[Code of Federal Regulations]

[Title 13, Volume 1]

[Revised as of January 1, 2006]

From the U.S. Government Printing Office via GPO Access

[CITE: 13CFR121.103]



[Page 289-292]

 

                TITLE 13--BUSINESS CREDIT AND ASSISTANCE

 

                CHAPTER I--SMALL BUSINESS ADMINISTRATION

 

PART 121_SMALL BUSINESS SIZE REGULATIONS--Table of Contents

 

           Subpart A_Size Eligibility Provisions and Standards

 

Sec. 121.103  How does SBA determine affiliation?



    (a) General Principles of Affiliation. (1) Concerns and entities are 

affiliates of each other when one controls or has the power to control 

the other, or a third party or parties controls or has the power to 

control both. It does not matter whether control is exercised, so long 

as the power to control exists.

    (2) SBA considers factors such as ownership, management, previous 

relationships with or ties to another concern, and contractual 

relationships, in determining whether affiliation exists.

    (3) Control may be affirmative or negative. Negative control 

includes, but is not limited to, instances where a minority shareholder 

has the ability, under the concern's charter, by-laws, or shareholder's 

agreement, to prevent a quorum or otherwise block action by the board of 

directors or shareholders.

    (4) Affiliation may be found where an individual, concern, or entity 

exercises control indirectly through a third party.

    (5) In determining whether affiliation exists, SBA will consider the 

totality of the circumstances, and may find affiliation even though no 

single factor is sufficient to constitute affiliation.

    (6) In determining the concern's size, SBA counts the receipts, 

employees, or other measure of size of the concern whose size is at 

issue and all of its domestic and foreign affiliates, regardless of 

whether the affiliates are organized for profit.

    (b) Exceptions to affiliation coverage. (1) Business concerns owned 

in whole or substantial part by investment companies licensed, or 

development companies qualifying, under the Small Business Investment 

Act of 1958, as amended, are not considered affiliates of such 

investment companies or development companies.

    (2)(i) Business concerns owned and controlled by Indian Tribes, 

Alaska Native Corporations (ANCs) organized pursuant to the Alaska 

Native Claims Settlement Act (43 U.S.C. 1601 et seq.), Native Hawaiian 

Organizations (NHOs), Community Development Corporations (CDCs) 

authorized by 42 U.S.C. 9805, or wholly-owned entities of Indian Tribes, 

ANCs, NHOs, or CDCs are not considered affiliates of such entities.

    (ii) Business concerns owned and controlled by Indian Tribes, ANCs, 

NHOs, CDCs, or wholly-owned entities of Indian Tribes, ANCs, NHOs, or 

CDCs are not considered to be affiliated with other concerns owned by 

these entities because of their common ownership or common management. 

In addition, affiliation will not be found based upon the performance of 

common administrative services, such as bookkeeping and payroll, so long 

as adequate payment is provided for those services. Affiliation may be 

found for other reasons.

    (3) Business concerns which are part of an SBA approved pool of 

concerns for a joint program of research and development as authorized 

by the Small Business Act are not affiliates of one another because of 

the pool.

    (4) Business concerns which lease employees from concerns primarily 

engaged in leasing employees to other businesses or which enter into a 

co-employer arrangement with a Professional Employer Organization (PEO) 

are not affiliated with the leasing company or PEO solely on the basis 

of a leasing agreement.

    (5) For financial, management or technical assistance under the 

Small Business Investment Act of 1958, as amended, (an applicant is not 

affiliated with the investors listed in paragraphs (b)(5) (i) through 

(vi) of this section.

    (i) Venture capital operating companies, as defined in the U.S. 

Department of Labor regulations found at 29 CFR 2510.3-101(d);

    (ii) Employee benefit or pension plans established and maintained by 

the Federal government or any state, or their political subdivisions, or 

any



[[Page 290]]



agency or instrumentality thereof, for the benefit of employees;

    (iii) Employee benefit or pension plans within the meaning of the 

Employee Retirement Income Security Act of 1974, as amended (29 U.S.C. 

1001, et seq.);

    (iv) Charitable trusts, foundations, endowments, or similar 

organizations exempt from Federal income taxation under section 501(c) 

of the Internal Revenue Code of 1986, as amended (26 U.S.C. 501(c));

    (v) Investment companies registered under the Investment Company Act 

of 1940, as amended (1940 Act) (15 U.S.C. 80a-1, et seq.); and

    (vi) Investment companies, as defined under the 1940 Act, which are 

not registered under the 1940 Act because they are beneficially owned by 

less than 100 persons, if the company's sales literature or 

organizational documents indicate that its principal purpose is 

investment in securities rather than the operation of commercial 

enterprises.

    (6) A protege firm is not an affiliate of a mentor firm solely 

because the protege firm receives assistance from the mentor firm under 

Federal Mentor-Protege programs. Affiliation may be found for other 

reasons.

    (7) The member shareholders of a small agricultural cooperative, as 

defined in the Agricultural Marketing Act (12 U.S.C. 1141j), are not 

considered affiliated with the cooperative by virtue of their membership 

in the cooperative.

    (c) Affiliation based on stock ownership. (1) A person (including 

any individual, concern or other entity) that owns, or has the power to 

control, 50 percent or more of a concern's voting stock, or a block of 

voting stock which is large compared to other outstanding blocks of 

voting stock, controls or has the power to control the concern.

    (2) If two or more persons (including any individual, concern or 

other entity) each owns, controls, or has the power to control less than 

50 percent of a concern's voting stock, and such minority holdings are 

equal or approximately equal in size, and the aggregate of these 

minority holdings is large as compared with any other stock holding, SBA 

presumes that each such person controls or has the power to control the 

concern whose size is at issue. This presumption may be rebutted by a 

showing that such control or power to control does not in fact exist.

    (3) If a concern's voting stock is widely held and no single block 

of stock is large as compared with all other stock holdings, the 

concern's Board of Directors and CEO or President will be deemed to have 

the power to control the concern in the absence of evidence to the 

contrary.

    (d) Affiliation arising under stock options, convertible securities, 

and agreements to merge. (1) In determining size, SBA considers stock 

options, convertible securities, and agreements to merge (including 

agreements in principle) to have a present effect on the power to 

control a concern. SBA treats such options, convertible securities, and 

agreements as though the rights granted have been exercised.

    (2) Agreements to open or continue negotiations towards the 

possibility of a merger or a sale of stock at some later date are not 

considered ``agreements in principle'' and are thus not given present 

effect.

    (3) Options, convertible securities, and agreements that are subject 

to conditions precedent which are incapable of fulfillment, speculative, 

conjectural, or unenforceable under state or Federal law, or where the 

probability of the transaction (or exercise of the rights) occurring is 

shown to be extremely remote, are not given present effect.

    (4) An individual, concern or other entity that controls one or more 

other concerns cannot use options, convertible securities, or agreements 

to appear to terminate such control before actually doing so. SBA will 

not give present effect to individuals', concerns' or other entities' 

ability to divest all or part of their ownership interest in order to 

avoid a finding of affiliation.

    (e) Affiliation based on common management. Affiliation arises where 

one or more officers, directors, managing members, or partners who 

control the board of directors and/or management of one concern also 

control the board of directors or management of one or more other 

concerns.



[[Page 291]]



    (f) Affiliation based on identity of interest. Affiliation may arise 

among two or more persons with an identity of interest. Individuals or 

firms that have identical or substantially identical business or 

economic interests (such as family members, individuals or firms with 

common investments, or firms that are economically dependent through 

contractual or other relationships) may be treated as one party with 

such interests aggregated. Where SBA determines that such interests 

should be aggregated, an individual or firm may rebut that determination 

with evidence showing that the interests deemed to be one are in fact 

separate.

    (g) Affiliation based on the newly organized concern rule. 

Affiliation may arise where former officers, directors, principal 

stockholders, managing members, or key employees of one concern organize 

a new concern in the same or related industry or field of operation, and 

serve as the new concern's officers, directors, principal stockholders, 

managing members, or key employees, and the one concern is furnishing or 

will furnish the new concern with contracts, financial or technical 

assistance, indemnification on bid or performance bonds, and/or other 

facilities, whether for a fee or otherwise. A concern may rebut such an 

affiliation determination by demonstrating a clear line of fracture 

between the two concerns. A ``key employee'' is an employee who, because 

of his/her position in the concern, has a critical influence in or 

substantive control over the operations or management of the concern.

    (h) Affiliation based on joint ventures. A joint venture is an 

association of individuals and/or concerns with interests in any degree 

or proportion by way of contract, express or implied, consorting to 

engage in and carry out no more than three specific or limited-purpose 

business ventures for joint profit over a two year period, for which 

purpose they combine their efforts, property, money, skill, or 

knowledge, but not on a continuing or permanent basis for conducting 

business generally. This means that the joint venture entity cannot 

submit more than three offers over a two year period, starting from the 

date of the submission of the first offer. A joint venture may or may 

not be in the form of a separate legal entity. The joint venture is 

viewed as a business entity in determining power to control its 

management. SBA may also determine that the relationship between a prime 

contractor and its subcontractor is a joint venture, and that 

affiliation between the two exists, pursuant to paragraph (h)(4) of this 

section.

    (1) Parties to a joint venture are affiliates if any one of them 

seeks SBA financial assistance for use in connection with the joint 

venture.

    (2) Except as provided in paragraph (h)(3) of this section, concerns 

submitting offers on a particular procurement or property sale as joint 

venturers are affiliated with each other with regard to the performance 

of that contract.

    (3) Exception to affiliation for certain joint ventures. (i) A joint 

venture of two or more business concerns may submit an offer as a small 

business for a Federal procurement without regard to affiliation under 

paragraph (h) of this section so long as each concern is small under the 

size standard corresponding to the NAICS code assigned to the contract, 

provided:

    (A) The procurement qualifies as a ``bundled'' requirement, at any 

dollar value, within the meaning of Sec. 125.2(d)(1)(i) of this 

chapter; or

    (B) The procurement is other than a ``bundled'' requirement within 

the meaning of Sec. 125.2(d)(1)(i) of this chapter, and:

    (1) For a procurement having a receipts based size standard, the 

dollar value of the procurement, including options, exceeds half the 

size standard corresponding to the NAICS code assigned to the contract; 

or

    (2) For a procurement having an employee-based size standard, the 

dollar value of the procurement, including options, exceeds $10 million.

    (ii) A joint venture of at least one 8(a) Participant and one or 

more other business concerns may submit an offer for a competitive 8(a) 

procurement without regard to affiliation under paragraph (h) of this 

section so long as the requirements of Sec. 124.513(b)(1) of this 

chapter are met.

    (iii) Two firms approved by SBA to be a mentor and 

prot[eacute]g[eacute] under 13 CFR 124.520 may joint venture as a small



[[Page 292]]



business for any Federal Government procurement, provided the 

prot[eacute]g[eacute] qualifies as small for the size standard 

corresponding to the NAICS code assigned to the procurement and, for 

purposes of 8(a) sole source requirements, has not reached the dollar 

limit set forth in 13 CFR 124.519.

    (4) A contractor and its ostensible subcontractor are treated as 

joint venturers, and therefore affiliates, for size determination 

purposes. An ostensible subcontractor is a subcontractor that performs 

primary and vital requirements of a contract, or of an order under a 

multiple award schedule contract, or a subcontractor upon which the 

prime contractor is unusually reliant. All aspects of the relationship 

between the prime and subcontractor are considered, including, but not 

limited to, the terms of the proposal (such as contract management, 

technical responsibilities, and the percentage of subcontracted work), 

agreements between the prime and subcontractor (such as bonding 

assistance or the teaming agreement), and whether the subcontractor is 

the incumbent contractor and is ineligible to submit a proposal because 

it exceeds the applicable size standard for that solicitation.

    (5) For size purposes, a concern must include in its receipts its 

proportionate share of joint venture receipts, and in its total number 

of employees its proportionate share of joint venture employees.

    (i) Affiliation based on franchise and license agreements. The 

restraints imposed on a franchisee or licensee by its franchise or 

license agreement relating to standardized quality, advertising, 

accounting format and other similar provisions, generally will not be 

considered in determining whether the franchisor or licensor is 

affiliated with the franchisee or licensee provided the franchisee or 

licensee has the right to profit from its efforts and bears the risk of 

loss commensurate with ownership. Affiliation may arise, however, 

through other means, such as common ownership, common management or 

excessive restrictions upon the sale of the franchise interest.



[61 FR 3286, Jan. 31, 1996, as amended at 62 FR 26381, May 14, 1997; 63 

FR 35738, June 30, 1998; 64 FR 57370, Oct. 25, 1999; 65 FR 30840, May 

15, 2000; 65 FR 35812, June 6, 2000; 65 FR 45833, July 26, 2000; 69 FR 

29201, May 21, 2004; 70 FR 51248, Aug. 30, 2005]