR Program purposes by
allowing business concerns that are majority owned or controlled by one
or more VCCs to be eligible for SBIR awards, regardless of the
ownership and control of the VCCs. SBA is seeking information on how
such a change is likely to impact the program and its participants, and
how such a change could be implemented while at the same time ensuring
that the SBIR Program remains a program that benefits small business
entrepreneurs.
Specific issues that SBA is seeking information on include the
following:
1. The role of VCC financing on SBIR projects during Phases I and
II.
[[Page 70202]]
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.
If SBA ultimately determines that it is necessary to develop a
proposed rule on this issue, then it will perform an analysis mandated
by the Regulatory Flexibility Act (RFA). As part of an RFA analysis,
SBA must determine whether the rule will have a significant economic
impact on a substantial number of small entities. The RFA defines small
entities as small business concerns, small not-for profit
organizations, and small governmental jurisdictions. Thus, SBA is
seeking comments to determine the number and type of small entities
that would be affected by a rule that would provide an exclusion from
affiliation for VCC companies in size determinations for eligibility
for the SBIR Program. In addition, SBA is seeking comments on the
number of small business concerns competing for SBIR awards that have
received venture capital funding and the number of VCC majority-owned
small business concerns that potentially may be interested in
participating in the SBIR Program.
As part of an RFA analysis, SBA must also determine whether the
rule will have a significant economic impact on these small entities.
To make this determination, agencies seek information about the
percentage of revenues or profits affected by the rule. Therefore, SBA
is also seeking comments on the costs to small entities if SBA
implements a rule that would provide an exclusion from affiliation for
VCC companies in size determinations for eligibility for the SBIR
Program. Such costs include implementation costs and the effect the
rule would have on profits or revenues, i.e., whether it would it
reduce profits or raise or lower revenues.
Comments on any other aspect of the SBIR Program that might
directly affect whether or not SBA should propose excluding VCCs from
affiliation for purposes of the SBIR Program are also welcome.
Dated: September 15, 2004.
Hector V. Barreto,
Administrator.
[FR Doc. 04-26609 Filed 12-2-04; 8:45 am]
BILLING CODE 8025-01-P