[Code of Federal Regulations]
[Title 13, Volume 1]
[Revised as of January 1, 2008]
From the U.S. Government Printing Office via GPO Access
[CITE: 13CFR121.103]

[Page 302-306]
 
                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

[[Page 303]]

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 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

[[Page 304]]

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.
    (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

[[Page 305]]

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 
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,

[[Page 306]]

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]