The U.S. Small Business Administration (SBA) has issued a long-awaited final rule establishing a Government-wide mentor-protégé program for all small business concerns, consistent with SBA’s mentor-protégé program for participants in SBA’s 8(a) Business Development (BD) program. The final rule implements certain provisions of the Small Business Jobs Act of 2010 and the National Defense Authorization Act of 2013 (NDAA). It was published on July 25, 2016, and became effective on August 24, 2016.
An existing mentor-protégé program is available to 8(a) BD program participants. The final rule establishes a separate mentor-protégé program for all small businesses, including participants in the Service-Disabled Veteran-Owned Small Business Concern (SDVO SBC) Program, the HUBZone Program, and the Women-Owned Small Business (WOSB) Program, as well as small businesses not participating in a designated SBA program. The SBA drafted this expanded small business mentor-protégé program in a similar manner to the 8(a) mentor-protégé program.
Mentors
A mentor must be a for-profit business that demonstrates a commitment and the ability to assist small business concerns. Specifically, the mentor must demonstrate that it (i) is capable of carrying out its responsibilities to assist the protégé firm under the proposed mentor-protégé agreement; (ii) possesses good character; (iii) does not appear on the federal list of debarred or suspended contractors; and (iv) can impart value to a protégé firm due to lessons learned and practical experience gained or through its knowledge of general business operations and government contracting.
The final rule presumes that a mentor will have no more than one protégé at a time. However, SBA may authorize a mentor to have up to three protégés where it can demonstrate that the additional mentor-protégé relationship will not adversely affect the development of either protégé firm.
Protégés
To qualify as a protégé, an entity must qualify as small for the size standard corresponding to its primary NAICS code or identify that it is seeking business development assistance with respect to a secondary NAICS code and qualify as small for the size standard corresponding to that NAICS code. SBA will not authorize mentor-protégé relationships in secondary NAICS codes where the firm has never performed any work in that NAICS code previously or where the protégé would bring nothing to a potential joint venture with its mentor other than its status as a small business.
SBA clarified that protégés do not need to undergo a size determination before participating in the program, as the normal size protest procedures act as a sufficient “check” on participants’ size certifications.
A protégé may have two mentors where the two relationships would not compete or otherwise conflict with each other and the protégé demonstrates that the second relationship pertains to an unrelated, secondary NAICS code, or the first mentor does not possess the specific expertise that is the subject of the mentor-protégé agreement with the second mentor.
Benefits
A protégé may joint venture with its SBA-approved mentor and qualify as a small business for any federal government contract or subcontract, provided the protégé qualifies as small for the size standard corresponding to the NAICS code assigned to the procurement. However, this does not mean that such a joint venture affirmatively qualifies for any other small business program.
The final rule permits mentors to own an equity interest of up to 40% in their protégé firms in order to raise capital for the protégés. SBA decided not to require a mentor to divest itself of its ownership interest in a protégé firm once the mentor-protégé relationship ends. Initially, SBA was concerned that allowing the ownership interest to survive the termination of the relationship might allow far-reaching influence by large businesses that act as mentors and enable them to receive long-term benefits from programs designed to assist only small businesses; however, SBA determined that the affiliation rules are sufficient to protect against this. During the mentor-protégé relationship, the protégé firm is shielded from a finding of affiliation where a large business mentor owns 40% of the protégé. Once the mentor-protégé relationship ends, any protection from a finding of affiliation also ends. As such, if the large business mentor’s 40% ownership interest is controlling (or deemed to be controlling under SBA’s affiliation rules), the two firms are considered affiliated and the former protégé would not qualify as a small business on an ongoing basis. If the former protégé desires to continue to qualify as a small business after the mentor-protégé relationship ends, the mentor must divest itself of its 40% ownership interest; otherwise, there is no rule requiring divestment.
Written Mentor-Protégé Agreement
All mentor-protégé agreements must be in writing, identifying specifically the benefits intended to be derived by the projected protégé firms.
For the 8(a) BD and small business mentor-protégé programs, if control of the mentor changes (through a stock sale or otherwise), the previously approved mentor-protégé relationship may continue provided that, after the change in control, the mentor expresses in writing to SBA that it acknowledges the mentor-protégé agreement and that it continues its commitment to fulfill its obligations under the agreement.
Joint Venture Requirements
Every joint venture, whether a separate legal entity or an informal arrangement that exists between two or more parties, must be in writing.
If a joint venture exists as a formal separate legal entity, it may not be populated with individuals intended to perform contracts awarded to the joint venture. The joint venture must be unpopulated or populated with administrative personnel only.